It appears that popularity in the often controversial “reverse mortgage” is subsiding even as interest rates hover slightly above all time lows. For those that are new to (or researching) these products they are exactly what their name insinuates – the opposite of a conventional mortgage.
They are offered to people over the age of 62 only, which in and of itself has been the center point for a lot of criticism since the height of their popularity back in 2006-2008. Most of the criticism dealing with age restrictions revolves around the complexity of these ‘equity release’ products and the fact that some lenders have been known to use this to their advantage. They also cost much more to set in motion than a conventional mortgage would. On average new mortgages cost owners roughly $5,000 while the reverse mortgage costs nearly $8k (according to wiki: reverse mortgages).
Basics of a Reverse Mortgage
1) Who should use them?
Anyone or couple over the age of 62 that is strapped for cash. These products should be treated as last resorts. In contrast with a normal mortgage, a reverse mortgage puts money back in the consumers pocket every month by depleting a portion of the equity in one’s home.
2) Which federal organizations back them?
The United States Department of Housing and Urban Development (HUD) manages the federal program. A survey conducted by the AARP was also released in 2006 stating that 93% of all reverse mortgage recipients were at least satisfied with their reverse mortgage experience.
3) How much money can you get?
There are five elements involved in determining the total sum one can receive over the course of the reverse mortgage. 1) Appraised value of property including any maintenance costs. 2) Interest Rate – this is based of LIBOR average or 1 year US Treasury Bill. 3) Your age. The younger you are the less you are eligible to receive (remember it’s only available after the age of 62). 4) How you choose to take your sum. Monthly payments would garner more than one lump sum over the life of the reverse mortgage. 5) Limits and regulations based on HUD restrictions and laws.
Commercialization of Reverse Mortgages
The most notable ally for reverse mortgages as far as marketing these products is concerned is likely former politician/actor/lobbyist Fred Thompson (R). Fred Thompson, former Tennessee Senator (1994-2003), took the senate seat vacated by Al Gore two years prior. He has also played both a politician and lawyer on television (most recently as a prosecutor in Law and Order). Below is one of his many reverse mortgage commercials that are most prominently seen on Fox News but also many other 24 hour news networks.
While Fred Thompson may make for a likable spokesman to the 62+ aged population his only work in the financial world came from his years as a lobbyist. He primarily lobbied for banking deregulation under the Reagan administration and likely wasn’t that significant of a player as his total lobbying income was reported at under $2,000 (according to Wiki: Fred Thompson).
Our Take on Reverse Mortgages
As we mentioned before, these are asset depletion products that should only be used in dire financial situations on par with bankruptcy. Although commercials make them seem stress free, simple and generally beneficial, they often get criticized for their complexity which can lead to predatory lending (especially to an aging population). As for their popularity, Google Trends is showing a significant drop off in interest for these products since their hay days starting back in 2006.