By Mary Boone
Reverse mortgages have been in the news a lot lately, primarily because of accusations that they’re hurting the very people they’re supposed to be helping: senior citizens.
A reverse mortgage is, in essence, a loan. It allows a homeowner 62 or older to convert home equity into a line of credit or monthly payments so they can stay in their homes and gain access to money needed for retirement. Homeowners borrow against their equity, and the loan balance grows over time. Payments do not have to be made while the homeowner is still living in the home. When the borrower moves out – or passes away – the reverse mortgage must be paid off, although not more than what the home is worth. With a reverse mortgage, the homeowner is required to pay real estate taxes, utilities, and insurance premiums.
There are several types of reserve mortgages on the market. The Home Equity Conversion Mortgage (HECM) is offered by the Department of Housing and Urban Development (HUD) and is insured by the Federal Housing Administration. These are the most popular reverse mortgages, making up approximately 95 percent of the market. Proprietary Reverse Mortgages are offered by some lenders to homeowners with high value homes.
Depending on the type of reverse mortgage selected, borrowers may receive payments as a lump sum, line of credit, fixed monthly payment for a specific period or for as long as they live in their homes, or a combination of payment options. The money borrowed through a reverse mortgage is tax-free and can be used for any purpose.
Criticism of reverse mortgage programs is nothing new, but a surge in reported abuse has federal and state regulators tracking new violations. The most common complaints have to do with lenders who aggressively pitch loans to seniors who can’t afford the associated fees. Some widows are facing eviction after they say they were pressured to keep their name off the deed without being told they could face foreclosure after their husbands died.
The Consumer Financial Protection Bureau, which was created in July 2010, is working on new rules concerning mortgage disclosure laws and stricter supervision of lenders.
If you’re considering a reserve mortgage, keep these five tips in mind:
1. Explore all your options. Before considering a reverse mortgage, a senior should first determine if he or she qualifies for less expensive programs such as Supplemental Security Income (SSI), Medicaid, prescription drug discount programs, or energy and telephone discount programs that offer cost-cutting benefits. Reverse mortgages are expensive loans and should be considered as a last resort.
2. Understand the risks. If, for example, you’re unable to pay property taxes or insurance premiums, foreclosure may occur. You can also lose your home if you live somewhere other than your home for longer than your loan agreement allows.
3. Think big picture. Payments from a reverse mortgage may affect your eligibility for assistance from some government programs. Check with the provider of any benefits you’re receiving or for which you may be eligible in the future, including Supplemental Social Security Income, Medicaid and food stamps.
4. Beware of predators. Be especially wary of anyone who encourages you to take out a reverse mortgage in order to fund another investment such as an annuity.
5. Seek outside advice. These products are so complicated that financial counseling is required for those applying for an FHA-insured reverse mortgage. It’s a good idea for those considering other products. Beyond provided counseling, consider asking a lawyer or another party you trust to review your loan documents. You have three days to back out of a deal if problems pop up.