published Wednesday, November 28th, 2012

Personal finance: Reverse mortgages a good tool when used wisely

Christopher A. Hopkins CFA

Fred Thompson, Robert Wagner and Henry Winkler all promote them on TV as a way to help seniors enjoy a better retirement. But recent media attention has focused on a number of abuses in the reverse mortgage industry, raising questions about the appropriateness of this particular financial tool. As is often the case, the answer depends upon the circumstances. But used wisely, this arrangement can help retirees realize a more secure and comfortable retirement.

The key is a complete understanding of the benefits as well as potential pitfalls.

A reverse mortgage is effectively a home equity loan with a twist. Homeowners who qualify can borrow against a significant proportion of their home equity to spend today, but are not required to repay the loan until their death or until they choose to sell the property. Technically referred to as Home Equity Conversion Mortgages (HECM), these loans are regulated by the U.S. government through the FHA. To qualify, all borrowers must be at least 62 years of age and have a specified amount of equity in the home. Furthermore, there must be no other loans outstanding against the home (or the borrower must use proceeds of the HECM to pay off any outstanding loans).

Regrettably, media reports have recently highlighted a relatively small number of unfortunate reverse mortgage disasters, most of which are traceable to poor decisions or lack of understanding on the part of borrowers.

The most commonly reported complaint is the eviction of a surviving spouse upon the death of the primary borrower. Although this is rare, such an outcome is entirely avoidable with a clear understanding of the basic terms of the loan.

As noted above, all persons listed on the title of the property must be at least 62 years old. If the younger spouse is not yet 62, he or she may not be listed on the deed if the house is to qualify for the loan. However, death of the last borrower on the title triggers a repayment event: either the HECM is repaid (by refinancing or with cash), or the home must be sold to satisfy the loan, leaving the untitled surviving spouse out in the cold.

Obviously, this situation is easily avoidable. Do not consider entering into a reverse mortgage unless both spouses qualify and are listed as co-owners on the property title. If a lender suggests that you consider removing one spouse from the deed (for any reason), do not pursue the loan with that lender.

Retirees with substantial home equity can productively utilize the HECM to unlock some of their static assets to enjoy a better retirement lifestyle, but as with any financial commitment it is essential to understand the ramifications. Before entering into a reverse mortgage, contact a qualified loan counselor to assist you in evaluating your options and responsibilities. FHA provides a list of approved HECM consultants ready to assist you in your decision. The best starting place is the government website HUD.gov. Tell them Fonzie sent you.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.

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