Suze Orman: Know the risks, rewards of reverse mortgages
Suze Orman says reverse mortgages can look enticing, but they can sink you financially, if you're not careful.
In this Nov. 1, 2010, file photo, Robin Miles stands outside her Baltimore home. About a year ago, Miles got a reverse mortgage on the three-bedroom Spanish-style house. Financial guru Suze Orman suggests reverse mortgages be used only as a last resort.
Steve Ruark/AP/File
By Suze Orman, CNBC.com
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As far as I am concerned, retirees have been the most innocent of victims of the financial crisis. During the past two and a half years the aggressive action of the Federal Reserve to lower short-term interest rates, while sound policy, has nonetheless created great hardship for retirees who rely on safe interest income to to live on. Yields on bank and credit union deposits, as well as short-term Treasury bills, are below 2 percent. It’s hard to make ends meet with that paltry payout.
So I completely understand when retirees come to me and ask what I think about taking out a reverse mortgage on their home. It sounds so enticing. You tap the equity you have in your home, owe no money to the bank as long as you stay in the home, and you can suddenly have $1,000, $2,000, or more income each month. It sure seems like such a great lifesaver.
But I ask every retiree — and the grown children of retirees who are looking out for the best interests of their parents — to be very carefuI. A reverse mortgage can end up sinking you financially.
The biggest risk with a reverse mortgage is that you do not stand in the truth of your situation. While a reverse mortgage can indeed be a viable way to generate income, it is very important to understand that after you take out a reverse mortgage you will still be responsible for paying the property tax, the insurance premium, and all the maintenance costs for your home. If you can’t continue to cover those costs you will risk losing your home to foreclosure. That’s exactly what many retirees who already have a reverse are facing today. (Just check out this note from the Federal Housing Administration, which insures the majority of reverse mortgages. The FHA is well aware it has a growing problem on its hands.) I don’t want you to end up in such a sad predicament.
As I explain in my new book, The Money Class, the only way to create true security is to Stand in Your Truth. By that I mean carefully assessing what is real for you today. Not what you had in the past, or what may have “worked” for you in the past. And not what you hope or wish your future holds. Security tomorrow depends on a clear-eyed assessment of what is true and honest for us today. For retirees, there may be no more important Stand in the Truth act than to honestly assess whether a reverse mortgage will actually solve your income shortfall, or whether it is just temporarily masking the fact that you really can’t afford to stay in your home.
In the following excerpt from The Money Class I explain how you should carefully size up whether a reverse mortgage is right for you:
LESSON 7. REVERSE MORTGAGES
In the coming years I expect reverse mortgages to become increasingly popular among retirees who are eager to find extra income. A reverse mortgage is available to anyone who is at least 62 years old and owns a home outright, or has a small mortgage balance remaining.
If you are married and both spouses are on the home’s title, the youngest spouse must be 62 before you can consider a reverse. With a reverse the borrower can opt to receive a lump payment, or an ongoing payment for a set period of time, or a line of credit in which the home equity is the collateral for the loan. It is literally a way for retirees to live off their homes. While I think a reverse can make sense in certain circumstances,it is not nearly the win-win it is often made out to be. There are many costs and risks to doing a reverse that you mustfully understand.
REVERSE MORTGAGE BASICS
The vast majority of reverse mortgages are loans that are insured by the Federal Housing Administration. The formal name for these FHA- insured loans is Home Equity Conversion Mortgage (HECM). The maximum home value that can be tapped for an HECM is based on home values in your area. The upper limit in 2011 for people living in high- cost areas is $625,500. But that is just a limit used to calculate the benefit you can receive; in fact, no one can receive a payment anywhere near the full value of their home; typically your original loan amount might be 60% or so of your equity.
