“Please Explain A Reverse Mortgage”
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Someone asked me recently to please explain a reverse mortgage.
Remember when you bought your home? You got a mortgage, a huge loan, and you put a down payment into the purchase, real money you have worked for and saved, and that’s how you came up with the purchase price.
If you got a 30 year fixed rate, at the end of the thirty years you may pay double or triple the price of the home. You can usually pay it off faster if the loan contract allows you to, saving a lot of money in interest charges.
So many years later, when you’re a senior retiree, or within years of retirement (you have to be at least 62 years old to apply for a reverse mortgage), let’s say you have paid off the home, or paid it off at about 80%.
You’d like to retire but you don’t have much in the way of savings. Your social security income, combined with that of a spouse if you have one, is not enough to live on, and continue paying the property taxes and home maintenance.
Then you hear a radio ad, or see a television ad, performed by a celebrity you know and like. This tells you that you can sell your house back to some kind of financial institution, which will pay you a favorable monthly amount for your home.
This business will buy your home, slowly, over time. How much time? Depends on the loan contract. During the effective duration of the contract, you can live in the home. Your spouse can as well, even if you die, as long as the spouse is on the loan.
“What Are The Reverse Mortgage Risks?”
Reverse mortgage risks is a high profile topic on consumer and government sites. Both the FTC and the FBI issue warnings.
If you outlive the reverse mortgage loan it’s payable in full right then according to Forbes. If you are given a few months grace, the loan amount continues to increase. And that could wipe out your savings if the house sale can’t pay it.
If it is a bad time for you to sell, the lender can foreclose on the home. Now you have no house and any savings will be dissipated by moving and the cost of renting. Worse yet, now you’re so many years older.
The Pros And Cons Of A Reverse Mortgage
- Mortgage companies usually charge fees to initiate a loan and it will also have closing costs just like any other mortgage.
- These loans are considered expensive and complicated.
- Intermittent costs may occur for the ongoing administration of the mortgage.
- The balance you owe on the loan increases every month and interest may be high.
- The monthly payout reverse mortgages (most typical) are subject to varying rates and may increase your balanced owed.
- This loan can eat up all the equity in your home, leaving a diminished or no legacy for your heirs.
- You, the home owner, are responsible for all expenses and maintenance. In fact, some loan companies withhold payouts to save for upkeep. After all, it is likely that it will end up being their home to sell.
- If you neglect the upkeep or property taxes, some companies will then demand full payout.
- Interest on these mortgages may not be deductible from your taxable income until the loan is paid back in part or whole.
In the US the government attempts to protect consumers, especially seniors, from reverse mortgage cons by providing counseling for home owners who are seeking financial relief. These advisors have no financial interest in the outcome of an application for funds.
After such a counseling session, a certificate is issued to the person or couple and it is required for a loan application.
Retirees are “marks” for the shark infested markets of these risky loans. Advertising, church groups, and the seminar circuits are busy roping in attendees. Desperate and vulnerable seniors may have their critical thinking faculties submerged by their financial stress.
The FBI recommends…
…That you never respond to an unsolicited ad. If you listen to talk radio you’ll hear them every day! You will get the best information from a HUD counselor.
The Federal Trade Commission advises…
…That if during a reverse mortgage application process there is any pressure to proceed, or any feeling of being rushed, to “just walk away“.
Review all the pros and cons of a reverse mortgage.
Like with any loan, shop around and compare fees, interests and other options. It is crucial to understand how the loan amount increases, and that there are conditions under which the loan may become payable.
You may have to pay for a home appraisal and inspection upfront.
Forbes advises that you have an attorney review the loan contract, and that is an extra cost for you too. It is worthy of note that the bigger banks like Bank of America and Wells Fargo no longer issue these loans.
Your regional Area Agency On Aging can give information on alternate types of loans for home repairs. Don’t get “sold” on a private lender loan if you have better options.
On the hud.gov web site it states:
“Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender. “
Two Important Points
Get a HUD counseling session with a qualified person who has no stake in you getting a loan.
Get a US government insured loan, an HECM.
(The two and a half point – have an attorney review the loan contract.)
Update: I wrote this two years ago. I just came across a Washington Post article by Jonnelle Marte. which discusses the common financial struggles of people over 60. The comment section follows mostly the issue of reverse mortgages and it is interesting! Her main points in the article are:
- Struggles with debt
- Suffering the complications of reverse mortgages
- A difficulty with recovering from scams or identity theft
- Non-comprehension of banking products and fees
- Managing finances after a spouse’s death
One comment is: “Not mentioned is the widow’s tax penalty. The year after the death of a spouse, the survivor files singly and is bumped to a higher tax bracket, even if his/her income is likely to be lower.“
That is something that I think should be changed!
I hope I’ve given some insight here for my friend who asked me to please explain a reverse mortgage.
Would you like to learn to write a blog like this?
Drop me a comment below if you have any thoughts or questions about reverse mortgages, or other financial concerns that seniors face.