Bending the Third Rail
Because We Should, We Can, We Do
Tuesday, January 30, 2007
Reverse Mortgage
I've been hearing a lot of ads lately about reverse mortgages. These have been around a few years now but are getting hotter as baby boomers move into retirement. Essentially a reverse mortgage allows a homeowner to borrow money with their home equity as the security for the loan. The loan is not paid back (no monthly payments) until the homeowner either sells the house or dies.

For many folks who are house rich and cash poor, this sounds like a pretty good deal. A good deal that is until you factor in that banks are involved:
Ingram's mortgage, like most of its ilk, is variable, with the interest rate tied to the widely quoted London Interbank Offered Rate. Her rate is currently 8.42% and can readjust every six months, up to a maximum of 14.92%. The 8.42% rate is about two points higher than the interest on a regular adjustable-rate mortgage. What significance is the interest rate if you're not making monthly payments? It's the basis for calculating how much Ingram or her heirs will eventually have to repay the lender.
In today's interest rate environment, these rates are usury. But the banks get away with it because the borrower never makes any payments. And if you're not on the hook to pay it off until you're dead, who cares? Right? It's a license for banks to steal.

Also remember that all these schemes are predicated on a continued appreciation in home values .... and more importantly .... and no depreciation. Of course those individuals who don't happen to have a multi-million dollar home are SOL.
4 Comments:
Anonymous Anonymous said...
Standard reverse mortgages rates are competitve around 1% over the 1 year t-bill currently a 6.1%. right now they are comparable to your typical 30 year rate. The loan you are talking about is a Jumbo and is priced right around prime(the same rate most people are paying on there home equity lines). Nothing usury about it. As well you can take out a reverse mortgage on any value home and never have any personal liability. It not a scheme it's just a loan that can benefit any house rich cash poor homeowner over the age of 62.

Blogger GreyHair said...
Thanks for your comment. And I don't totally disagree with you.

I think it is usury when consider that even a jumbo shouldn't be that high. You are comparing a reverse mortgage to a home equity loan. What if you compare it to a regular mortgage? Exactly what risk is the banking taking in excess of lending money for a home purchase?

Yes, you can get reverse mortgages on any property with equity (basically), but my point is that fewer people are having equity these days, and fewer people are owning homes, thus this is yet another retirement benefit for the haves vs. the have nots.

Anonymous Anonymous said...
Here is a great example of "a little knowledge is a dangerous thing" the original comment while well meaning is inaccurate. The response dead on; to get accurate information one should look to HUD.org. or NRMLA.org (National Reverse Mortgage Loan Association). Reverse Mortgages can be of great benefit and change the quality of life for a senior while allowing them to remain in the home they love. That said, the individual needs to look at all options and decide which is best for them.

Blogger GreyHair said...
Just to clarify. I'm not saying that reverse mortgages are necessarily "bad". I'm just saying that if you give the banks and inch, they'll take $1000. By taking advantage of older people who are trying to maintain a lifestyle, they appear (at least to me) to be charging incredible interest rates and getting away with it.

I totally agree with both posters that individuals need to decide what's best for them. But like with all things banking, "let the buyer beware". There may be cheaper alternatives available than the popularly advertised (they seem to be everywhere lately) RM.f