My mother recently forwarded to me an official-looking letter she received in the mail asking what it was all about. In big, bold letters it says:
Federal Housing Administration
Federally Insured Benefit HECM Program
Then it says that the recipient "may be eligible for to participate in the U.S. Department of Housing and Urban Development (HUD) Home Benefit Program." The letter is designed to look like an official, government notice.
It repeats its reference to the "Federally Insured HECM Program," but never explains what the acronym stands for. It talks about how money is available to the over-62 homeowner to pay her bills, how she can still live in her house for the rest of her life, the money is tax free, doesn't affect benefits such as Social Security, and they can still leave the house to their heirs.
The letter comes from a Garry Bates of Evolve Bank & Trust in Worcester. You can call him at 877-533-5754.
Everything he says is technically true, but tells only part of the story. He's selling reverse mortgages, which permit seniors to borrow on their homes when they do not have sufficient income or credit for a more traditional loans. Reverse mortgages are great tools that permit seniors who are house rich and cash poor to draw on the equity in their homes. But they are more expensive than traditional mortgages and should only be used when no other options are available.
In addition, even though they are available beginning at age 62, if anyone uses up the equity in her home at that age, it will not be available for her needs in the future, which may well last another three decades if the homeowner is not ill.
Let's examine Mr. Bates' claims:
Yes, the holder of a reverse mortgage may stay in her house for the rest of her life. But if she moves out, she must repay the bank within one year, whether or not it's a good time to sell the house.
In addition, if she uses up the equity, she may have less resources at a later to date to pay for a place to live or necessary care and living expenses.
The money is tax free because it already belongs to the homeowner. But if and when the homeowner sells the house, she may have to pay taxes on capital gain which would include the amount she already borrowed and spent. (This may or may not be a problem depending on the amount of gain since homeowners can exclude up to $250,000 of gain from taxation.)
While reverse mortgages do not affect Social Security benefits, they can affect MassHealth or Veterans Administration benefits which can be vital to paying for care at home.
It's true that the homeowner can still pass the property on to her children, but there may well be less to pass on if the equity has been spent down by means of the reverse mortgage. Depending on how the money is spent, this may or may not make total sense. In addition, it's unlikely that the senior will be able to pass on the family home, since the reverse mortgage must be paid off within a year of the owner's death.
In short, it's dangerous to think of one's home as a piggybank to dip into as needed. The still ongoing housing crisis shows the risks of this approach. On the other hand, the equity in one's home can be an important resource, especially for seniors, and reverse mortgages can be important tools for accessing that resource. Whether to do a reverse mortgage is a major decision that depends upon many factors. It makes me nervous when reverse mortgages are sold by direct mail to unsuspecting seniors.
Click here to read more about the pros and cons of private reverse mortgages.