SmartMoney.com has a good article about reverse mortgages. Specifically, they address the pitfalls of this type of financing. The key point here is that reverse mortgages can be a useful financial vehicle, but clearly are not for everybody. I have provided some links below to more reverse mortgage information published by the private senior organization AARP, the reverse mortgage industry association and the federal government’s HUD Department. Hopefully, these publications read together will give a balanced overview of the reverse mortgage and help borrowers make more informed decisions about what’s best for themselves.
Reverse mortgages are like many specialty financial products. They are a great idea to address special situations, but then they take on a life of their own and tend to get oversold. Adjustable rate mortgages, option ARMs and negative amortization mortgages are all great financial products. But they were oversold. By oversold I mean sold to people who had no business getting them and to people who didn’t understand them, and many who didn’t want to understand them, as long as they got their house. Throw in the burst in the housing bubble and that was the recipe for disaster for lenders and many borrowers.
My sense is the explosion in the popularity of this product is creating a situation where people (and lenders) are getting into situations they don’t fully understand. When you are young and make a mistake, time is on your side to help recover. Senior citizen’s have a much more difficult path to recover from serious financial mistakes. Senior citizens should always be cautious with financial decisions and especially cautious with reverse mortgages. Rightfully so, a home is for many people their largest asset, the roof over their head and a source of stability in their life.
Borrowers should pursue these mortgages with caution, education and careful planning. Lenders should embrace customer education, complete and informed disclosure, and an underwriting process that is more than just numbers oriented to help ensure the product is right for its customer.