Consumers Union, the non-profit publisher of the Consumer Reports magazine series, recently released a stinging report entitled, “Examining Faulty Foundations in Today’s Reverse Mortgages.” I will address the report in its entirety in a later post, but for now, I would like to focus exclusively on the section on reverse mortgage alternatives.

The report jibes with the advice that I have proffered on this website, and advises that, “Reverse mortgages are very expensive loans, and as such, they should be considered only as a last resort.” Accordingly, Consumers Union recommends that prospective borrowers “should first determine if he or she qualifies for less expensive programs…including Supplemental Security Income (SSI), Medicaid, prescription drug discount programs, energy and telephone discount programs, City and County grants and low-cost home improvement loans (sometimes called “single purpose” loans), state property tax postponement programs, In-Home Supportive Services, and Veterans pensions to pay for in-home care.” The report includes a reference to HECM Resources, a fantastic website with a comprehensive listing of reverse mortgage alternatives, organized by state.

Consumers Union also devotes considerable space to so-called Family Financing. Just as it sounds, this involves a loan from family members (or friends) to the homeowner in lieu of a reverse mortgage. The advantages of this kind of reverse mortgage are primarily financial. Even if the family member(s) charge a comparable rate of interest on the loan, the absence of insurance premiums, origination fees, service fees, and other closing costs will yield significant cost savings over the life of the mortgage, which means there is more home equity left over if/when the home is ultimately sold. Since the loan lacks insurance, however, there are downside risks. Namely, if the home equity falls below the balance of the the reverse mortgage, the lending family member will have no way to collect the difference. Depending on how this is resolved, this could lead to awkwardness and even resentment.

There are a handful of other alternatives that the report doesn’t explore. Common-sense possibilities include consuming less and saving more, retiring later, and/or downsizing into a smaller home. Prospective borrowers can also cash in life insurance policies or borrow from retirement accounts. More complicated solutions include HELOC loans, single-purpose reverse mortgages, and even products that forgo home appreciation in return for a one-time payment to the homeowner.

For those borrowers that are determined to obtain a reverse mortgage, you should consider that you still have options. There are HECM Saver loans and HECM Standard loans, fixed-rate loans and variable-rate loans, loans that disburse all of the proceeds upfront and loans that make term/tenure payments over the life of the life. The point is simply to understand all alternatives (both aside from and within reverse mortgages) and make an informed decision.

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