Reverse Mortgages – Read the Fine Print — Twice!

Sep 22, 2024 by michael

By Adelade Morgan, www.grandparentuniversity.com

You have probably seen the commercials advertising the benefits of reverse mortgages. The benefits of these loans that are described in the ads sound extremely enticing, but there is little information on the risks involved. They usually feature a celebrity spokesperson and showcase active retirees enjoying leisure activities – spending a lazy day at the beach, playing golf, or traveling to exotic destinations. Often ads for reverse mortgages deceptively describe them without mentioning that they are truly a loan. And most of the important information regarding the loan requirements are buried within the fine print that can barely be read on television, if they are mentioned at all. Do the potential benefits really outweigh the risks? Just like any loan you are considering, it’s extremely important to understand exactly what is required in the loan before committing to it.

What is a reverse mortgage?
Reverse mortgages are a popular loan used by seniors who have equity in their homes and want to supplement their income. However, a recent study by the Consumer Financial Protection Bureau in the federal government found that many older homeowners did not understand that reverse mortgages need to be repaid. Despite the carefully-crafted messages in the ads, reverse mortgages are a loan – not a government benefit. They are for homeowners, usually 62 or older, who have paid off a considerable amount of their mortgage. Through the loan, these homeowners can access the home equity they have built up in their homes without mortgage payments. Although the lack of required monthly payments sounds attractive, just like other home loans, there are compounding interest and fees that must be paid. The interest and fees are added to the loan balance each month and the payment of the loan is deferred until the homeowners die, sell, or move out of their home.

You can live in your home as long as you want . . . not
“You can live in your home as long as you want” and “you still own your home” are only some of the misleading statements used in ads for reverse mortgages. These ads do not tell the whole story. Borrowers must continue to meet all the requirements of the loan to keep their home. Falling behind on property taxes, lapses in homeowner’s insurance, and extended absences from your home are a few of the most common ways you can trigger a loan default. Many times, these requirements are listed in the fine print of the loan, but not always. A loan default can eventually lead to foreclosure on your home if you are unable to clear the default within the time parameters set forth in the loan.

Seek expert advice.
Because these requirements can be confusing and difficult to find within the loan documents, it is essential to consult with an expert that understands your options. Most reverse mortgages today are insured by the Federal Housing Administration (FHA), as part of its Home Equity Conversion Mortgage (HECM) program. In addition to HECM reverse mortgages, some lenders may offer what are called proprietary reverse mortgages or ones that are not insured by the FHA, which may have different costs.

Try contacting a HUD-approved housing counselor near you through www.portal.hud.gov. Reverse mortgage counseling costs are charged by the counseling agency, not the lender. Counseling usually costs around $125, and consumers are responsible for paying this cost directly to the counseling agency. Low-income individuals can often get this fee waived, so be sure to ask your counselor if you qualify. Paying for upfront costs with loan funds is more expensive than paying them out of pocket. If you use your loan funds to pay for upfront costs, you will be charged interest and ongoing mortgage insurance on these costs. This means the total amount you will pay for these costs will be more than if you paid for them out of pocket.

You could outlive your money.
If you relied on the information in reverse mortgage ads, it would be easy to believe that the loan would guarantee your financial security for as long as you live. Unfortunately, this is not true for many of the American seniors that take out reverse mortgage loans. The loan is usually not due and payable until you die, sell your house, or are absent and not living in your home for an extended period. Also, if you fail to pay property taxes, homeowner’s insurance, let the condition of the home deteriorate significantly, or transfer the title of the property, the loan may become due immediately. Many borrowers choose to receive their loan in one lump sum instead of monthly payments, which they are unable to pay once they default on their loan. Also, the one lump sum does not provide for the monthly income shortage that the reverse mortgage is supposed to help alleviate. Once the mortgage is due, you (or your heirs) may: Pay off the existing balance to retain ownership of the home; sell the home to settle the balance of the loan and keep the remaining equity; or allow the lender to sell the home. If the loan amount equals more than the value of the home, an FHA mortgage insurance fund covers the difference.

Reverse mortgages are not cheap, but they may be beneficial for some borrowers.
The upfront costs of entering into a reverse mortgage can cost approximately the same amount as a traditional mortgage, and the interest rate may even by higher than on a conventional mortgage. Unfortunately, reverse mortgage loans can quickly balloon because the interest that accrues is treated as a loan advance. The interest is calculated as compound interest and becomes more expensive each month – depleting the remaining equity in the home. A.M.