Touting her new book, "The Money Class", Suze Orman has published an article on CNBC entitled, "Reverse Mortgages: Know the Risks and Rewards." Orman has always urged caution when discussing reverse mortgages, even though for years direct mail marketers have quoted her to create credibility in their mail pieces.
The crux of her concerns regarding the product is that older Americans may use a reverse mortgage as a way to temporarily avoid the inevitable, that they just can't afford their home. She warns that borrowers can set themselves up for foreclosure if they are unable to continue paying insurance, property tax and maintenance costs. As illustration, she points to the FHA reports regarding the growing issue with tax and insurance defaults.
Orman than points to the interest charges that accrue on the loan and how this can serve to absorb the equity of the home leaving no proceeds for borrowers or their heirs when the home is sold. She does provide an explanation of the non-recourse provisions. She does warn that this only applies when the home is sold, not if the heirs desire to retain the home, which then the entire balance is due.
"I have to say that I think reverse mortgages are a potentially dangerous step for many retirees," Orman writes. "It is far too easy to get blinded by the prospect of receiving much- needed income today and overlook some important considerations."
Her recommendation is that older homeowners consider a reverse mortgage as a last-resort emergency fund in retirement, instead of a primary part of a retirement plan. This is especially true for potential borrowers closer to 62 years old. She warns of the equity running out and borrowers having no other resources to turn to. Later in retirement, she suggests, if a senior needs extra income, it may be viable to consider a reverse mortgage, as long as the homeowner is fully aware of the costs and risks.
Coming from a person billed as a "money expert," the argument Orman uses in cautioning against reverse mortgages is a little simplistic. She does not that she believes a reverse mortgage can make sense "in certain situations," but she does not elaborate on what that means. Her warnings against it are really the basic elements any borrower should consider in weighing the benefits of the program against the costs.
A borrower who uses a reverse mortgage appropriately has the potential of extending their retirement assets much longer than could be accomplished without it. The most common overlooked benefit in these scenarios is the ability to remain in their home, which is one of the most common desires of older Americans. The costs of insurance, tax and maintenance can be much more manageable without a mortgage payment. The familiarity and comfort of remaining at home, for as long as health and safety keep it possible, seems to be worth those costs.