Reverse Mortgage BasicsReverse mortgages are forms of equity release. In the USA, they are available to homeowners aged 62 or over who are living in the property concerned as their principal residence.  They can borrow money using the equity on their home as collateral. There is generally no fixed period on the loan, which is repaid when they sell their home or pass away. In the latter case, the lender has first call on the value of the home irrespective of any will.

Although reverse mortgages appear to be a good way for elderly people to make use of the equity while they are still alive, there are some potential reverse mortgage problems. In many cases, the elderly are hitting problems, particularly when they use the equity release to pay off other debts. Here are some of these problems.

Some Common Reverse Mortgage Problems

Fixed-Rate Lump Sum Loans: When the equity is taken as a lump sum, the interest is included in the loan. The interest is therefore compounded over time, and you are paying interest on the interest! Not only that, but increasing numbers of people are taking loans based upon their total equity. Should they have a need for emergency cash at a later date, they cannot get it because they have used up all their collateral.

The Problem of Small Lenders:  Because most of the large mortgage lenders have stopped offering reverse mortgages, those that are still doing so tend to be smaller firms that are not what are known as ‘depository institutions.’ This means that the borrowers are at a greater with these smaller companies. They do not have the financial strength of the larger lending banks such as Wells Fargo and the Bank of America.

Problems with Younger Borrowers: When borrowers aged 62 or just over use their equity in this way, they have little or no finance available to use during their later years of retirement. A reverse mortgage works best for over 70s who are able to use the cash tied up in their home in the latter years of their life.  To use that prior to retirement is to use up all your insurance for a relatively wealthy retirement in your later years: your 80s and 90s!

Aggressive Marketing:  Some companies use aggressive marketing tactics to persuade vulnerable elderly people that reverse mortgages are their best option. They stress the cash they will have to spend, but ignore the fact that they are using up all their equity. They will have nothing to leave their children, and no fall-back in the last years of their life. They fail to explain the effect of interest on their equity.

Are Reverse Mortgages Worthwhile?

Yes, reverse mortgages can be worthwhile if used correctly. You should be aware that they are loans and attract interest just like any other loan. This is often forgotten, since the interest is not paid as it accrues, but added to the reducing equity of the property.

You should first discuss a reverse mortgage with your family.  If they finally agree that you should go ahead, the next step is to seek professional advice from a mortgage advisor. Your advisor will help you select the best company for the loan, and help you make sure you are leaving sufficient home equity for later use.

Keep in mind that you have other options to a straight home equity loan.  An equity line of credit will charge you interest only on what you spend, not on the total amount of credit. There are also programs available for the elderly if you are having trouble paying for your medication or utility bills. A reverse mortgage should be your last resort – not the first.