Two years ago I wrote about reverse mortgages (RM) so an update is appropriate as some things have changed. As I mentioned earlier, the RM is a federally initiated program to help seniors over 62 use some of the home equity they have built up over the years to pay for current expenses. In effect, the senior gets a loan from a bank or mortgage lender pledging their home as security for the loan. The senior can take a lump sum payment, establish a line of credit, or take monthly payments based on a percentage of the equity in the home.
Beginning April 1, by the way, the lump sum payment will no longer be an option. The RM provides that seniors can stay in their home until death at which time the home is sold and the loan is repaid from the proceeds. The senior while alive always has the option of selling the home and paying off the loan. You can check on the amount of your equity the RM loan could be for by going to www.reversemortgage.org where they have a calculator.
There have always been some problems with reverse mortgages, particularly high up front costs, and they are certainly not for every senior. Only if a senior is over 70, isn't concerned about leaving their home as a legacy to their children, and is having serious financial problems, which cannot be solved with a conventional home equity line of credit (HELOC), should they consider an RM. Thousands of seniors are currently using RMs to help with their financial problems, but care is needed to use them effectively.
Recently three of the largest reverse mortgage lenders have stopped making RMs. Bank of America, Wells Fargo, and Met Life have all quit making them citing as reasons decreasing home values and the difficulty in assessing lenders ability to repay the loans. This has opened the door for smaller banks and some unprincipled mortgage lenders to jump into the market some using unethical practices. It is truly a "buyers' beware" situation.
If one wants to investigate an RM here are some suggestions and pitfalls to be avoided:
1. Make sure all the upfront expenses and loan costs are legitimate and reasonable. It is wise to get estimates from more than one lender, to get them in writing, and to have an objective expert review them before you commit to the transaction.
2. Make sure that if you are married both names are on the deed to the house. Some unethical lenders are saying only one name is needed, this is wrong. If there's only one name on the deed and that person dies first the other partner will lose the house to the bank and have nowhere to live. If both names are on the deed, they both have the right to live in the home until death.
3. If you take a RM loan it is best to take monthly payments or a line of credit rather than a lump sum payment. As was mentioned earlier, after April 1, 2013 the option of taking the equity in a lumps sum will no longer be available. The borrower and homeowner also still has to pay for taxes, insurance, and maintenance on the home.
In summary it seems evident that a program the government intended to help seniors gain some cash off their home equity has had its problems and has had its share of fraud and misuse. The idea behind it is well meaning and many seniors have used the program as intended to their benefit. However, unless a senior with significant home equity has a strong need for extra money for basic living expenses it might be better to forgo this program. Those who do explore using it should use extra caution and advice from a financial expert before committing to going forward.
How you know you are getting old
You light candles on your birthday cake and a group of campers gathers around and starts singing Kum-by-ya.
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