Friday, January 18, 2013

A Reverse Mortgage May Not Be Your Best Option

picture of American flag outside home in USA
You and the lender may own your home

When you listen to Fred Thompson, Robert Wagner or Henry Winkler telling you the benefits of reverse mortgages, remember that they are actors. They’ve been acting for years --and continue to act in advertisements for reverse mortgages. Reverse mortgages have a limited place in the lives of some seniors, but they should be a last resort choice. Instead, reverse mortgages are on the rise, and so are repayments of reverse mortgages to avoid foreclosure.

You’ve already heard about the advantages of a reverse mortgage -- you can get cash to pay bills, you won’t have to pay the money back, you don’t have to make a mortgage payment, and it’s backed by the federal government. The backing by the federal government doesn’t help you. It provides mortgage insurance to the lender so the lender doesn’t lose money in the event of default and keeps your heirs from having to pay outstanding indebtedness.

Here are some of the disadvantages that you may not know. I’m not an actor and have nothing to gain from this advice -- but remember that a smart consumer is one who has searched for both advantages and disadvantages:

  • A reverse mortgage is a LOAN, and the loan company bases the amount you can borrow on your age and the equity in your home. You must be at least 62, and the older you are, the larger loan available to you. Because you won’t live as long at 80 as you would at 62, the lender won’t have to pay for as many years if you wait until late in life to take a reverse mortgage. The older spouse can get the largest amount, so many couples choose to have one person take out the reverse mortgage. This works well until the older spouse dies and the lender looks for repayment. HUD has included a provision in the mortgage to protect the surviving spouse, but some lenders ignore the provision. Make certain that any reverse mortgage is in both names if you’re married. You can read about the problem here: AARP Reverse Mortgages Increasing

  • You must live in your home to continue with a reverse mortgage. If you choose to move, or even if you are in a nursing home for more than a year, you aren’t compliant with the reverse mortgage terms and may lose your home to foreclosure.

  • You’ve heard that you still own your home. That’s true on paper, but you can’t sell your home without paying the reverse mortgage and all fees associated with the mortgage. Fees accumulate every year and will take most of the equity you have beyond the payment or payments you receive.

  • You’ll still have the expenses of owning a home, and you are responsible for the property taxes and maintenance. You can’t let it deteriorate, even if you can’t afford repairs. You own the property and home  when it comes time to pay taxes or make repairs, but the LOAN and LIEN on the house keeps you from selling or moving without repayment of the loan. You can die without repayment, but your heirs won’t own the house without repaying the reverse mortgage and all associated expenses. In most instances, the cost exceeds the value of the home, so don’t expect your children or relatives to benefit. You are basically giving away the house for the money you receive. You get to live there and maintain the property for the mortgage company.

Reverse mortgages are an expensive way to get some cash. The upfront costs are high for the Home Equity Conversion Mortgage unless you get the HECM Saver, and what it saves in upfront costs is added to the percentage rate for the loan. The yearly costs are high as well, and while you’re not making payments, you’re still accumulating costs.

Here’s what AARP says about the things you should know before taking out a reverse mortgage:

AARP Questions Answered About Reverse Mortgages 

What are the alternatives? You’ll probably be better off selling your home and moving to less expensive housing. If you’re a senior, a sale will likely free up the equity you need to relocate. You can downsize and prepare for retirement years instead of holding on to your house that you can no longer afford or maintain. AARP suggests that you might get a roommate if you are alone. Before you make any decisions, ask your children. You might choose to sell the property to a child and use the money you receive to make payments on the child’s loan -- all while you continue to live in the home.  

Who could benefit from a reverse mortgage? If you have no heirs and really need the money to pay for food and medicine, a reverse mortgage may be the answer for you. Consider whether you’ll be in the same position after you spend the money you get from the mortgage. If that’s the case, it won’t help for long, and isn’t the right answer for you.

What else can you do?

  • Inquire about public services available for seniors. You may qualify for help from your state or county, or from the federal government. Some drug companies reduce prescription costs for low-income individuals as well. 
  • Make some telephone calls. Check with the nearest Social Security office for benefits available. Call the state and county offices, and the Council on Aging in your area.
  •  Ask for help before you make any decisions involving the roof over your head.

Here’s some information from the federal Housing and Urban Development website: 

Housing and Urban Development Reverse Mortgage Information 

AARP warns of some of the dangers of reverse mortgages on its website.   

AARP Reverse Mortgage Information 

See you next time!