Another way to look at reverse mortgages

In the business world, it is common practice to initiate a product for one purpose, then try to increase sales by marketing that same product to a wider group and, at the same time, changing the purpose. It now seems that reverse mortgages are falling into that category.

Reverse mortgages were initiated some years ago for the purpose of assisting elderly homeowners to live out their later years more comfortably. With a reverse mortgage, homeowners who were strapped for income could not only pay down their existing mortgage, but could also have extra cash to provide for their needs. Now they had no more mortgage payments and the cash to stay in the home for the rest of their lives. The government liked the idea so much that it guaranteed reverse mortgages in a few ways, taking the lender entirely off the hook insofar as risk goes:

o If the value of the home dropped to below the amount of the mortgage, taxpayer money reimbursed the lender.

o If the homeowner failed to pay the taxes and maintain the home, the Government, and not the lender, took the property in foreclosure.

Reverse mortgages were intended to bail out older homeowners. It was a way to allow them to keep and live in their own homes in their old age.

The purpose of reverse mortgages has not changed. It is a good way for elderly homeowners to remain in their homes--but only as a last resort and only when no other avenues exist. A reverse mortgage is expensive and complex--it is not as simple as a conventional mortgage.

According to Consumer Reports, "unsuspecting borrowers have become cash cows for lenders and others who encourage them to use their mortgage proceeds to by financial products such as deferred annuities that can be inappropriate for their situation. And the required counseling can be skimpy." To me, such a practice is reminiscent of what was touted as a "pension-maximization plan" back in the 1980s. Here, a married wage earner was encouraged to choose the higher single-life pension and with the difference (between the higher single-life and lower joint-and-survivor pensions) buy a life-insurance contract on the pensioner. While it may have worked for some who had many options, this was usually a way to sell more life-insurance products.

How does a reverse mortgage work? Only homeowners older than age 62 are eligible. You apply for a loan amount that will pay off the existing mortgage plus some extra to cover living expenses. Of course, maximums apply. According to Consumer Reports, "for a $300,000 home in the New York City area, the maximum available was $152,074 for a 64-year-old and $182,541 for a 74-year-old." So, even if the amount received is only enough to pay off the existing mortgage, just this relief from monthly mortgage payments can tip the balance in favor of the homeowner's staying in the home.

Fees for reverse mortgages are not like those of conventional ones. Fees are steep and are added to the loan amount up front. In addition, interest rates are usually adjustable, and the interest simply keeps getting added to the loan amount over time.

A reverse mortgage is just a mortgage, so the homeowner still continues to own their home--as long as they maintain the property and pay the taxes. When the homeowner dies, the mortgage must be repaid and the home can go to your heirs. But what if the mortgage amount exceeds the value of the home and there are no funds in the estate to pay down the mortgage? The property is foreclosed and then owned by the government, not your heirs.

Reverse mortgages are an expensive way to pull money out of a home for purposes other than day-to-day living expenses. Not for lavish spending--and certainly not for investing. Consider what would happen if you took a reverse mortgage and spent or lost the extra funds. Would it be enough to live in a house without any mortgage payment? Could you afford the increasing taxes and maintenance?

Some things work well on paper with simple illustrations and assumptions. Real life adds the complications that were never considered in the simple illustrations. Before signing up for a reverse mortgage, it would be a good idea to seek the advice of a trusted friend or counselor--or an independent financial adviser. A reverse mortgage can be just the right product for those in dire straits and nowhere else to turn. But for those with somewhere else to turn, it would be better for them to do so.

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Look and learn

Everybody says you should “shop around” for a mortgage loan, but here’s my problem: What the heck are they? I like to visualize the stuff I’m going to buy and when I try to visualize the acquisition of a mortgage the only image that comes to mind is a guy stooping over while an enormous weight is loaded onto his shoulders. I don’t see a house. I don’t see a fence or a rose garden or a coffee pot or a grandfather clock. I just see a guy shouldering a massive burden in tenuous times, and why would I want to shop for something like that?

But I have to admit that, for me, the burden really isn’t the mortgage loan; the burden is my relative ignorance about mortgage loans. And ignorance, in my experience, is not bliss. Rather, it’s the well-seeded breeding ground for anxiety and defeat. So I told myself that this week I should seek the opposite of ignorance (which I guess is enlightenment) and instead of feeling anxious and defeated, I would feel the opposite: confident and triumphant. And it kind of worked.

I started my journey toward enlightenment by typing these words into my Google bar: “What is a mortgage?” And you can’t believe the response I got. I stared at my computer screen as the resources rolled in. It was like peering into a whirling galaxy of information. I tried not to panic, took a deep breath and entered a Web site about terminology, seeking a simple definition.

Here’s where things get a little tricky. To begin with, the word mortgage is both a noun and a verb. A mortgage is “a conditional conveyance of property as security for the repayment of a loan,” according to the Princeton Web site, wordnet.com. It’s also, according to the same source, something “to put up as security or collateral.” None of these words made a lot of sense to me the way they’re strung together by the Princetonians, so I poked around for a more rudimentary definition. One dictionary described a mortgage as a “type of loan used to secure property.” I could live with that.

Unfortunately Google also offered me about 20 related phrases to research, all of which had the word mortgage in them. Like adjustable-rate mortgage, fixed-rate mortgage, reverse mortgage, wraparound mortgage, mortgage liens, mortgage insurance…And I could look up these terms, not only in English, but in Chinese, Spanish, German, French, Italian, Russian or ALL LANGUAGES. Can you imagine the cacophony of that last one? I didn’t click on that because I thought my computer might explode. I also didn’t click on “Jumbo Mortgage,” because that just sounds like a death wish. I’d prefer a teeny-tiny-baby mortgage actually.

I did want to know more about “mortgage rates.” That’s a good one — everybody’s always asking about “mortgage rates.” That particular term refers to the interest rate that you pay on the money that you’re borrowing. As of the July Fourth weekend, California interest rates for a home mortgage were hovering around 5.31 percent on a 30-year, fixed-rate loan.

Speaking of our nation’s birthday, I have to say that government Web sites about home loans are remarkably lame. Here’s a typical entry from the Federal Reserve Board’s Web site: “You’ve been looking at houses for months and months, and you have finally found it — the house that’s just right! Now, you’re anxious to buy your new home, move in, and get settled. But you still have an important task ahead of you — getting a mortgage loan.”

Independent sites are better — even the really generic ones, like About.com, and the really huge real estate sites, like Zillow.com and Trulia.com. The best resources, though, are local and personal. By personal I mean breathing, as in on the phone or sitting across from you, or driving you around town to look at houses. Most real estate agents can recommend reliable, real-life lenders and brokers who can explain the local particulars of the real estate market. You should shop among these lenders (banks and private companies mostly) for a mortgage and for knowledge. Maybe it’s not as easy as shopping for shoes at Macy’s, but the more you look the more you learn.

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