Recently the Trump administration proposed changes to the Department of Housing and Urban Development’s reverse mortgage program: raising premiums, tightening loan limits, and making foreclosure easier. These changes merely worsen a horrific product through which elderly victims are already being conned out of their home equity for a fraction of its value.
Reverse mortgages are contracts through which people 62 and older can receive cash advances from an account secured by their home. Closing costs and all fees and interest are simply added to the loan balance, so the process can feel painless. But the financial harm is real and devastating.
For short-term money needs, reverse mortgages are more egregious than famously costly credit card cash advances. If you pay off a reverse mortgage in the first year, your effective cost of borrowing could exceed 200 percent. If you pay it off in two years, your effective annualized rate could be near 50 percent.
For long-term borrowing needs, reverse mortgages are even worse. Succinctly put, in the long run a reverse mortgage results in the sale of your home at a huge discount. Ads state that a reverse mortgage will allow you to use the equity in your home. Actually, a reverse mortgage will cause you to lose your equity. The cash flow you accept, perhaps 20 percent to 50 percent of your home’s value, will be all you ever get by the time the bank effectively owns your home.
HUD publishes tables showing the maximum percentage of home value you can be approved for. Closing costs, mortgage insurance, fees and bank “set-asides” all reduce the cash you can get. In the long run, at 5 percent interest a 62-year-old will get less than half of his or her home’s value. At 6 percent interest, a borrower would get less than 40 percent. At 7 percent, a borrower would get less than 30 percent of the home’s value. For these paltry sums, the bank will gain a claim for 100 percent of your home.
Contrary to assurances in ads, reverse mortgages bring on new ways your home can be seized. Through a reverse mortgage, the bank can take your home if you fail to insure or maintain it to the bank’s satisfaction. The bank can also seize your home if you live elsewhere for a year or more, even for hospice care or helping to raise a grandchild.
Commercials mention a host of reasons to get a reverse mortgage: pay off existing debt, plug a gap in your budget, get things you’ve denied yourself, improve your home. In each situation, reverse mortgages make things worse: You become much poorer with fewer life options later on.
Vastly better routes exist for seniors who face a cash shortfall. Move, and receive 100 percent of your home value; coordinate with heirs who want to keep the home in the family; get a term loan to cover temporary needs; set up a home equity line of credit (HELOC). That last is also borrowing, but with vastly lower costs, better tax benefits, and fewer foreclosure triggers. If a bank refuses to set up a HELOC but is willing to do a reverse mortgage, it is openly admitting that it does not want to lend you money under normal terms.
As a loan with no immediate payments, reverse mortgages allow banks to rip off a clientele who won’t feel the harm until it is too late. In cases in which the borrower dies before the balance is paid off or the home is foreclosed upon, heirs will be the ultimate victims.
The malicious nature of reverse mortgages is a mathematical fact. Don’t let anyone you know be victimized.
Art Ernst is a licensed analyst, adviser and portfolio manager, and the author of “The Final Rip-Off: Reverse Mortgages,” an eBook available at Amazon and Barnes & Noble. He wrote this for the Baltimore Sun.