Just what the heck is a "reverse mortgage," anyway?
Cable TV fans may have noticed that Fred Thompson finally woke up from the years-long nap he took after his 2008 presidential bid, and now, with renewed vigor but that same reassuring smile, he would like to talk to you about a reverse mortgage for your home.
Reverse mortgages have become an increasingly popular choice for cash-strapped seniors in recent years, and lending companies - with celebrity spokesmen like Thompson and the Fonz - have aggressively marketed these loans in TV ads.
So what exactly is a reverse mortgage?
A reverse mortgage is a loan available to seniors over 62, allowing them to tap the equity of their house to receive a lump sum, monthly payment, or a line of credit. Seniors don’t have to make any monthly payments of their own (hence the “reverse” part), but they are required to continue to pay property taxes, insurance and home maintenance, or their home can be foreclosed on.
The loan is not taxable, and generally does not have to be paid until the homeowner dies, moves or sells the house. Older homeowners are considered lower risk, so they can take out larger reverse mortgages at lower interest rates.
What’s the catch?
Reverse mortgages typically come with high fees and interest rates, so heirs will very likely be forced to sell the house when the homeowner passes on, in order to repay the debt. And seniors who become unable to care for themselves and are forced to move into long-term care will be hit with loan repayment right when they can least afford the added expense. Some couples will also take out the reverse mortgage in the name of the older partner to ensure a better rate, and if that partner passes first, the remaining partner will stuck repaying the debt earlier than envisioned.
In response to the growing number of financially distressed seniors turning to reverse mortgages and opting for the maximum allowed lump sum to stave off financial ruin, the Federal Housing Administration, which insures the majority of such mortgages, is tightening its restrictions on eligibility and the size of loans allowed. And consumer groups and the AARP have also warned seniors about the dangers of these loans, advising them to carefully read agreements before entering into anything that sounds enticing, but may leave them or their loved ones with serious financial problems when the bill comes due. At the very least, based on his performance in 2008, in Law and Order, and most damningly, in Die Hard 2, folks should be wary of anything Fred Thompson is selling.
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