Your Money ; Financially Speaking
Beware the pitfalls of taking a reverse mortgage too early
‘Tax-Free’ and Other Catnip By Jane Bryant Quinn
Reverse mortgages are attract- ing a younger crowd. Origi- nally they were designed to
help cash-poor older people stay in
their homes, as a loan of “last resort.”
But boomers ages 62 to 64 now represent 20 percent of prospective borrowers (62 is the earliest age you can
apply), according to a recent survey
by MetLife Mature Market Institute.
Nearly half the people considering a
reverse mortgage today are under 70.
One reason for the change might be
the TV-ad blandishments of celebri-
ties such as Fred Thompson and Rob-
ert Wagner. Thompson, in his trust-
worthy Law & Order voice, describes
reverse mortgages as “safe” and “ef-
fective,” not to mention (in words I
call American catnip) “tax-free cash”
and “government-insured.” Wagner
temptingly calls reverse mortgage
loans an “easy first step toward en-
joying life more fully.”
MetLife has a different take: The
steep recession pressed especially
hard on early retirees and others past
midlife who might have lost their
jobs and are motoring through their savings.
They’re turning to reverse mortgages to pay
bills or replace a traditional mortgage whose
payments they can’t afford.
But when you’ve used up the money you borrowed, what’s next? These “safe” loans can lead
you straight to foreclosure in your later years.
A reverse mortgage is a loan that allows a
homeowner to convert home equity into cash.
No repayments are due as long as you live in the
house. When you leave it—normally, at death
or because you choose to move, say, to assisted
living—the house is usually sold. The sale proceeds go toward covering the loan plus all the
substantial fees and interest that have accrued
over the years. Any money left over (a big “if”)
goes to you or your heirs. If the house sells for
less than what you owe, no problem. You pay
nothing more. In most cases, the lender’s insurer
(the federal government) swallows the loss.
All these guarantees make the loans sound as
safe as Fred Thompson promises. But there’s something he
overlooked. You can keep the
house only as long as you can
pay your property taxes and
homeowners insurance. If you
run out of money and let these
bills slide, you’re in default,
and the bank can foreclose on your house.
About 46,000 reverse mortgages are in default— 8 percent of the total, says the U.S. Department of Housing and Urban Development.
So far, 61 percent of the troubled borrowers are
in repayment plans. Still, lenders won’t let defaults accumulate indefinitely. You’ll likely see
foreclosures rise toward the end of this year.
It’s bad public relations to throw Granny out of
her house, so banks are getting choosier about
making loans. In the past, you could get a re-
verse mortgage without a credit check. Now, you
might have to show that you’ll still be able to
pay your bills when the reverse mort-
gage money runs out. If the banks turn
you down, consider it a timely warn-
ing. To avoid eventual foreclosure, sell
your home now, grab whatever home
equity you still have, and make other
living arrangements.
These ‘safe’
loans can lead
you straight to
foreclosure in
your later years.
Jane Bryant Quinn is a personal finance expert
and author of Making the Most of Your Money
NOW. She writes regularly for the Bulletin.
