Last week's article on reverse mortgages generated a very interesting response from one reader. Unfortunately, due to his choice of vocabulary, I can't print his response here.
Suffice it to say that this advisor doesn't want me saying anything negative about his chief source of revenue.
This week I'd like to pull back the curtain on the real reason reverse mortgages have become so heavily marketed and what you need to do as a consumer to protect yourself.
In my previous article, I mentioned an elderly couple from Florida who were considering a reverse mortgage as the answer to their financial crisis. Over the course of a year, they attended two different seminars presented by their bank.
This couple was living beyond their means and saw tapping their home equity as a way to keep making credit card payments. A reverse mortgage would have given them access to a $38,000 line of credit, but would have cost them almost half that much in fees.
Fortunately, they shared their plans with their son. They were scheduled to sign the papers in a week. That's when he called me.
He gave them my advice and took the time to help them look at all the options available. More on their decision later; the issue I really want to explore is why are conservative banking institutions and mortgage brokers pushing these mortgages so heavily?
The answer is simple and obvious: the collapse of the housing bubble. Home values are declining, credit is drying up, and fewer homes are being bought or sold.
Mortgage departments are a huge source of revenue for a bank. Over the last 5 years, the mortgage department has been generating huge profits. Suddenly, that has all changed.
Enter the reverse mortgage. These have been available for some time, but when a loan officer was so busy writing traditional mortgages, there wasn't a reason to focus on them.
With some spare time on their hands, mortgage brokers need to find a way to feed their families. And from their point of view, the reverse mortgage is the perfect product for a variety of reasons.
For one thing, reverse mortgages are government guaranteed so the bank doesn't have to worry about losing money in a foreclosure. This is especially important when home values have plummeted 10% or more. In other words, there is very little risk for the bank.
It also helps that the fees on reverse mortgages are amazingly high. That means that the mortgage brokers, if they are successful pushing reverse mortgages, can continue to make money. The bank likes it because the mortgage department continues to add to the bottom line.
A third reason why reverse mortgages are so popular is because the market for them is far larger than the traditional mortgage market. Most people only buy/sell a home every 5-10 years.
Think of how many seniors are sitting in homes with huge amounts of equity! Instead of chasing a limited market of home buyers who can afford large down payments, mortgage brokers can tap a larger, ever expanding senior market.
It isn't that banks and brokers shouldn't make money. They should. My primary concern isn't the bank, though. It is you.
I want you to understand the motivations of those involved. You should research any large financial decision you make. Get all the facts so you can make an informed decision. It's the same when considering a reverse mortgage.
There are certain situations when a reverse mortgage can make sense, but I expect that there are many, many reverse mortgages done in situations where there were better alternatives. It was never intended as an easy way to pay for dream vacations.
What about my friend's elderly parents? Given all the facts, they chose credit counseling instead. They consolidated their credit card debt while reducing their interest rates.
They also decided to sell their home and use their equity to relocate closer to family. Besides leaving a hurricane zone, they'll be moving to a more temperate climate with a much lower cost of living.
Don't blindly fall for the reverse mortgage sales pitch. Explore all the options and make sure you're making the choice that is best for you. I also suggest you get your children involved as well. You could just sell the house and move in with them (just kidding)!
