If you’ve watched TV lately, you’ve likely seen ads selling
reverse mortgages. A
reverse mortgage can be a great tool to help you realize your dreams. However, it is a very specific type of tool
for a very specific type of situation.
If used incorrectly, it can cause a borrower to lose their home. You owe it to yourself and your loved ones to
learn the good, the bad, and the ugly of reverse mortgages.
How they work
A reverse mortgage is a loan which allows homeowners 62 and older to convert some of the equity they have in their primary residence into cash. The amount of equity required to obtain a reverse mortgage depends on your age. Younger borrowers need about 60% equity in their homes to qualify, while those over 80 may need just 45%.
Once approved, you can receive the money in one of three ways: as a lump sum, as monthly installments, or as a line of credit. Because you receive payments from the lender, your home’s equity decreases over time, while the loan balance gets larger, thus the term “reverse” mortgage.
With a reverse mortgage, you no longer have to make monthly mortgage payments, and you can stay in your home as long as you keep up with property taxes, pay insurance premiums, and keep the home in good repair. Lenders make money through origination fees, mortgage insurance, and interest on the loan balance, all of which can exceed $10,000 to $15,000.
Be aware, the reverse mortgage loan (plus interest and fees) becomes due and must be repaid in full when any of the following events occur:
- Your death
- You are out of the home for 12 consecutive months or more, such as in the case of needing nursing home care
- You sell the home or transfer title
- You default on the loan by failing to keep up with insurance premiums, property taxes, or by letting the home fall into disrepair
still evolving industry
In 2011, the Consumer Financial Protection Bureau cracked down on some of the misleading advertising practices by lenders. All reverse mortgage advertisers are now required to disclose that the loans must be repaid after death or upon move-out. Additionally, advertisers can no longer claim the loans are a “government benefit” or “risk free.”
In 2014, HUD developed new policies to better protect surviving spouses who were often being “left out in the cold” literally under the old rules. Now, if a married couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse” with rights to retain the home if the older spouse dies.
Despite these recent changes, however, the number of ads for reverse mortgages hasn’t declined and too many borrowers (and non-borrowing spouses) still end up going through foreclosure. The industry continues to need to offer better protections for the elderly against unscrupulous reverse mortgage lending practices.
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