Q&A: Reverse mortgages have improved but still require caution

Dear Liz: You’ve written about the potential financial flexibility and options for preserving quality of life for seniors by using a reverse mortgage line of credit. I believe there is a great need for much more cautionary advice regarding reverse mortgages.

Someone I know entered into a reverse mortgage and the consequences have been disastrous. She was barely past the minimum age of 62 when she got the loan and took the lump sum option, only to spend it hastily on various purchases and debts.

Having no income other than Social Security, and almost nonexistent savings, she faces many years of figuring out how to pay property taxes and ongoing maintenance costs to avoid foreclosure. So although she has her home, it’s a precarious situation from year to year. She also no longer has an asset that could be used for long-term care or other expenses because the reverse mortgage makes it unlikely the owner will receive any leftover proceeds after paying off the lender.

Answer: You didn’t say when your friend got her reverse mortgage, but the rules for lump-sum payouts have been tightened under the Federal Housing Administration’s Home Equity Conversion Mortgage program.

In the past, borrowers could take 100% of the loan proceeds upfront. Today, only 60% is typically available in the first year. The total amounts that can be borrowed overall have been reduced as well. These changes were meant to shore up the program’s finances, but they also could lead to fewer situations like your friend’s.

That said, people should be extremely careful about encumbering their homes in retirement. Prospective borrowers have to meet with HECM counselors to discuss a reverse mortgage’s financial implications and potential alternatives, but they would be smart to also meet with a fee-only financial planner.

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  1. I’m not sure I follow the logic. She took a lump sum and secured it with property. She would be paying taxes and maintenance on that property regardless, so all of that is entirely moot. If she can keep up on that she not only gets to continue living there, but still can participate in any upside of appreciation in the interim.
    She could have gone out and taken out a traditional mortgage secured by her home, or a HLOC, and would be in a worse situation (based on my understanding she’d surely end up foreclosed on and evicted if unable to repay those loans).
    I see this as a story of poor financial management, not of the particular type of loan issued. I would further posit that by choosing the reverse mortgage she is now better off than the alternatives that likely would have been taken at the time.