The average reverse mortgage borrower is about 75, an age when female life expectancy is 12.3 years. If all seniors utilized reverse mortgages at this stage in life, the TALCs would always be low. But, some keep waiting. The older the borrower, the more money they can get, but the higher the TALC on average.
Thus, the HECM benefits a sub-set of the elderly, namely those with a desire and the ability to stay in their home for life. Every senior is eligible, but those in poor health, for example, should recognize their risk of paying a higher TALC if they are forced out of their home prematurely. (Of course, couples have an extra advantage in that the mortgage doesn’t end when the first dies.)
The examples above also point out a basic fact: the real cost (TALC) cannot be determined in advance, only estimated. Not only are the cash flows and ending date undetermined, most HECMs have variable interest rates. Uncertainly may breed fear that it could be expensive.
A reverse mortgage is asset-based lending to consumers, which is unique. Loan collection is based 100% on the home, not on the borrower’s ability to repay. No other type of consumer loan works this way, including forward mortgages, lines of credit, auto loans, and student loans. The reverse mortgage lender shares the home appreciation risk with the borrower and may end up assuming all of it.
Over long periods of time, investment in real estate has proven to have lower returns than investment in equities. Yet, people continue to invest in homes in amounts far higher than their returns would justify. They do this because a home is not just an investment asset; it is also where the heart is. Particularly with seniors, their own home may have deep emotional value, despite not being an ideal environment. Seniors all too often live in homes that are older, need maintenance, aren’t accessible, and have far more space than they need. The ideal place for an 85 year old widow, based strictly on physical capability, is probably not the house she and her husband bought 40 years ago and where they raised their kids.
The ability to stay in a home until death is really a luxury. To have someone else assume some or all of the appreciation risk ought to be expensive.
The lender has no control over the length of the loan and, in extreme cases, it could run to 40 years. How much could a home’s value decrease, relative to inflation, during that time? How much deferred maintenance will go on? Lenders actually have no right to enter homes for inspection although they do have the right to “call” the loan if they know it is not being maintained to FHA standards.
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