Reverse Mortgages – Boon or Boondoggle – South Florida Retirement Abuse and Exploitation Litigation, Arbitration and Probate Estate Attorney:
If you are approaching retirement age, and own your home, chances are you have heard about reverse mortgages-or will soon. Reverse mortgages can be helpful to homeowners who want to stay in their homes but are having trouble keeping up with their mortgage payments, or who have no other source of funds to pay bills or meet unexpected expenses. This is something that I recently was exposed to when I assisted my aunt in obtaining one and I can tell you that it is important to deal with a mortgage broker that is schooled in these types of mortgages because the hoops that the homeowner has to go through to obtain a reverse mortgage, especially if it is coming from private investors, are substantial. But not a night goes by where I do not see an advertisement for a reverse mortgage as an easy, cost-free way for retirees to finance lifestyles. In the investment arena, unscrupulous “financial advisors” tout reverse mortgages as a why to obtain capital to invest in “can’t lose” investments so that seniors can secure their financial futures.
The first question that you have to ask your self is what is a reverse mortgage and how does it work?
Older homeowners who want to access the equity in their homes usually have three options. They can sell their house and downsize, take out a home equity loan, or consider a reverse mortgage. A reverse mortgage is an interest-bearing loan secured by the equity in your home. To be eligible, you and any other co-borrowers, such as your spouse, must own your home and be 62 or older-although some lenders offer reverse mortgages to individuals as young as age 60.
Like a home equity loan, a reverse mortgage allows you to convert your home equity to cash that you can use for any purpose. Unlike other home loans, however, homeowners make no interest or principal payments during the life of loan. The interest is added to the principal, which is why reverse mortgages are often called “rising debt” loans. Unless you opt for a fixed-term loan, the loan only becomes due when you die, sell your home to move or otherwise leave your home for more than 12 months-for instance, if a health issue requires you to enter a nursing home.
If any of those events occur, you or your heirs must repay the loan, including compounded interest, in full. Normally, that means the house must be sold, and the loan will be paid back from the proceeds of the sale. Because interest will have been accruing during the life of the loan, you will likely owe more than you borrowed-and if home values have fallen or you live longer than expected, you may even owe more than your house is worth. But since reverse mortgages are non-recourse loans, the worst that will happen is that you or your heirs will receive nothing from the sale of your house. The lenders can not go after any other assets that you or your heirs own.
Recent Changes to FHA Reverse Mortgage Loans
The Housing and Economic Recovery Act of 2008 made significant changes to FHA reverse mortgages and how they are sold. For example, the law allows seniors to use a reverse mortgage to purchase a new home. It also mandates counseling for all FHA reverse mortgages, and caps origination fees at 2 percent of the first $200,000 borrowed plus 1 percent of any additional amount, up to a maximum of $6,000 for homes worth more than $125,000. For homes worth less, origination fees cannot exceed $2,500.
In addition, Public Law 111-229 (signed by the President on August 12, 2010) allowed FHA to introduce a new option for reverse mortgages that lowers borrowing costs further for those who wish to take out smaller home equity conversion mortgages.
What are some of the issues that you need to pay attention to when taking out a reverse mortgage?
First of all, reverse mortgages may seem like “free money” but in fact, they are quite expensive. Like traditional mortgages and home equity loans, you will be charged interest, but interest rates for reverse mortgages are generally higher than these other types of loans. In addition, the fees and costs associated with reverse mortgages are often significantly higher, sometimes as high as 4-8 percent of the total loan amount. You can usually have these costs deducted from the loan amount, instead of paying for them out of pocket, but either way, you may end up with less cash than you expected.
Also, be aware that reverse mortgages must be the primary mortgage on your home, so if you have another mortgage already, you will have to borrow enough to pay that off, too. That may also reduce the amount of cash left for you to use.
Second, you are still the owner of your home and therefore responsible for property taxes, insurance and home maintenance costs. If you are not able to meet these obligations, the lender may have the right to foreclose on your home, leaving you in the worst possible situation-no place to live, and no more home equity to draw on.
Even if you can keep up these payments, you may get to the point that you want or need to move into a smaller home, or into an assisted living facility, for reasons other than cost. At that point, your loan will come due. With compounded interest due, you may be surprised to find out how much you owe, which may restrict your future housing choices.
If you do take out a reverse mortgage use the money wisely
Tapping into your home equity in your retirement years through a reverse mortgage is a very serious decision. For many borrowers, choosing a reverse mortgage is a last resort way to secure additional monthly income in retirement. Whether it is the right decision for you may ultimately depend on a number of factors-your health, your spouse’s health, other sources of income, the reason you’re tapping your home equity, when you do it and how wisely you use your loan proceeds. Unfortunately, some financial professionals who profit from selling reverse mortgages aggressively urge homeowners to obtain them even when they are not necessary-and to use the money to take dream vacations, buy a second home or invest in risky or illiquid investments. In some cases, those who sell the mortgages may also profit from the sale of the touted investment, giving them twice the incentive to talk you into a loan you may not need.
When you obtain a reverse mortgage, you normally have several options for receiving the funds. You can take a lump sum payment, set up a line of credit that you can draw on as needed or set up regular periodic payments. Depending on your lender, you may also be able to set up a combination of these options. For example, you may decide to receive a portion of the loan amount in monthly payments, and leave the remainder as a line of credit that you can use for unexpected expenses.
Whichever you choose, make sure you use your loan wisely. Just because you don’t have to pay back it back as long as you live in your home doesn’t mean you should treat it as “mad money.” Reverse mortgages were originally designed as a tool for allowing aging, low-income homeowners to keep their homes by providing a source of additional monthly income to meet expenses. Now, as lenders are realizing that more and more Americans are retiring and sitting on large pools of home equity, they are beginning to aggressively market reverse mortgages to younger retirees as a way to finance a more extravagant retirement lifestyle than they could otherwise afford. The trouble is, those same homeowners may need their home equity some day for something far more pressing than a vacation, only to find that it has already been spent.
If you are approached by a financial professional to do a reverse mortgage in order to fund a particular investment that he or she is proposing don’t do it. To reinforce this position, if your financial adviser persist in pressuring you into taking out a reverse mortgage and to use the proceeds to invest though him, immediately call his manager and complain. You don’t want this person as your adviser anyway.
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