Reverse Mortgages -- The Good, Bad, and Ugly

In Cashing in on home sweet home, 96 Ill. B.J. 179 (2008), Helen W. Gunnarsson explains that reverse mortgages are a popular, but controversial, way for elderly clients to use the equity in their homes.  Her article discusses how they work and why people should be wary.

Here is an excerpt from the article:

Simply put, says [Elizabeth W.] Anderson, a reverse mortgage is "a way of getting cash from the equity in a home." The lender pays the borrower/homeowner money, either as a lump sum, a monthly payment, a line of credit, or a combination of those methods, Anderson says. "The home remains titled in the name of the owners and the responsibility of maintaining the property, paying home-owner's insurance and property taxes continues to lie with the owners."

Instead of making monthly repayments of the loan, the amount of the homeowner's debt actually increases over the loan term. So, says Anderson, "If the loan is carried for a long period of time, there may not be any equity left in the house. This is also true if the home's value decreases. However, a lender may not recover any more than the value of the home upon repayment. Therefore, the homeowner will never owe more than what the home is worth."

All reverse mortgages involve fees, Anderson notes. Those fees are added to the loan balance and accrue interest over the period of the loan. Naturally, those fees, plus interest on them, must be repaid when the loan is repaid. Additionally, fees as well as interest rates and closing costs may impact the loan amount, Anderson cautions. * * *

Anderson cautions that clients should consider carefully whether a reverse mortgage makes financial sense for them. "[I]t can be a very expensive way to make purchases or investments, particularly when other options are available," she notes. Additionally, taking out a reverse mortgage may mean leaving little or nothing to heirs, she points out. * * *

Anderson warns of third parties who may financially exploit elderly people by persuading them to take out reverse mortgages to buy other goods and services.