Finance LIFESTYLE  >  Is a Reverse Mortgage for You?

Is a Reverse Mortgage for You?

Is a Reverse Mortgage for You?
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By Steve Nubie

It sounds so simple but a Reverse Mortgage is actually a very complex loan transaction.

Most of us never heard of Reverse Mortgages until some aging movie stars started to appear in commercials making it all sound so easy. They say reassuring things like, “You can still live in your home,” and, “Get the cash flow you need right now.”

The fact of the matter is that a Reverse Mortgage is actually a complex, loan transaction. You’re borrowing on the equity you have in your home and are receiving regular payments on a monthly basis that is accruing interest every day.   Yes, you can live in your home and collect the money, but someday you or your heirs will have to pay back the money you have received plus the interest and fees; sell the home and pay back the principal, interest and fees, or face foreclosure.

Have you considered other options?

Certain individuals in dire need of cash may determine that a Reverse Mortgage is their only option. In actual fact there are other options including a home-equity loan that at least keeps you aware of your liability by requiring regular interest payments. That’s one of the hidden dangers of a Reverse Mortgage. The interest is growing and you may not be aware of how fast it’s adding up because payment is not required until you vacate the home in some way.

Why would you vacate your home? There are a number of reasons. You may need to move to a managed-care facility for health reasons. You may want to move to a new location or you may pass away. If the Reverse Mortgage is in your name and you leave the home the loan comes due immediately. Even if you have family members still living in the home, it’s your absence that triggers the due date. This is one of the clauses that aren’t always discussed when the contract is presented to you.

You can also face foreclosure if you fail to maintain insurance on the home or fail to pay real estate taxes. That’s another clause that is indicated in the contract but is rarely brought up at the outset.

Your heirs and their inheritance

There are also unique challenges that your heirs will face upon your death. If they cannot afford to pay off the amount of principal, interest and fees that are due -foreclosure results. That can be tragic. Consider this scenario: You engage in a Reverse Mortgage and over a period of a few years receive $50,000. In addition to that principal amount, there are interest charges in the thousands and fees in the hundreds. If you pass away and your home is worth $250,000 and your heirs cannot pay the $50,000 plus interest and fees, the home becomes the property of the bank through foreclosure and your heirs are out $200,000 in equity that remains in the home. The assumption is always that we will sell it and pay off the loan but there are strict time limits on Reverse Mortgage payoffs and if the home doesn’t sell and close quickly, your heirs are in for an expensive court battle and possible loss of the property.

The HECM option

There is one Reverse Mortgage option you could consider that is not directly originated through a bank, but it carries the same restrictions, clauses and limitations. It’s a Reverse Mortgage through the FHA and one of their approved lenders. It’s the only reverse mortgage insured by the U.S. Federal Government and is called a Home Equity Conversion Mortgage or HECM.

According to the HECM website:

If you are a homeowner age 62 or older and have paid off your mortgage or paid down a considerable amount, and are currently living in the home, and are eligible, you may participate in FHA’s Home Equity Conversion Mortgage (HECM) program.  The HECM is FHA’s reverse mortgage program that enables you to withdraw some of the equity in your home with limitations or a single disbursement lump-sum payment at the time of mortgage closing.

You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

Do your homework

Just because this program is insured by the FHA and is managed by the government to some degree, don’t assume you won’t incur some of the same risks we’ve already covered. The advantage of exploring a Reverse Mortgage through the HECM program is that it requires full disclosure of all conditions and clauses; it gives you the opportunity to talk with an HECM counselor who will honestly and candidly answer your questions, and will not have any hidden clauses or additions that a private and unscrupulous lender might attach to the contract.

Alternatives to a reverse mortgage:

If you’re considering a Reverse Mortgage you should also take some time to consider alternatives.

  1. Sell your home to your children with the understanding that you will live in it until your death. Depending on their financial condition they may be able to help you while providing a place for you to live and protecting their inheritance.
  1. Sell your home to a third party with the understanding that you will occupy the home until your death. This may result in you paying rent to the new owner or offering a reduced cost for the home, but it allows you to receive close to the true value of the home rather than sacrificing most of the equity to a Reverse Mortgage lender due to a premature death or departure.
  1. Apply for a home-equity loan or line of credit. This will have to be paid back but the interest is due monthly with the option to pay varying amounts of principal. Your heirs can also continue to pay the interest and principal and either sell it to pay off the full home-equity amount, or occupy the home while maintaining at least the interest payments.

The bottom line is that a Reverse Mortgage is both a risky and complicated proposition. If you have no other options and are in dire need of the cash, the HECM program is the best place to start but make sure you consider all the possibilities and discuss them with your heirs as well.

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