Reverse Mortgage Loan Blog

Homeowners should get advice from objective source

The recession hit at a bad time for people getting ready to retire. Not only did their retirement investments take a major hit, their homes also lost significant value.

Many retirees are looking at reverse mortgages as one way to make up the difference, but are reverse mortgages a good idea? It all depends, financial experts say.

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash while you continue to live in it. The equity that built up over years of home mortgage payments can be paid to you in a lump sum, or in payments.

But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. If you were to die, or move into a nursing home for example, the payment would come due.

In recent years — even before the financial meltdown — these kinds of loans have gained in popularity. In fact, the government’s FHA program created the first reverse mortgage.

“The Home Equity Conversion Mortgage (HECM) is FHA’s reverse mortgage program which enables you to withdraw some of the equity in your home,” the U.S. Department of Housing and Urban Development says on its Website. “The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more.”

To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are further required to receive consumer information from an approved HECM counselor prior to obtaining the loan.

Why not just get a traditional second mortgage, or home equity line of credit? You can, of course, but you’ll need sufficient income to qualify for the loan and you’ll have to make monthly payments, which could eat into the equity you take out.

No monthly payments

The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest, the more you can borrow.You don’t make payments, because the loan is not due as long as the house is your principal residence.

What happens when you die? Is there anything left for your heirs? It all depends. When your heirs sell your home, your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to your heirs.

Not all financial planners are sold on reverse mortgages. Anna Rappaport, a former president of the Society of Actuaries and now head of a Chicago consulting firm, says reverse mortgages may offer significant income potential to some households, but at relatively high cost and risk.

“Furthermore, they may help older households remain in their homes, but they limit future housing choices and are presented as a last resort option by some financial planners,” she said.

Earlier this year AARP warned its members that scammers have moved into the business of offering reverse mortgages with mailing designed to look like they come from government agencies. Last year Florida Attorney General Bill McCollum warned his state’s large elderly population to be very careful when considering a reverse mortgage.

“When our senior citizens are concerned about finances and are seeking a legitimate option for financial relief, they should not have to worry about predatory lenders or brokers trying to capitalize on their precarious position,” said McCollum. “Consumers should take every precaution to avoid scams and situations which could leave them in even worse financial shape.”

May be a bad deal

Even if the reverse mortgage is not a scam, it may come with so many charges and hidden fees to make it a bad deal. And of course, the person trying to sell it to you probably won’t mention that.

If you think you might be interested in a reverse mortgage, your best course would be to speak with a HUD counselor, or a financial planner who does not sell mortgage-related products.

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