A reverse mortgage can be a financial lifeline, but consumer advocates are worried that some people are taking them out with too many strings attached.
Some lenders inappropriately push older homeowners to the products or sell them additional high-cost annuities, a new AARP survey claims.
Some experts say there may be potential conflicts of interest between lenders and counselors providing required consumer education on the mortgages. Proposed legislation would provide more protections, but experts say it is important to study fees and terms.
'The real problem'
"Costs seem to be the real problem" keeping more homeowners from getting into reverse mortgages, said Bronwyn Belling, coordinator for the AARP Foundation's Reverse Mortgage Education Project.
Besides interest, total costs, including origination fees and other closing costs, could be 10 percent of total home value or higher, according to AARP.
AARP said 9 percent of homeowners it surveyed reported lenders had offered additional products such as annuities and long-term-care products at the time of or shortly after a reverse-mortgage deal, which the group said could be unsuitable given the costs. The survey queried 1,500 homeowners who had undergone the counseling.
In a reverse mortgage, a homeowner age 62 or older receives regular payments from a lender that don't have to be paid back until the home is sold. If the homeowner dies, the home is used to pay off the loan.
Can be lifeline
They can be a lifeline if you're cash poor and home-equity rich, but they can wipe out the possibility of leaving a home to heirs. The costs cut into what you can take out of the home, and there are limits on how much can be paid out.
The pending FHA Modernization Act of 2007 would set a national loan limit for reverse mortgages at $417,000 and would cap origination fees at 1.5 percent (subject to minimums) instead of the current 2 percent. Currently, states have different limits.
If the new limits become law, the products would attract owners of pricier homes, because they could have access to a larger sum of cash.
Those fees and limits keep many seniors from taking reverse mortgages, said David B. Yeske, a financial planner with Yeske & Co. in San Francisco.
"If they've gotten themselves into a large mortgage, chances are good they won't be able to get enough [in a reverse mortgage] to really dig out of the problem," Yeske said.
So when do reverse mortgages make sense?
"They're most effective if you're going to be in the house a long time," Yeske said.
That's because the upfront fees can be hard to justify if you decide you want to sell the home within a few years, experts said.
Charles and Jacqueline Whitman, ages 74 and 73, recently took out a reverse mortgage on their Bermuda Run, N.C., home to pay off a home equity line, and they still have reserves from which they can draw if they need the money down the road. Meanwhile, those funds are earning interest, Charles Whitman said.
"I had a lot of equity in this house, so I figured I could be earning money on it," he said.
Charles Whitman has a financial background, but the couple talked over the deal with their grown children and spent about 90 minutes on the phone with a reverse-mortgage counselor before signing.
Counseling is a required step in federally insured reverse mortgages, and it's getting more attention from consumer groups and legislators.
The National Foundation for Credit Counseling recently announced a grant from lender HSBC Finance to develop online counseling for reverse mortgages and other financial products.
Proponents worry that lenders, who pay for the service, hold too much sway in directing consumers to counselors. The bill also would increase federal financing for the counseling.
It's important to understand what you will learn in a counseling session. A counselor is trained to provide information but will not offer a customized opinion on whether you're making the right move, said Susan Bierly-Craig, housing director for Springboard, a consumer credit-counseling service in Riverside, Calif.
Counselors tell seniors about alternatives and how the mortgage might affect benefits such as Medicaid, "but we do not tell them what to do," she said.
Check out AARP's free, 45-page booklet Home Made Money that describes costs, alternatives and details of reverse mortgages. Call 800-209-8085, or access information online at www.aarp.org/revmort.
Janet Kidd Stewart writes for Tribune Media Services.