Can a Reverse Mortgage Back You Into a Corner?

By Catherine Powell

Image courtesy pixfree.org

If you're a baby boomer you've no doubt heard about reverse mortgages.  These loans are routinely touted by celebrities such as Tom Selleck, Robert Wagner, and Henry Winkler.  The pitches being made by all of them explain how senior citizens with equity in their homes can cash in without having to pay monthly fees as they would if they got a home equity loan.  This can free up needed funds that can be used to help pay for living expenses, cover medical costs, or home improvements.  There's no need to repay a reverse mortgage until you move out or pass away, they say.  Better still, assets from a reverse mortgage won't interfere with your social security benefits or bump you into a higher tax bracket because funds received in this way aren't taxable.  For people living on a fixed income with limited means and possibly poor credit, the lure of easy money sounds almost too good to be true.  While for some, tapping into a reverse mortgage can be a blessing, you need to do your homework before you sign on the dotted line.  Below are ten things you need to consider before you consider a reverse mortgage.

#1: What is a reverse mortgage? - A reverse mortgage is a kind of loan that's available to homeowners who are 62 or older.  Instead of paying monthly installments, a reverse mortgage pays the homeowner either monthly, in a lump sum or as a line of credit based on a percentage of the equity in their home.  

#2: How many kinds of reverse mortgages are there? - There are currently three different kinds of reverse mortgages available.  

• Single-Purpose Reverse Mortgages are available through some state, local or nonprofit agencies.  They are designed to be used to pay for a specific purpose, such as for property taxes, home maintenance or upkeep of a property.
• Home Equity Conversion Mortgages are insured by the Department of Housing and Urban Development.  This type of loan, which is available either as a lump sum or a line of credit, can be used for any purpose the homeowner has in mind.
• Proprietary Reverse Mortgages aren't insured by the government.  These loans are offered and insured by private lending institutions. These lenders don't have to abide by the rules and regulations put in place to restrict lenders of home equity conversion mortgages.  As a result, fees with this kind of loan are generally higher than with other products of this kind.

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#3: Do you plan on moving in the near future? - You had better wait on acquiring any kind of reverse mortgage if it's a possibility that you could wind up relocating.  That's because as soon as you move, you'll be required to pay off a reverse mortgage in full.

 #4: Is anyone currently living with you? - If you should die, they could be forced to move out if they aren't able to pay off the reverse mortgage or qualify as an eligible non-borrowing spouse.

#5: Would you like to leave your property to your heirs? - Depending on how much the property is worth and how long you live, willing your home to your heirs can be all but impossible once the fees and interest built into some reverse mortgages are calculated.  

#6: Can you be kicked out of your home before you die? - Make sure you read the fine print before you opt for any reverse mortgage.  You could come to find that everything from home insurance and taxes to property maintenance is not only required, but a missed payment or if the property falls into disrepair you could be evicted from your home if the lender calls in the loan.

#7: Are there hidden costs associated with reverse mortgages? - Other than a fixed or adjustable interest rate on the loan, make sure you understand any other required fees that will be bundled into a reverse mortgage.  These can range from origination fees involved in setting up the loan, to appraisal fees, real estate commissions, closing costs, mortgage insurance premiums, service fees, and even counseling fees.

Image courtesy Pixabay

#8: What's the true cost of a reverse mortgage? - Depending on the value of your home, a reverse mortgage can more than exceed your equity in the home from the date of inception.  If you should die shortly after the paperwork is signed, your heirs could find themselves forced to walk away from the property when the loan is called in.  

#9: How can you make the reverse mortgage process as transparent as possible? - Pay attention to several documents you'll be asked to sign before initiating a reverse mortgage.

• The Good Faith Estimate discloses the fees you agree to pay to acquire the loan.
• The Total Annual Loan Cost lets you know how much you'll be charged as the loan progresses.
• The Amortization Table shows you the debt the loan will incur over time against a given interest rate.

#10: What alternatives are available other than a reverse mortgage? - If you're concerned about putting your property and your family at risk of losing your home, there are several other ways to tap into your home equity that you should consider before taking out a reverse mortgage.

• Sell your home and downsize - Selling your home and buying a smaller property is one way to generate cash while reducing your overhead at the same time.  
• Take out a home equity loan or a HELOC - A home equity loan or a home equity line of credit will allow you to tap into the value of your home without relinquishing control of your property.
• Find a roommate - If you find yourself strapped for cash and live alone, finding a roommate could be just the ticket to turning your finances around.  The monthly rent checks will provide thousands of dollars in added income annually and you can reduce your overhead by getting your roommate to split the utilities with you.
• Sell your home to your children - A sale-leaseback or a private reverse mortgage would allow you to tap into your home's equity without pulling the rug out from under your heirs when you pass.  You'll need to consult a real estate attorney to make the deal legal.

Catherine Powell is the owner of A Plus All Florida, Insurance in Orange Park, Florida.  To find out more ways to save on flood insurance, check out her website at http://aplusallfloridainsuranceinc.com/