Understanding a reverse mortgage
The reflection of blue skies and palm trees are seen in the window of a Countrywide location offering "reverse mortgages" in Sun City, Ariz., on October, 27, 2007.
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Tess Vigeland: This is that handsome fellow from "The Rockford Files."
Commercial: Hi, this is James Garner for Financial Freedom. If you're 62 or older and own your own home, I'd like to talk to you about something you should know. It's called a reverse mortgage, and it's a safe, easy way to quickly turn your home equity into tax-free money.
These commercials are everywhere nowadays. A couple decades ago, only about 150 people a year took out reverse mortgages. Last year more than 100,000 did. They're popular. But they can also be confusing -- and potentially expensive.
Sally Herships reports.
Sally Herships: Carolyn Russel is 69. She and her husband live in rural Oregon. They retired a few years ago. They were hoping to spend their winters in Arizona. But they just didn't have the money to cover their living expenses. Especially the payments on their $250,000 mortgage.
Russel: The cost for our mortgage with insurance and taxes was more then half of our total income. And it just overwhelmed us.
Then Russel's husband saw an ad on TV for a reverse mortgage. It said they could get a loan on their house. And the best part was, they wouldn't need to pay back a single penny -- as long as they stayed in the house. So last year they took out a reverse mortgage and paid off the mortgage they already had.
But how exactly does a reverse mortgage work? The answer turned out to be so complex I had to ask two experts. First: Charlene Crowell. She works for the Center for Responsible Lending in North Carolina.
Charlene Crowell: A reverse mortgage is actually a home equity conversion.
Basically you convert some of the value in your home into cash. The Russels were able to get just over $260,000. But it's not a home equity loan. A reverse mortgage doesn't have to be repaid until you move out of your house or die. And it's only available to seniors, 62 and older.
But, there is a but. Expert number two:
Sandy Becker: Someone's going to give you $50,000 and say OK, you don't have to pay us back until you're not here anymore. There's gonna be a catch to that.
Sandy Becker is a certified counselor with the U.S. Department of Housing and Urban Development. She says even though interest rates on reverse mortgages are often lower than home equity loans, reverse mortgages are ultimately a lot more expensive. The Russels got a great interest rate on their loan, under 2 percent. But they also paid for the privilege: $14,000 in extra costs.
Becker: So, right off the bat there are closing costs, and the closing costs are usually higher then a normal home equity loan would be.
Becker says reverse mortgages also require mortgage insurance. Typically, 2 percent of your home's value. It's to protect the lender in case the value of your house doesn't appreciate. The Russels paid about $5,000 for their mortgage insurance and an additional $5,200 in administrative fees.
And there are other strings attached. Back to expert number one, Charlene Crowell with the Center for Responsible Lending.
Crowell: You can't let the home fall into disrepair. You must pay your property taxes on time. You must have insurance enforced. If you don't have those three things in place, then you will be in default.
Both Crowell and Becker say reverse mortgages are complex financial products. If seniors don't understand the details, the loan can become a burden.
Marguerite Gabrielli is 58. She's too young for a reverse mortgage. But her mom took one out on the duplex she and Gabrielli shared in Buffalo, N.Y. Then this spring, her mom passed away. Soon after, Gabrielli says she got a letter from the bank demanding $30,000.
Marguerite Gabrielli: Yeah, it says right on there that they're going to foreclose if you don't meet it in 30 days. I mean, it's nine days after she died. Repayment of the loan?
Back in 2002, Gabrielli's mom took out a reverse mortgage for $15,000. Now with all the fees and interest, the amount has doubled. Gabrielli says she thought she'd be able to handle the loan like a credit card bill, by making monthly payments.
Gabrielli: But that's not how it worked. Because they want all the money upfront.
All seniors who want these types of loans are required to talk to a counselor certified by HUD. Mortgage counselor Sandy Becker advises talking to someone local. They may know about alternative loan programs for seniors in their community.
Becker says reverse mortgage should only be used as a last resort, but she agrees they can be helpful in the right circumstances.
Back in Oregon, Carolyn Russel told me when her reverse mortgage came through, she and her husband were so relieved they went to a drive-in and had hamburgers and milkshakes.
Russel: Chocolate. That was our big celebration for hoping that we were going to be OK.
And Russel says they are OK. They even went to Arizona last winter -- thanks to the reverse mortgage.
I'm Sally Herships for Marketplace Money.