Q. My wife and I are considering a Reverse Mortgage. Please help me understand the pros and cons of this financial product.
A. If you have been within earshot of a television or radio in the last year, and then you have no doubt heard about reverse mortgages. While the term seems to be self-explanatory, most consumers have no idea how they work and being uneducated is dangerous territory when it comes to making a major financial decision.
A reverse mortgage allows homeowners to convert part of the equity in a home to cash without having to sell the property. In other words, it is a loan against your home that you do not have to pay back for as long as you live in your home. Due to the attractiveness of these loans, some senior citizens are being charged excessive up-front fees for services that are generally available free of charge, or at a very low cost through the Department of Housing and Urban Development (HUD).
The Better Business Bureau (BBB) advises consumers to use caution if approached with the opportunity to obtain a reverse mortgage; take the time to understand the requirements, consider all the factors involved, and learn what free resources are available to help make an informed decision. Most importantly, do not be swayed by celebrity spokespersons endorsing this type product until you have all of your questions answered.
The BBB provides the following tips when considering a reverse mortgage:
1) Know the basic requirements. To apply for a reverse mortgage, all owners of the home must be at least 62 years of age, have equity in the home and sign the loan paperwork. The home must be the primary residence and remain in good condition. Reverse mortgage borrowers continue to own their homes; therefore you are still responsible for property taxes, insurance, and repairs. If you fail to carry out those responsibilities, your loan could become due and payable in full. The loan process can not be initiated until the senior homeowners receives counseling from a Home Equity Conversion Mortgages (HECM) counselor.
2) Consult a Home Equity Conversion Mortgage counselor. Such a counselor will help answer questions regarding eligibility, financial implications and other alternatives. The Fair Housing Association (FHA) does not recommend using any service charging a fee for referring a borrower to an FHA lender as FHA provides all the information free of charge and HECM housing counselors are available free or at a very low cost. For a list of approved counseling agencies, call 800-569-4287 or visit the HUD website at www.hud.gov.
3) Involve heirs in the decision-making. Because a reverse mortgage affects the assets of the borrower in case of death, involving heirs will avoid future misunderstandings and family discord.
4) Make sure a reverse mortgage suits your needs. The amount you can get from a reverse mortgage generally depends on your age, your home's value and location, the cost of the loan, and who is making the loan. Determine whether it is practical to remain in the home for 5-10 years to make the reverse mortgage economical. Also take into consideration future health care needs as well as safety and ease of use of the home.
5) Consider all costs associated with obtaining a reverse mortgage. Be prepared to pay for some of the fees involved in the processing of a reverse mortgage loan, which can include an origination fee, closing costs, a mortgage insurance premium, a servicing fee, and the interest rate.
6) Understand the repayment terms. A reverse mortgage loan must be repaid in full when the owner dies, or sells the home. Other conditions that affect loan repayment include failure to pay property taxes or hazard insurance, allowing the property to deteriorate, and if the borrower permanently moves, has a new primary residence, or fails to live in the home for 12 consecutive months.
Understand that because you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your equity) generally grows smaller. But you never owe more than your home's value at the time the loan is repaid.
BBB and the FTC are receiving complaints on reverse mortgage loans. Consumers need to be aware that both spouses should be listed on the loan contract. There are issues where one spouse is not yet 62 years old, and is promised that they can be added to the contract later. Unfortunately, complications arise and the older spouse dies before the younger has a chance to be added to the contract. This leaves the total amount of the loan due to be paid immediately. The living spouse, effectively buying the home back from the loan originator, or face foreclosure. Many spouses do not have the money to pay off the loan, and thus are evicted from their homes. Also being reported is that reverse mortgages have troublesome incentive structures to encourage brokers to direct seniors toward lump-sum loans. This type loan carries a fixed interest rate rather than a line of credit with a variable interest rate. In a lump-sum contract the interest charges are added each month and over time can exceed the original loan.
As with any program, reverse mortgages can be ideal for some consumers but BBB urges you to ensure that you have all of your questions answered before committing.
Get answers to your questions each Friday from Jim Winsett, president and CEO of the Better Business Bureau Inc., which serves Southeast Tennessee and Northwest Georgia. 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 e-mailing him at dflessner@ timesfreepress.com.