If you are age 62 or older, I’m sure you’ve seen the countless commercials every day on TV about reverse mortgages. Whether it’s Henry Winkler (yes, the Fonz!) or Tom Selleck (yes, Magnum P.I.!) telling you about the wonderful advantages and the free information that you can get about them, you were probably a little curious if you own your own home and are looking for ways to help limit your mortgage costs and retirement expenses. Who wouldn’t want to do that?
Truth be told, reverse mortgages are very complicated and are not the “be all end all” for everyone. There is danger in this process for some and as we all know when something sounds too good to be true, it probably is just that. So let’s cover some reverse mortgage pros and cons.
A reverse mortgage is a loan for senior citizens using your home as equity collateral. In general, the loan does not have to be repaid until the last surviving qualified homeowner decides to move out or passes away. If either happens, the loan balance technically becomes due. However, if the homeowner has passed away, the estate has an initial 6 months to sell the home for payback of the loan (further extensions may be granted). If there’s any remaining equity, then it goes to the owner or the estate. If the sale doesn’t cover the balance, the estate is not responsible for the mortgage balance as long as it is a federally backed Home Equity Conversion Mortgages (which most are). Sounds pretty good, doesn’t it?
The Federal Housing Authority (FHA) administers reverse mortgages. To qualify, the owner(s) must be at least age 62, the home must be owned free and clear or all existing liens against it must be cleared with the proceeds of the reverse loan. If there is an existing mortgage, it is paid off at the time of closing your loan. Generally, there are no credit score requirements for a reverse mortgage.
Can you outlive a reverse mortgage?
The simple answer is that you can’t. It will not ever become due as long as you stay in your home as a primary residence and you are alive. You must continue to pay your real estate taxes and your homeowners insurance and maintain the home within FHA requirements. As stated above, the estate is not responsible to pay off the entire loan after the property is sold so it doesn’t impact any second homes left by the homeowner nor does it affect cars, investments, and any other valuables they leave behind. The lender will take the loss on any reverse mortgages not paid back in full and must request reimbursement from the FHA.
How much money can you get?
The amount you can qualify for on a reverse mortgage depends on 4 factors: age (the older, the better), current interest rate at the time of loan, your home’s appraised value, and government lending limits. You can use a reverse mortgage calculator to see how much you can qualify for.
How is the money distributed?
There are 5 ways to receive the money:
- Lump sum – full amount at the closing
- Tenured – equal payments for as long as the homeowner lives in the home
- Term – equal amount monthly for a fixed number of years
- Line of Credit – you can draw from the line at any time for any amount until the balance of the line is zero
- Any combination of the above
The biggest advantage is that you no longer pay your mortgage each month, but you do get a check for the loan you have taken monthly, or in any way above.
So, what’s the problem?
Many people, over 58,000 homeowners, currently have reverse mortgages from the FHA. The amount borrowed is currently over $2.8 billion and it’s put the government at high risk. Why? 1 in every 10 loans is currently in default and another 1 in 10 is still underwater from the recession of 2008.
Why are loans defaulting?
One reason is that people tend to use the money quickly and then don’t pay their taxes and insurance or can’t maintain their homes. If you go into default, you must pay the loan off in total and if you can’t, the lender can foreclose on your home.
What else can happen?
Some seniors have done things like taking the name of a younger spouse off the deed and then having the older spouse take the loan. If something happens, like the passing of the older spouse, the younger one may not qualify to continue the loan because of their age (under 62). This has happened to many who were anxious for a reverse mortgage and were either ill-advised or not taking into consideration the “what if” scenario.
Another problem occurs if the homeowner becomes ill and needs to move to an assisted living facility or nursing home. The loan becomes due at the same time they are facing tremendous costs. Even worse, a non-qualified spouse or other dependent will be forced to move.
Other situations may be an extreme illness or other emergency that causes a great unforeseen expense and uses all the monies from the loan and leaves nothing for the taxes and maintenance. That means again being booted out of your home and a possible foreclosure and other huge problems.
While there are advantages for some, there is a high risk as well. Before you enter into a reverse mortgage, seek legal help and/or consult with a trusted family member who may wind up being the estate trustee as well. Carefully consider the reverse mortgage pros and cons, or your dream retirement may end up being a nightmare.
Have you considered a reverse mortgage? Can you see this as a real help to you in financing your retirement planning?