Are reverse mortgages really a good bargain for seniors?
No doubt most folks have seen the numerous TV advertisements, many featuring former Senator and TV actor Fred Thompson, R-Tennessee, touting the so-called “reverse mortgage.”
These commercials claim this to be the greatest thing since sliced bread for those who are over 62 and have remaining equity in their home. Be assured that there are a number of features in this program that are not mentioned and are not stressed in the dealing with the mortgage sales pitch.
Having two personal experiences with this government program, it seemed to be a proper time to bring some of the practical outcomes into the public eye and ear. In the early days after the institution of this program, about 30 years ago, my adopted stepdaughter was living with her mother to provide some care. She, possibly illegally, obtained a reverse mortgage on her mother’s unencumbered ownership for a substantial up-front payment (one of the payout options) and then disappeared.
Under the terms of these loans, the mortgage company holds a first mortgage on the property and after the death of the owner, the heirs have one year to pay off the mortgage or it is foreclosed. At least that is what our middle son informed me was the situation. Well, she lived to 2011 and the principal amount had somewhat exceeded the market value of the house (which was several times the amount paid for it in 1954, including additions) so the other children were unable to make the buyout and the house was repossessed.
Last year, it became absolutely necessary for me to take one of these mortgages in order to avoid foreclosure. Outgo had exceeded income. In this situation, the program can be a real lifesaver, but it does come with some downside features when you look into the “small print.” First, it is relatively easy to obtain such a mortgage, assuming that there is any equity existent in the current situation. Second, the reason is that the mortgage company is totally protected by the government from any loss coming from the final end of the term, that is the death of the homeowner or (as now written) the moving from the home for a year while still alive.
It should be known that, in Oklahoma, there is a provision in the State Constitution that if a house has been “homesteaded,” a surviving spouse cannot be expelled. Many lawyers may not be familiar with this protection that the original writers included as evidenced by some of the documents that have come from their offices, to their embarrassment when appraised of it.
Third, in this period of historically low interest rates on standard mortgages, the rate on the reverse mortgage is somewhat high, in my case 5.060 percent, and subject to adjustment, or so it seems to be from reading the monthly reports. In addition, the mortgage company is totally protected from loss by a government mortgage insurance policy with a monthly premium rate presently of 1.250 percent. It should be remembered that the dollars covered by these rates increase each month as they are on the current balance which is increased each month by the addition of the monthly interest and premium amounts.
Thus, when the owner dies, the mortgage company is paid the complete mortgage principle as increased each month by the mortgage insurance policy.
The company still has a mortgage on the property which it can use to foreclose on and take ownership of the property. Being so protected, they are then free to sell the property, if not purchased by the heirs, even at great discount and still reap a windfall to further pad its profits on the investment. It should be remembered that this insurance is issued by the government and thus may be underwritten by we poor taxpayers who are already grossly overtaxed.
Tea Party anyone?