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The Fine Print about Reverse Mortgages

Realtor with keysA reverse mortgage is a mortgage you can take out when you’re 62 years or older. This plan lets you stay in your home as you age. The Federal Trade Commission says that it’s turning your equity into cash without having to sell your home. However, the FTC warns that reverse mortgages can be tricky, so you need to do your homework.

wfmz.com’s article, “Life Lessons: Reverse mortgages: When are they dangerous,” reports that Elder Law attorneys have had adult children come to their offices wondering how they were named in a foreclosure lawsuit, when it was the mother’s reverse mortgage.

When parents pass away, their homes are commonly inherited by their children. In the case of parents with a reverse mortgage, however, the children could also be named in a foreclosure. This can come as quite a shock to adult children. Seniors also may not understand that they have to keep paying for the upkeep of the home.  If you’re married and there’s just the one name on the mortgage, it could also spell trouble for your spouse.

The rules state that if you’re out of the house for a year, the reverse mortgage company is allowed to foreclose. In addition, a reverse mortgage may not provide enough cash to assist you, especially if you need around-the-clock at-home care costing as much as $12,000 a month. Despite these dangers, a reverse mortgage still may be right for you.

A reverse mortgage would be a good option, if a person insists on staying in the home and they have a family caregiver.

There are also Medicaid programs that may help pay for nursing home care as well as waiver programs through Medicaid that may help pay for assisted living and home care with the ability to keep your home and can leave it to your children or spouse.

If you have more assets, talk to an Elder Law attorney to develop a plan that protects those assets. For example, in some states you can pay a relative to be your caregiver.

Reference: wfmz.com (January 24, 2017) “Life Lessons: Reverse mortgages: When are they dangerous”

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Reverse Mortgage Answers

HouseA Reverse Mortgage is a special type of loan that allows a senior homeowner to convert part of their home’s equity into cash or income, without having to make regular monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. The borrower can’t default on the loan or be forced to move, as long as they live in the home, pay the property taxes and insurance and maintain the home.
The Daily World, in “Reverse mortgages—your questions answered,” explains that in order to qualify, the homeowner must be 62 years of age or older and pass a credit check. The home also has to be used as the primary residence.
With a reverse mortgage, the homeowner retains the title and ownership during the life of the loan and can opt to sell the home at any point. The home can have an existing mortgage. Many borrowers apply the reverse mortgage funds to pay off any existing mortgage and eliminate the monthly mortgage payments.
The amount of money one can receive from a reverse mortgage is determined by the following: (i) the age of the youngest spouse; (ii) the value of the home; and (iii) the current interest rate.
The money from a reverse mortgage can be received in a lump sum, in monthly payments, or through a line of credit. It can also be any combination of these options.
Reverse mortgages are insured by the Federal Housing Authority and the Department of Housing and Urban Development (FHA/HUD). If something happens to the lender, HUD takes over the loan and become the reverse mortgage servicer.
The fine print: It is important to understand that because the borrower makes no monthly payments, the interest on the reverse mortgage loan will accumulate over time, increasing the balance due. Depending on when you sell or move, you may have little or no equity left in the home. However, today the law protects the borrower and their heirs from ever owing more than 95% of the market value of their home at the time the loan becomes due.
Reference: The Daily World (November 18, 2016) “Reverse mortgages — your questions answered”

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Changes Made to Reverse Mortgage Process

HouseThe goal of the change in the reverse mortgage process is to reduce defaults on reverse mortgages by making sure borrowers have the wherewithal to pay property taxes or home insurance.
A recent article in the Houston Chronicle’s, “Mortgage: What reverse mortgage financial assessment means to you,” discusses the steps to determine reverse mortgage eligibility.
First, conduct an assessment of your finances, especially your credit history and income; then set aside part of the mortgage proceeds (based on that financial assessment) to help cover estimated tax and insurance payments over the expected life of the youngest borrower. These changes are effective for reverse mortgages issued on or after April 27, 2015.
These requirements are designed to decrease the default rate on reverse mortgages. Roughly 12% of reverse mortgages were in technical default in 2014, so borrowers hadn't paid taxes or insurance or both. In addition, borrowers had no proceeds remaining from their reverse mortgages.
A recent 2016 study from Boston College found that the new rules could reduce reverse mortgage default rates by as much as half.
The financial assessment includes an analysis of the borrower's credit history, including any foreclosures, defaults, late mortgage payments, and late payments for property charges.
Research reveals that a prospective borrowers' credit scores are big predictors of their likelihood to default on reverse mortgages. It examines income from employment, self-employment, Social Security, alimony, child support, military income, pensions and retirement accounts. If the lender sees that the borrower isn't willing or able to make tax and insurance payments, a portion of the mortgage proceeds will then be set aside to cover these future costs.
Reference: Houston Chronicle (Sept. 16, 2016) “Mortgage: What reverse mortgage financial assessment means to you”

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Reverse Mortgages Give You Tax-Free Cash

HouseReverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), are government-insured loans. These loans let qualified senior homeowners convert illiquid home equity into available tax-free cash.

The Fifty-Plus Advocate says in "Top ways to use a reverse mortgage" that when used properly, a reverse mortgage may be the solution to living an independent, fulfilling life. A reverse mortgage lets you retain full control and ownership of your home. You are still obligated to maintain the property and to pay real estate taxes and homeowner's insurance, but you can stay in your home for the rest of your life. You also can sell your home at any time without a penalty, and any profit from the sale after paying off the reverse mortgage belongs to you. In many instances, properties held in a trust or life estates are eligible.

For qualified borrowers, the unique aspect of a reverse mortgage is that you don't have to make a monthly mortgage payment. That's what's thought of as the "magic" of a reverse mortgage. You can elect to receive a lump sum of cash, a monthly check for life, or a line of credit to be used if needed—all with no monthly payment for as long as you live in the home.

In addition, your home doesn't have to be free and clear, which can help seniors with a mortgage who are struggling to make the required monthly payment—impacting their quality of life. A reverse mortgage allows you to see a significant increase in monthly cash flow, which can reduce financial stress. However, even if you don't need cash or a monthly tax-free income, a reverse mortgage can be used as an estate-planning tool to protect against unexpected life events and to prepare you for the unknown.

This isn't for everyone. There are strict guidelines and protections. Speak with a qualified estate planning attorney.

Reference: Fifty-Plus Advocate (April 26, 2016) "Top ways to use a reverse mortgage"

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Is a Reverse Mortgage the Way to Go?

Reverse-mortgage-appraisalHomeowners age 62 and older may be tempted by the offers for reverse mortgages as a solution to the financial stresses.  The celebrity spokespeople seem so warm and caring and it seems like a simple solution to an overwhelming problem.  While reverse mortgage might be a reasonable solution for some seniors, for many it is a bad financial decision, for a number of reasons.

Every year, the Better Business Bureau receives a lot of complaints about reverse mortgages.  As these complaints show, there are many problems and issues with reverse mortgages, and they also illustrate many seniors who turn to reverse mortgages as a solution do not actually understand the process or the long term results.

A recent article in The (Appleton WI) Post Crescent, titled “Be cautious before taking on reverse mortgage,” says that some consumers don't know that a reverse mortgage is actually a loan that leverages their home’s equity. It's actually one of the most expensive forms of credit a person can get, with very high origination fees, high interest charges, and insurance premiums topping those of most other types of loans. Typically, a reverse mortgage origination fee can be up to $6,000, and the initial premium for federal insurance is set at 2% of the home’s value.

Repayment of a reverse mortgage loan isn't required until the borrower dies or moves out of the home, but this is where problems arise.  If the borrower moves into a nursing home or assisted living facility and leaves behind a non-borrowing spouse, child, or grandchild, they’ll also need to move out of the house.

The article explains that there are seniors who apply for a reverse mortgage because of financial difficulties, which can include property taxes or insurance payments. Here’s part of the fine print:  property taxes, insurance, upkeep, and maintenance are still the borrower's responsibility. If the borrower fails to do any of these, he or she will be in default and the lender can foreclose.

When is a reverse mortgage a good idea?

The Number One benefit of a reverse mortgage is that a senior can remain in the home while at the same time receiving a steady cash flow. The best reverse mortgage candidate is an individual age 62 or older who lives alone and has significant equity in the home (or doesn’t have a mortgage).  Also, this person isn't planning on leaving the home to their heirs and is healthy enough to stay in the home for a long time without going into an assisted living facility.

The article says that if you're thinking about a reverse mortgage, forget about those celebrity spokespeople on TV! Talk with an experienced elder law attorney before signing anything.

Lastly, watch out for scammers who want to take advantage of seniors. That includes anybody with too-good-to-be-true interest rates, real estate deals, or investment ideas. Talk with a qualified elder law attorney. It’s critical to do so first.

Reference: The (Appleton WI) Post Crescent (June 20, 2015) “Be cautious before taking on reverse mortgage.”

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