Reverse Mortgages Require Prudent Evaluation

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Reverse Mortgages have been in the headlines for the past few months. Seniors are using reverse mortgages to repair diminished nest eggs, as they try to stave off the damaging effects of this major recession:

Seniors’ portfolios hammered by the stock market decline are getting a boost from reverse mortgages. Such mortgages allow seniors to get monthly payments based on the equity value in their homes – the amount that the value of the home exceeds any mortgage on the home.

Aging has its compensations, at least in figuring a reverse mortgage payout. The older the homeowner, the better, because the payout increases with the homeowner’s age on the date the mortgage begins.  For homeowners younger than 70, the payout rate usually will be unattractive. But as age increases to 70 and beyond, the payout rate rises markedly, especially for larger loan amounts.

However the headline this morning states that Reverse Mortgages Leave Seniors at Risk according to the Government Accountability Office (GAO).  Meanwhile the Department of Housing and Urban Development (HUD), which usually backs these reverse mortgages, defends such programs’ safeguards.

While these reverse mortgage loans have become more attractive to seniors as the economy has soured and housing values have dropped, reverse mortgages are complex. That is why the FHA has long required that the seniors take part in HUD-approved counseling sessions before these loans are processed. The GAO report concluded that HUD “lacks effective controls” over the counseling programs.

Seniors should therefore consider carefully the reverse mortgage rates before entering into such a loan arrangement.  They should consider all eventualities that might arise and use a reverse mortgage calculator to estimate what they might be faced with in the future.  It could also be very worthwhile to consider using the AARP HUD Reverse Mortgage Counseling services too.