Reverse mortgages are controversial in the lending world. A lack of information combined with reverse mortgage scams fuels the debate. More than 78,000 reverse mortgages — also called home equity conversion mortgages — were insured last year.
Few lenders deal with these federally insured mortgages, but the ones who specialize in this type of home equity loan aim to clear misconceptions and inform the public of their benefits.
According to Jody Smythe, reverse mortgage specialist, Security 1 Lending, Omaha, a reverse mortgage is a home equity loan only available to people ages 62 and older. There are three ways to receive the money: a lump sum, a line of credit and monthly income.
There are substantial upfront fees as well as ongoing fees associated with reverse mortgages.
The older the applicant, the more money he or she can receive.
“It’s a sliding scale based on their age,” she said.
Smythe said there are various reasons why homeowners apply for reverse mortgages.
“The cost of living is going up,” she said. “There’s more fear of running out of money than dying. Most retirees aren’t moving out of their housing.
“What causes more fear is when the stock market drops,” Smythe said. “When you are retired, you don’t have as many years to save.”
The biggest misconception people have about reverse mortgages is that the bank will own their home.
“When they pass away, their house goes to whatever their will says,” Smythe said. “It’s a mortgage. If my kids inherit the house, they can either refinance the house or sell the house and repay the bank. It’s exactly the same.” Reverse mortgages are tax-free income that does not go against a homeowner’s homestead exemption for property taxes.
Smythe said interest in reverse mortgages has waned since the housing crunch.
“So many people were concerned their housing values weren’t what they needed,” she said.
Smythe does not recommend reverse mortgages for homeowners who don’t plan to live in their homes at least the next three years. However, she said, desperate times sometimes call for desperate measures.
“If you need heart medication and you need $1,000 a month, by all means, get it,” she said. “It’s not a black and white — this works and this doesn’t.”
Smythe started in the reverse mortgage business about 10 years ago. Back then, she said, “there were people in California buying really nice boats” using reverse mortgage income.
“We are really conservative in Nebraska,” she said. “We tend to use it to supplement the income. Maybe a spouse died and the pension died with the spouse.
“This was pretty much the last resort; now, the financial planners have embraced this program,” Smythe said. “It’s evolved with the boomers who look at housing differently. The previous generation looked at it (housing) as, it was something you paid off and didn’t do anything with it.”
Smythe recommends those interested in reverse mortgages visit a reputable lender, and she cautions against calling toll-free numbers on TV.
“Some of those commercials are not really to celebrate the reverse mortgages,” she said, and the companies sell callers’ personal information.
“Not all reverse mortgage companies have BBB (Better Business Bureau) ratings that are good,” she said.