Since her husband, Barry, died back in April, Carol Ann Pretzel of Thomaston has had to come to terms with more than her loneliness and grief.
“I’m only getting about half the Social Security we were getting when there were two of us,” she said. That, and a “very small amount of life insurance” are pretty much all she has to live on now, and at 66, without solid prospects for employment, she’s not feeling good about it.
“If I can’t find some way to supplement my social security, I’m going to be in something of a pickle,” she said. “When I sit down and look at all my weekly and monthly bills, I figure I can only stay here for about a year.”
“Here,” for Pretzel, is the home her parents left her in 1989, a modest, 3-bedroom ranch house on a quarter-acre lot on a dead-end road in the coastal town of Thomaston. It allows her to live the private, low-profile life she prefers, in company with her beloved dogs, Daisy and Bugs. But between paying back an old home equity loan, property taxes, insurance and upkeep, along with her groceries, clothing, pet care and other basic expenses, her budget is looking pretty threadbare.
That’s why Pretzel is considering a reverse mortgage, a special loan that allows homeowners age 62 and older to borrow against the equity in their homes. Unlike a more conventional home equity loan, a reverse mortgage requires no monthly payments, instead stipulating that the loan be paid back in full with accrued interest when the homeowner dies, sells the property or no longer claims it as their primary residence. The amount of the loan is based on the age of the homeowner and the value of the home and may take the form of a lump sum, a regular monthly allowance or an as-needed line of credit.
“The beautiful thing about a reverse mortgage is that you never have to make a payment,” said Heidi Eastman of Bangor, who works for San Diego-based Retirement Funding Solutions, one of dozens of companies that sell reverse mortgages in Maine. Companies screen applicants carefully to be sure they’re a good credit risk and able to meet routine expenses responsibly. While it’s not the right tool for everyone, Eastman said, “a reverse mortgage can work beautifully for the right borrower, so they can age in place and never have to move again.”
Not an option of last resort
But reverse mortgages, which date back to the 1960s in Maine, have a mixed reputation that includes stories of unsuspecting consumers forced to give up their homes, losing their life savings and being driven deep into debt by unscrupulous lenders.
The most egregious abuses took place in the early days, before these financial products were regulated and insured by the federal government, according to Jason Thomas, director of housing counseling and education at CEI, a Brunswick-based agency that provides the free, unbiased consumer counseling and support now required by the Federal Housing Administration for all who apply for a reverse mortgage.
“A reverse mortgage is a financial tool,” Thomas said. “It’s not right for everybody, but a lot of people are able to use it shrewdly as part of their retirement planning.”
Generally, he said, a reverse mortgage should not be used as a “last resort” option for critically cash-strapped homeowners, since borrowers are still responsible for property taxes, insurance, maintenance and other costs required by the lenders. Failure to keep up with these expenses can lead to default, the recalling of the loan amount in full and, potentially, foreclosure.
On the other hand, for those who who are financially stable but need a little extra for travel, home improvements or other retirement goals, or who want to pay off their standard home mortgage and get out from under a regular monthly payment, a reverse mortgage can be good solution. Interest rates, which may be either fixed or variable, run somewhat higher than standard mortgage or home equity loans — currently about 6.25 percent for a fixed rate loan and lower for a variable rate.
CEI counsels about 130 individuals and couples a year, making sure they understand how a reverse mortgage would affect them and continuing to provide information and support as needed throughout the loan period. Thomas predicts reverse mortgages will grow in popularity as Maine baby boomers age.
“We’ve got a lot of people who really want to age in place and not move out of their homes,” he said. “But even if they’re open to moving [to senior housing], there isn’t enough housing available. Unless people decide to move in with family members, this may be their best alternative.”
At the Maine Bureau of Consumer Credit Protection, superintendent Will Lund said Mainers considering a reverse mortgage should do their homework carefully. More conventional sources of cash, such as a second mortgage or a standard home equity loan, are typically cheaper and more straightforward, he said. Consumers who decide to pursue a reverse mortgage should think carefully about how they wish to receive the money, since loan officers may be under pressure to encourage the lump-sum option, which typically accrues the most interest.
Specific complaints received by the bureau have fallen into three categories, Lund said. First, many loan agreements fail to take into account the needs of a surviving spouse, sometimes demanding the immediate repayment of the loan and all interest upon the death of the borrower. This may force the sale of the home and the eviction of the surviving spouse.
The bureau also assists homeowners whose loans are recalled due to failure to pay taxes, insurance and other expenses. “When distressed homeowners call us, we work with them to see if their towns can offer some sort of abatement … or if there are other monies available to allow them to stay in their homes,” Lund said. “No one benefits if older folks are required to move out of their homes before they are ready to do so, and lenders can suffer reputational damage as well.”
Finally, Lund said, there are complaints from “disgruntled heirs” who discover the their parents’ property has a reverse mortgage on it that must be paid off before they can take ownership, which sometimes means the home must be sold instead.
In Thomaston, Pretzel knows she shouldn’t rush into a reverse mortgage while she’s still grieving the loss of her husband of 40 years. “They say you should wait a year before you make any big decisions,” she said. So for now, she’s focusing on sprucing the place up a little, sorting through some of her parents’ old belongings and possibly finding a part time job to supplement her income.
She’s not sure she’ll be eligible for a reverse mortgage anyway — her credit history is marred by a few missed tax payments, and the property shows the effects of deferred maintenance due to Barry’s long illness and disability.
But she can’t get comfortable with the idea of moving away from the place that has been her home and safe haven since she and Barry moved up from Massachusetts in 2000. She’s got a fireplace and a back porch. She can keep her dogs and a comfortable accumulation of family belongings. She really wants to stay right where she is, but she knows a reverse mortgage may not be the best way to do it.
“I haven’t talked to anyone who has a positive thing to say about it,” she said. “But no one’s been able to say exactly why, either. I think I’ll wait for my mental fog to clear before I get serious about it.”