I enjoyed Lu Bauer's recent Down East column on the never-ending quest for more. The sad part is that most of us do eventually come to understand the cost of such a quest - but realize the cost so late in life that the damage to financial health has long-since been done.
It's hard to imagine that the average 50-year-old has made over $1 million dollars in a lifetime of work yet has set aside little savings in the quest for more frivolous things, more experiences, and more perceived happiness. I read the other day that the average 50-year-old person has $2,000 in savings. That reality may seem difficult to believe but I can tell you that from my experience that the amount is fairly accurate.
What we are finding more frequently is as people approach retirement age they have a lot of equity in their homes but little money saved for retirement. This reality leaves people with few choices but to refinance their home to pull equity to cover expenses. Stories of retired individuals needing to raise cash to continue their current lifestyle and to retain ownership of their homes abound. So do the stories of those who accepted poor advice from inexperienced - or unscrupulous - home loan lenders.
Mortgagenewswatch.com reported a recent study of 4,000 sub-prime mortgage loans written by a national lender that revealed that one in seven loans were to individuals older than 60 years old. Some of the loans were more predatory than sub-prime. As examples, a 79-year-old janitor was persuaded to obtain ten sub-prime refinances over a nine year period while a 93-year-old woman was convinced to refinance three times in just three years. The saddest part of the last example was that the loans stripped away more than $50,000 in home equity in fees alone and eventually resulted in monthly obligations three times the borrower's monthly earnings.
How prevalent is this type of lending? The Seattle Times reported a study of thousands of sub-prime mortgage loans reflecting 40 percent of the sub-prime loans going to individuals over 50 years old. Many were likely very susceptible to the marketing pitches of sub-prime loans and many of the negative characteristics associated with the pitches.
Yet with all of that said, my opinion of reverse mortgages has changed. Yes, the closing costs are expensive due to the special insurance that is attached to the loan to cover the possibility that the borrower may live past the established life expectancy (approximately $10,000 in costs) but not nearly as expensive as the other option of multiple refinances. And, though they are not for everyone, reverse mortgages certainly can be a good option considering most retirees' great need for discretionary funds.
Although I think reverse mortgages are not the best financial choice when other options exist, they may be a good answer to the dilemma that many find themselves in as cash runs short and home equity remains strong. Maybe a reverse mortgage is just the cost of the quest for more things earlier in life, and, just maybe, it isn't the worst cost that one can have.
An overview of reverse mortgage will follow in the next Down East article and can also be found at www.askmarkjones.com .
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