They’re playing with house money. But they could still lose big.
Cash-strapped baby boomers, taking the TV advice of the Fonz and former US Sen. Fred Thompson, have opted for reverse mortgages in increasing numbers.
Inside Mortgage Finance, a trade publication covering the housing industry, said borrowers took out some $15.3 billion of these loans last year, an increase of 20 percent over 2012.
Reverse mortgages, which let homeowners age 62 and up borrow money against the value of their homes, have become a popular way for boomers without significant assets to fund retirement.
Still, most advisers are skeptical, while others say they have clients use them but with numerous caveats.
“I would only consider the reverse mortgage as a last resort. They cost a lot, and there are better ways to pay for retirement,” said Charles Hughes, a financial adviser. “Gone are the days of gleefully burning the mortgage and passing the home on to the children,” he adds in a client publication.
There are three types of reverse mortgages: single-purpose, offered by local governments and nonprofits; federally insured; and proprietary, which are private loans backed by the companies that write them. The single-purpose reverse mortgage is generally the least expensive, according to the Federal Trade Commission. And costs are one reason advisers generally say homeowners should try to avoid these loans.
“The fees are just too much; they’re just too expensive,” says Raymond Mignone, a certified financial planner. Loan-origination fees, mortgage insurance and home-appraisal costs are among the charges the reverse-mortgage client will pay. “I always try to help clients who need more income find another way,” he added.
Another adviser notes that taking equity out of a house goes against most retirement planning assumptions.
“Generally, you should have debts paid off in retirement,” but reverse mortgages often come with high fees, says Ronald Rogé, an adviser in Bohemia, NY.
Still, one planner says that for those without significant retirement assets, reverse mortgages may be a solution.
“They can be a valuable tool for those who need cash and have no other option,” says adviser Anthony Ogorek. Nevertheless, Ogorek asks clients to explore every option before taking the pricey loans.
Mignone points out that one less risky way to finance retirement could be to move out of a house — especially an old one that is likely to need many repairs — into a less costly place like an apartment. And Hughes says that a realistic lifestyle change, like moving to a cheaper state, could help without meaning giving up the equity in a home.
Still, Mignone acknowledges the popularity of reverse mortgages, while cautioning, “Whenever you have companies and brokers doing well, often it is the client who ends up paying the bill.”
Yes, a home with a reverse mortgage will never be foreclosed on in the owner’s lifetime.
But it can be a different story for heirs, whom lending companies can strong¬-arm to pay the mortgage off in full after the borrower dies, under threat of foreclosure. At the very least, it means dealing with often-confusing red tape in a time of grief and stress.
For these unfortunates, a reverse mortgage was literally mortgaging the future.