Reverse mortgages are loans that provide supplemental income to seniors 62 and older based on the value of their homes. A reverse mortgage does not need to be repaid until the homeowner sells the property, moves or passes away. But the loans that were intended to help retired homeowners maintain their lifestyle in their current homes are beginning to cast a dark shadow. Several disturbing trends have emerged prompting some experts to advise older homeowners to think twice before considering a reverse mortgage.
5 disturbing trendsSome experts believe that a reverse mortgage should be a last resort. There are no restrictions on how the money is spent, and the loans have become a tempting refuge to help borrowers pay off short-term debt. Here are five disturbing trends in the current reverse mortgage market: No. 1: Younger borrowers are choosing reverse mortgages. Reverse mortgages are designed for elderly homeowners to "age is place." Meaning, reverse mortgage funds are designed to allow older homeowners to remain in their properties until they pass away or need to move to an assisted-living facility. The younger you are, the less equity available to aid you through your retirement years. Read: 5 costly reverse mortgage mistakes According to Reverse Market Insight, the average age of reverse mortgage borrowers went from 76 in 2000 all the way down to 62 in 2011. "The concern is: what will you have to fall back on when you are in your 70s, 80s and 90s," says Lori Trawinski, a senior strategic policy adviser at AARP Public Policy Institute. "People are living much longer than they ever expected to. There's a belief that people will eventually have to use home equity to fund their longevity, but at what point is it best to do that?" No. 2: Borrowers are taking all the money at once. Currently, about 70 percent of reverse mortgages are taken as fixed-rate, lump-sum loans, according to the Consumer Financial Protection Bureau's report to Congress in June 2012. This segment increased by 30 percent between 2007 and 2011. With reverse mortgage products, the fixed interest on a lump sum is folded into the loan and compounds over time. Younger borrowers, in particular, may deplete the value of their home-equity so it may not be available when needed. Aging seniors are likely to have unforeseen health expenses or may someday need to move to an assisted-living facility that they will no longer be able to afford.
6 reverse mortgage tipsHere are six suggestions from AARP's Trawinksi:
- Shop around among reverse mortgage lenders
- Understand it's a loan and clarify all your obligations
- Ask the housing counselor questions if there's anything you don't understand
- Consult a lawyer or a trusted financial advisor
- Discuss with family members
- Consider other options, such as a home equity line of credit, moving or investigating programs that can assist with utility bills, food and prescription medications
Reverse mortgages are not suitable for every senior. For more information, consult the National Council on Aging's educational booklet on how seniors can remain in their homes as they grow older.