Today, we bring you an interview with the blogging team from Reverse Mortgage Adviser. Below, they share their thoughts on the benefits and drawbacks of reverse mortgages, as well as handful of specific issues that (potential) borrowers should be aware of. [Such represents the opinions of Reverse Mortgage Advisor staff and is not intended to serve as official advice].

ReverseMortgage.Net: Critics of reverse mortgage argue that they are expensive, complex, and often unnecessary. Do you agree with any of these notions? Can any negative generalizations be made about reverse mortgages (i.e. Are there certain conditions/situations in which reverse mortgages are always inappropriate?), or must the suitability be gauged on a case-by-case basis?

You always have to look at each potential borrower’s situation on a case by case basis in order to address the individual’s current financial position and the needs they are trying to satisfy.  That is why we always recommend speaking to a Reverse Mortgage Specialist if you are considering the program.  Due to the fact that upfront costs tend to be higher than a conventional loan, a reverse mortgage is not the best option if looking for a short term source of income. In general, it is best if homeowners can commit to living in their home for a minimum of 5 years in order to offset/spread out the upfront cost over time.

ReverseMortgage.Net: On a related note, many reverse mortgage lenders have announced that they will aim to make reverse mortgages less expensive, by eliminating origination fees and/or paying part of the FHA insurance premium. What’s your take on this? Do you agree with the handful of commentators who think that this will only serve to confuse (potential) borrowers?

It is a very positive development for the industry.  It is a good step in the right direction to help more seniors qualify, as well as increasing the payout (sometimes by thousands of dollars) for those already eligible.  Many seniors use a reverse mortgage to eliminate their current mortgage and other monthly payments, helping them to free up more cash and live more comfortably during their Golden Years.  Rather than creating confusion for borrowers, this may actually help to simplify the explanation of the fees since there are fewer of them.

ReverseMortgage.Net: The FHA recently announced that it will step up pressure on lenders  to initiate foreclosure against seniors who are in violation of the terms of their reverse mortgages. Given that lenders are protected against default by FHA insurance, do you think they will be aggressive in foreclosing? Should borrowers be concerned?

It is not likely that lenders will be overly aggressive with foreclosures because of the FHA insurance guaranteeing the loan, and the loans are much more valuable when homeowners occupy the property as long as possible.  Borrowers should always consider the requirements of a loan before moving forward.  Borrowers can address loan requirements with both the Reverse Mortgage Specialist and the HUD counselor.

ReverseMortgage.Net: I read a recent report that showed the the average reverse mortgage is terminated (presumably by the borrower) within only 6 years. What’s your interpretation? Does that imply that borrowers are using reverse mortgages inappropriately? Or perhaps borrowers are moving to repay their reverse mortgages while they still have equity remaining in their homes?

This statistic can most likely be attributed to a combination of those two assumptions.  With the state of the economy over the past few years, it is not unlikely that some seniors may have used their loan proceeds to account for the shrinking of their retirement funds, or even to downsize their homes to cut back on tax and homeowner insurance costs, etc. Some seniors may have done so more as a precautionary move for the unforeseen future economic environment (depreciation).

ReverseMortgage.Net: In your opinion, when is it economical to refinance a reverse mortgage? In other words, how do you balance the prospect of a lower interest rate and more cash with paying the hefty fees associated with refinancing?

It is economical to refinance a reverse in a few situations. The first reason would be if you can dramatically reduce the interest rate on the loan, especially if you can get a fixed rate that is lower than your current adjustable rate HECM. Another situation would be if your home has appreciated over the past few years at a consistent rate.  Many times the rate of appreciation may be enough to offset any costs associated with refinancing.  Most importantly, it is recommended that homeowners who are considering refinancing a reverse mortgage make sure they are not planning to move within the foreseeable future; again this will allow them the opportunity to spread those costs over time, and allowing time for the appreciation of the home in order to help offset costs.

ReverseMortgage.Net: For certain borrowers, it seems that a single-purpose reverse mortgage would be both more economical and more suitable than an HECM reverse mortgage, yet the vast majority of reverse mortgages are insured by the FHA as HECMs. Is this surprising, and do you expect this to change?

This is not surprising considering the current economic environment.  As the economy stabilizes we will begin to see more proprietary loans, creating more options for borrowers.

ReverseMortgage.Net: Is there a way for borrowers to obtain reverse mortgages and still ensure that if/when the time comes, they will still have enough leftover equity to switch to a long-term care facility?

There is no guarantee, and predicting future home values is not possible.  The best way to plan for such a switch is to consult with a financial planner to assess the funds received through the reverse mortgage and/or the amount saved each month by eliminating mortgage payments.  A financial planner can help to develop a plan that aims to ensure funds will be accessible in a worst case scenario, like a depreciating housing market that would eliminate equity.

ReverseMortgage.Net: Most reverse mortgage legislation has aimed to simply increase consumer education and prevent fraud, rather than make it more difficult for borrowers to obtain reverse mortgages. What’s your position on such legislation? Is there a possibility that future regulations will be more strict?

This legislation is a very important part of the reverse mortgage industry, and reverse mortgages need to be closely regulated to protect the senior demographic the loans are designed for.  The goal should be to help as many seniors as possible rather than making it more difficult for seniors, who would greatly benefit from a reverse mortgage, to qualify for one.  However, because these loans are subject to fraud (as is the case with all financial products), education is a very important piece of the puzzle.