The reverse mortgage was invented decades ago to help seniors facing economic hardship access the equity in their homes. Between 1990 and 2010, more than 660,000 reverse mortgages were issued, according to the AARP. Today, the products are aggressively marketed through ads featuring Boomer-friendly spokespeople such as Henry Winkler (the Fonz from Happy Days). But these products are complicated, expensive and ripe for abuse, which lead a reader named Fred to ask:

"What is your opinion about reverse mortgages? So many financial planners are pushing this sort of thing, but I heard that fees are steep."

Home Equity Conversion Mortgage (HECMs) are the most popular reverse mortgage available. They are federally insured and offer certain borrower protections. Seniors who either own their homes outright or have low mortgage balances can take out reverse mortgages and convert their equity into cash -- either as a lump sum, monthly payment or line of credit, or some combination of the three.

There are no income or credit requirements, and the loan has no monthly payment. Instead, the lender pays the homeowner, and the reverse mortgage balance rises as a result, accruing interest and fees. Lenders get repaid when the owner either moves or dies, and the home is sold. HECMs are insured by the Federal Housing Administration, so if for the sale price of the home falls short of the loan amount, FHA pays the lender the difference.

"Reverse mortgages are full of pitfalls and they are very expensive -- but they are very valuable to the people for whom they work," says Margot Saunders, at counsel with the NCLC. "If you are sitting on a mortgage and you can afford to make payments on it, and have home equity and other assets, this is probably not a good idea. But if you are 85 years old and have $250 a month in income and a $500,000 house, it's a great idea no matter how much it costs, because the lender will give you money you don't otherwise have."

In short, these pricey loans can be a lifeline for low-income seniors. What they aren't is a cost-effective source of cash to buy sports cars or dream vacations, although the industry has aggressively marketed them that way. Lenders have also falsely pitched reverse mortgages as some kind of government benefit program, or part of the economic stimulus plan -- and been sued by states for doing so.

The amount someone can borrow depends on their age and the amount of equity in the home, but the maximum is $625,500. (The loan limit was raised in 2009 as part of the federal stimulus law and is set to expire Dec. 31, after which it reverts to $417,000.)

The Risky and Expensive Sides of the Lifeline

Reverse mortgages also come with hefty fees, which can run as high as 5% of your home's value by some estimates. The FHA charges everyone who gets one a mortgage insurance premium fee of either 0.01% or 2% up front, as well as ongoing annual fees. The HECM Saver loan, created in October 2010, has lower fees, but typically higher interest rates and more restrictions on borrowing. Consumers also have to pay a fee up front for third-party counseling to make sure they have a clear understanding of their options.

Another pitfall: The NCLC and other groups have documented multiple instances in which seniors were steered unnecessarily into products with higher interest rates and fees by brokers seeking bigger commissions. While HUD capped origination fees, it has done nothing about "yield spread premiums" given to brokers.

In addition, Fannie Mae used to buy reverse mortgages from lenders and hold them in its portfolio. But in 2006, reverse mortgages were securitized for the first time, and the resulting securities sold to investors. Since investors like predictable, fixed rates of return, fixed-rate loans have begun dominating the market. That's actually problematic for seniors, because fixed-rate reverse mortgages must be distributed to their borrowers as lump sums.

Think about it: You cash out the equity from your home at, say, a 5% interest rate and then invest it -- where? In a savings account earning 1%? You're losing 4% a year. This is where the bad apples in the business bob up: Some brokers try to convince seniors to use the cash to buy insurance policies, annuities and the like. Steer clear of anyone who links the reverse mortgage transaction to a subsequent financial product purchase. Although the Housing and Economic Recovery Act of 2008 banned cross-selling of this kind, it still occurs. If you have access to a simple home equity line of credit or home equity loan, you're better off.

The final problem with reverse mortgages arises when seniors quickly spend the lump sum. Normally, one only pays off the loan when the owner of the house moves or dies, and the home is sold, but a reverse mortgage also comes due if the owner fails to pay property taxes and homeowners insurance, or make necessary repairs. Those situations are occurring more frequently lately, according to the NCLC.

So, find a variable-rate reverse mortgage that allows you to draw on the line of credit as needed instead of taking a lump sum, advises Saunders: "Homeowners who take the cash all at once may not have the ability to pay property taxes and insurance later, and HUD is directing lenders to foreclose. The rules should be changed so there is an evaluation of the ongoing ability to pay taxes and insurance, or money should be kept in reserve."

Borrowers should also delay getting a reverse mortgage as long as possible in the event they need the money for long-term care, according to the AARP, which offers a host of other recommendations.

Good luck with your decision.

Increase your money and finance knowledge from home

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

Banking Services 101

Understand your bank's services, and how to get the most from them

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

The post will help me find out the best reverse mortgage lenders according to my own case in NC. In general, the mortgages may benefit senior homeowners with little income and significant equity in their home. So, it is a good financing solution for senior homeowners over 62.

July 11 2013 at 3:24 AM Report abuse rate up rate down Reply

Damned if you do and damed if you dont! "Reverse mortgage" just another scam for banks and lenders to make more money! Some just don't see the light and never will!

June 06 2013 at 7:16 PM Report abuse rate up rate down Reply
reverse mortgages

seniors are flocking to this program for many good reasons - allows them to pay off mortgage and receive income for life without having to make monthly mortgage payments

November 21 2011 at 1:16 PM Report abuse rate up rate down Reply

Don't lefties have to own homes first or did Obama give them all one with my tax money that they don't seem to pay. Even Warren Buffet owes 1 billion dollars in back taxes since 2002 at one of the companies where he is the major shareholder . Didn't warren famously say several time he wants to pay more taxes of all kinds?

This is a hint, never believe what a lefty says but watch closely what they do if you want to know the truth about them. They are pathological about their lying and flash mob stealing from any and all who cross their path.

September 04 2011 at 11:30 PM Report abuse rate up rate down Reply

Reverse Mortgages are bad because they have the most fraud in that part of the mortgage business. Just get a 15 year fix rate mortgage and get that home paid off for a peace of mind............

September 02 2011 at 8:14 AM Report abuse rate up rate down Reply

Since most young folks can't afford a home, Obama thinks a reverse mortgage is when the bank pays these poor noncredit worthy poor people for 30 years, every month, to run up a huge debt on the home and then, when they are older, they can declare bankruptcy and have the gubmit tax payer pay off the debt for them. Nothing like seeing socialism at work the way it was always meant to work.

September 01 2011 at 10:57 PM Report abuse +1 rate up rate down Reply
1 reply to dabrownman's comment
Mr. Phelps

Of course your so informed .......a reverse mortage is on a home you already owned. They are not for first time home buyers. Mostly senior citizens or persons whose home could supplement their social security while paying them modest monthy income.Or provide for care assistance. Once its to zero or you die the property is gone to the lender. I guess you don't spend much time watching the TEE-VEE where washed up actors and former Senators (Presidiential candidates) hawk them .

September 02 2011 at 5:41 PM Report abuse rate up rate down Reply
1 reply to Mr. Phelps's comment

I was speaking about what Obama thinks is a reverse mortgage. I know perfectly well what one is and my thoughts are usually 180 degrees removed from a Marxist posing as a Socialist like Obama

September 03 2011 at 11:53 PM Report abuse +1 rate up rate down

A reverse mortgage is perfect if you don't have children to leave your home to or if they don't want it.

September 01 2011 at 9:48 PM Report abuse +1 rate up rate down Reply

This is just one more financial product and guess what??? The folks that sell financial products only do it to make money. And, there is absolutely nothing wrong with that. Whether it is a RM or a regular mortgage or HELOC, just be sure you understand all facets of the deal. What is a good or necessary deal for an individual in a certain set of circumstances could be a terrible deal for another with different circumstances. Depends on many factors. Again, be sure you understand the deal going in, mostly the potential negatives. Some folks can pull in the new car dealer and drive out shortly after in new wheels of their choice. Others are forced to go to the dreaded buy here, pay here---we tote the note---used car dealer. Whether it is an RM, or any of the scores of other issues folks are faced with, there is not one short, one size fits all answer to most of these questions.

September 01 2011 at 2:24 PM Report abuse +1 rate up rate down Reply

Let me correct one of "Pitfalls" about Mortgage Brokers charging a higher rate on reverse mortgages to earn more yield spread premium. The days of mortgage bankers and mortgage brokers charging a higher rate to earn a bigger commission ended on April 1st 2011. The Federal Reserve successfully passed a law from mtg bankers and mtg brokers from steering a consumer to a higher interest rate to earn more commission. There is no longer any benefit for a loan officer to charge a higher rate on a reverse mtg to earn more commission. The commission is the same if we offer a consumer the lowest rate possible or the highest rate possible. Those days of selling a higher interest rate for more commission are long gone along with everyone trying to blame mortgage brokers for our countries meltdown. By now, most people in this country realize that all the big banks knew this was all going to happen and were behind it all. Most people all know by now that they were the only ones who actually benefited from this mess. So please save the bashing on the mortgage brokers because its in one ear and out the other with most people.
The idea of a reverse mortgage is to "Enhance the Quality of Life" for a certain individual. If the product wont enhance the quality of your life then don't do it. If you believe it will enhance the quality of your life then do it and join the thousands of Americans who are enjoying their lives during retirement. Yes the closing cost are costly and yes unfortunetly banks actually charge and interest rate with reverse mortgages, welcome to home financing America.

September 01 2011 at 1:58 PM Report abuse +1 rate up rate down Reply

"very expensive". As compared to what? Have you ever tried to help your parents look for a suitable home? Have you considered moving costs? Have you considered that most seniors are very comfortable and familiar with their present home and don't WANT to move? There is much more to this story than has been presented. Today's market has even provided opportunity to have costs slashed for brokers who are honest and willing to pass along savings to their customers.

September 01 2011 at 11:37 AM Report abuse rate up rate down Reply
1 reply to mtdlv1's comment

With a reverse mortgage they won't have to move.

September 01 2011 at 9:47 PM Report abuse rate up rate down Reply
1 reply to savemycountry911's comment

That was his point. A reverse mortgage is presented as "very expensive". He was pointing out the alternatives (such as moving) can also be very expensive. So "very expensive" is a relative term and you must compare it to the other options to determine if it really is "very expensive" compared to the alternatives.

September 02 2011 at 12:07 PM Report abuse rate up rate down