Reverse mortgages: not so scary after all

Reverse mortgages have been mentioned often in the press recently, and not in the best of lights. In the same circumstances that have seen banks criticized for “predatory lending,” and homeowners lambasted (or absolved) for walking away from mortgages, we are beginning to hear more and more about seniors (often the victims of this predatory lending, and scams in general) taking out reverse mortgages on their homes.

However, very little, if anything, is published in local papers about how reverse mortgages work.

Reverse mortgages are, in short, the release of equity in a home to the homeowner. This may be taken in payments, not unlike a stipend or a pension, or is sometimes granted in a single lump sum. The responsibility of the homeowner to pay off the original mortgage is deferred until death, the sale of their home or their change of residence. Reverse mortgages are restricted to senior citizens, more often than not; in the United States federal law requires one to be at least 62 years of age before taking one on.

The reverse mortgage is paid off by the sale of the home at the termination of the mortgagor’s tenure. In most cases, this selling off of the home by the lender is sufficient to recoup costs. If it is more than sufficient, the difference is passed on to the mortgagor or, in the instance of the mortgagor’s death, their heirs, often in the form of a lump sum; if it is insufficient, the bank will absorb the cost.

Most individuals hear about senior citizens being ‘counseled’ with regards to ‘pulling equity out’ of their home, generating minor panic. In truth, individuals already pursuing a reverse mortgage must be counseled before they can submit applications to any reverse mortgaging programs; after counseling has been completed with regard to the financial and legal implications of a reverse mortgage, the homeowner is certified and permitted to continue pursuing their mortgage. It is not the same as simply taking a lien out on one’s equity.

There is the myth that reverse mortgages are a way for senior citizens to acquire funds and pass the cost off on the next generation without their consent. This is also not true; once again, should the homeowner pass away while a reverse mortgage is in effect, the sale of the home is used to recoup all costs. Any excess is actually passed on to the heirs, but any debt is absorbed by the bank with no penalty applied anywhere else. Further, banks are beholden not to pursue recourse for anything but the value of the reverse mortgage. Should the home drop dramatically in value after a reverse mortgage is established, the lending bank may not pursue funds to recoup these costs. The risk is thus extremely low for all involved.

Banks profit from a reverse mortgage through interest established on the reverse mortgage payments. This is highest when the funds are taken as an immediate lump sum, but are considerably diminished when equity is taken in the form of monthly payments or a line of credit. Many begin wondering how banks profit from such a scheme–rest assured, they do; there is no deeper, nefarious purpose behind reverse mortgages.

All in all, reverse mortgages are a surprisingly comfortable method of augmenting one’s retirement for those willing and able to navigate the bureaucracy. Despite the myths and the negative context, not all bank programs—at least not this one—are evil. While all individuals are out for their own profit, borrower and lender alike, some things are truly strictly business.

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