First it was Robert Wagner and now Tom Selleck selling reverse mortgages on daytime television. The commercial promises that its “not to good to be true” and that its “not just another way for the Bank to get your home.” Repayment is due “when you leave your home” (no mention of death), and is pitched as a “way to bring a more stable and secure retirement” and allow homeowners to “stay in the home they love.”
Reverse mortgages work by using a portion of your equity to
fund the loan with the remaining equity used to pay the accruing interest on
the loan such that the borrower never has to repay the loan until they either
permanently leave the property, die, or otherwise default under the loan (such
as for failing to pay taxes, condominium assessments or insurance). The key
feature of the reverse mortgage is cash up front, especially for people with
substantial equity in their home, and the lore of no monthly mortgage payments.
What is never mentioned in Tom Selleck’s advertisement is
the downside to reverse mortgages. At the very end of the ad is a disclaimer,
in very small print, which actually provides a clear warning of the downsides
of this program. It makes it clear that a reverse mortgage decreases your home
equity through negative amortization; that borrowers are responsible for taxes
and homeowners insurance; and that borrowers must reside in the home and
maintain same, otherwise the “the loan becomes due and payable.”
Another thing not mentioned in the reverse mortgage
advertisement is the high cost of a reverse mortgage. Origination fees may be
as high as $6,000 plus there is normal loan closing costs and an upfront
mortgage insurance premium. These fees are usually much higher than
conventional mortgage loan closing fees. In addition, on top of the ongoing interest
charged on the reverse mortgage, the reverse mortgage borrower pays servicing
fees and annual mortgage insurance premiums equal to 0.5% of the outstanding
mortgage balance.
Using a reverse mortgage to purchase a condominium is no
different than traditional mortgage financing. However, qualification for a
reverse mortgage is restricted to persons over the age of 62 years old. In
addition, the amount that can borrow varies substantially depending on the age
of the borrower. A younger borrower is
only eligible for a smaller loan while an older borrower can borrow
substantially more on the equity in their condominium. All of this is based on
actuarial data regarding how long the condo owner will live so that there still
sufficient equity in the property when the loan comes due.
For example, a 62-year-old purchasing a $550,000 Florida
condominium is only eligible for a reverse mortgage of $217,800 to $288,200 while
a 78-year-old would be eligible for nearly $70,000 more. In both cases, especially when considering
closing costs, a substantial amount of cash would be needed to purchase that
condominium, most likely in excess of $225,000 to $350,000.
When the reverse mortgage comes due, mostly caused by an
elderly borrower no longer residing in the condominium or the last surviving
spouse passing away, the condominium may be sold by the owner or the owner’s
heirs to pay off the reverse mortgage. This is different than traditional
mortgages which do not become due and payable upon vacating the condo or
dying. With traditional mortgages the
owner or heirs have the option of continuing to make monthly payments until
property values go up or to keep the property as a rental income producing
property. This option is not available for reverse mortgage condominium owners.
The mortgage must be satisfied, or the mortgage will be foreclosed.
Reverse mortgages on condominiums also carry with them the
many restrictions that condominium themselves have on rentals and resales. For
example, many condominiums prohibit renting a property for one or two years
after sale. Because of the looming threat of foreclosure, it is sometimes
necessary to rush the sale of a condominium encumbered by a reverse mortgage.
Because of the rental restriction the market for buyers is reduced since
investors or second home buyers may not be interested in a property they cannot
be occasionally rented.
Many condominiums are also age restricted, prohibiting sales
to buyers under the age of 55 either in a 100% restricted community or the more
common 80/20% blended community. Again, these types of restrictions make resales
more difficult. All of this of course is on top of dealing with a deceased
parent and the probate requirements to clear the title to the condominium. In
many cases after deducting the cost of sale and ongoing, accruing interest,
there is little to no equity available and therefore, in many cases, the
condominium is not sold and instead foreclosed by the reverse mortgage lender.
Deciding on a reverse mortgage is a serious, life altering
decision that should not be made based on a commercial starring Tom Selleck.
Sometimes things are too good to be true and reverse mortgage may be one of
those for many people.
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