1 Reverse Mortgages: Reversal of Fortune? Certainly The Fonz would not lead us astray. Nor would Senator Fred Thompson. After all, he ran for President of the United States and played the President in several hit movies. Not THEM. They are just too trustworthy. You have seen these commercials with happy, retired people enjoying the benefits of their Reverse Mortgages. You can get cash now. It's so easy. Just get your reverse mortgage and your problems will be solved. Pay off debt. Have fun. These things must be GREAT! But what exactly ARE they? So I loaded up my trusty internet search engines and went looking. As with almost anything, there are sites extolling the virtues of a reverse mortgage and sites attacking them. How do they work? The Good Part A reverse mortgage is a loan for senior homeowners that uses the home's equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves away from the property or passes away. (Keyword: Homeowner) At that time, the estate has approximately six months to repay the balance of the reverse mortgage or sell the home to pay off the balance. Any remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage. Who is eligible for a reverse mortgage? To be eligible, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. The home must be owned free and clear or all existing liens must be satisfied with the proceeds from the reverse mortgage making it free and clear. If there is an existing mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at closing. When is it due? A reverse mortgage loan will not become due, as long as at least one homeowner (Keyword: Homeowner) lives in the home as their primary residence, continues
2 to pay required property taxes and homeowners insurance, and maintains the home in accordance with FHA requirements. What happens at death? In the event of death or in the event that the home ceases to be the primary residence of a homeowner for more than 12 months, the homeowner's estate can choose to repay the reverse mortgage loan or put the home up for sale. If the equity in the home is higher than the balance of the loan when the home is sold to repay the loan, the remaining equity belongs to the estate. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets of the mortgagor are affected by a reverse mortgage. Other investments, second homes, cars and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage. How much may a homeowner borrow? The amount that is available generally depends on four factors: age, current interest rate, appraised value of the home and government imposed lending limits. How may the homeowner receive the proceeds? There are several ways to receive the proceeds from a reverse mortgage: Lump sum: a lump sum of cash at closing; Tenure: equal monthly payments as long as the homeowner lives in the home, Term: equal monthly payments for a fixed number of years, Line of Credit: draw any amount at any time until the line of credit is exhausted, Any combination of those listed above. What is the difference between a reverse mortgage and a home equity loan? Generally a home equity loan, a second mortgage, has strict requirements for income and creditworthiness. As with other traditional loans, the homeowner must still make monthly payments to repay the loans. In a reverse mortgage, instead of
3 making monthly mortgage payments, the homeowner receives cash from the lender. How does a reverse mortgage work? Payment of the loan proceeds is not due as long as the homeowner lives in the home as their primary residence and continues to meet all loan obligations. The Bad Part The children of elderly borrowers are learning that their parents' reverse mortgages are now threatening their own inheritances. Under the Federal reverse mortgage rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount owed. Surviving family members are to be offered the choice to settle the reverse mortgage for a percentage of the full amount usually 95 percent of the home's current value. Any shortfall if the home sells for less than the debt is covered by a federal insurance fund, which all reverse mortgage borrowers are required to pay into each month. Reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full. Reportedly, some lenders are moving to foreclose just weeks after the borrower dies. Then the heirs are plunged into a bureaucratic maze as they try to get lenders to provide them with details about how to keep their family homes. Reverse mortgage lenders say that they follow the federal rules, averting foreclosures, which can be costly and time-consuming. Used correctly, reverse mortgages can help older homeowners get cash to pay for retirement. So what s the downside? One BIG downside is that if an heir lives in the home, but is NOT a Homeowner, that residence may no longer be their residence. They may have to move out, unless they are able to buy the property. What if, as is becoming more and more prevalent nowadays, a child lives in the home, but is not a homeowner?
4 For heirs, the problem with reverse mortgages often centers on the little-known set of federal regulations administered by the Department of Housing and Urban Development (HUD). Under the regulations, virtually all of the market lenders must offer heirs up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing. Most important is a rule that allows heirs to pay 95 percent of the current fair market value of the property a price that is determined by an appraiser hired by the lenders. The difference offered by the 95 percent rule can be critical. When housing prices tumble, the disparity between the current value of the home and the total balance on the mortgage often means the difference between keeping a home and losing it to foreclosure. What if the homeowner is no longer in the home? The homeowner is safe as long as they can live in the home. What happens when they have to move out of the home into assisted living or a nursing home? The mortgage becomes due immediately and the home must be must be purchased or the loan paid off. Now there is the expense of paying it off, besides the high cost of the assisted living or nursing home care. Can it affect any dependent in the home? If the elder who needs care in a facility leaves the home but has non-homeowner family members in that home, the loan is still due. Any non-borrowing family member left in the home must move out, or purchase the residence. They are "tenants" according the rules of reverse mortgages and they have to leave when the elder does. Default? If a homeowner with a reverse mortgage fails to pay property taxes, fails to keep up insurance on the home, or fails to maintain the home, he or she is in default and the lender can then foreclose. Elder homeowners who are low on cash may fail to pay home insurance premiums or property taxes. If they are getting forgetful, they might not maintain their properties.
5 What s the effect of our living longer? Living into one s 90 s is becoming more common these days. There is a risk that the amount loaned will not be enough to sustain the homeowner who needs long term care at home. The homeowner can run out of money to make the loan payments, go into default and end up homeless and impoverished. This is a real risk, particularly for anyone takes out a reverse mortgage to pay for home care providers. If the homeowner borrows, say, $200,000, and ends up needing roundthe-clock care, that reverse mortgage cash will be exhausted in about two years or less. Then what? Default, foreclosure and a Medicaid paid nursing home. When the last homeowner dies, what are the heirs options? The entire principal, plus accrued interest and service fees must be paid in full to the lender before the heirs can rightfully take possession of the home. This debt may exceed the actual market value of the home. If they can't pay the debt, the lender has the right to foreclose and sell the property. Low wealth heirs are not likely to be able to pay the debt and those homes fall into foreclosure. So what have I gleaned from my internet research? Consider a reverse mortgage. If you or your aging parent gets charmed by the TV ads, get advice from a competent financial planner and elder law attorney before doing anything. Recognize that your care at home might cost more than the proceeds of a reverse mortgage, especially over a period of years. Be careful if you have a non-homeowner living in the home. There just might be less costly, smarter ways to deal with the need for money when funds run low, without the obvious downside. Resources: Mortgages-Polishing-Not-Tarnishing-The-Golden-Years.pdf Mortgages-Leaving-Seniors-and-Taxpayers-On-The-Hook.pdf
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