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Reverse mortgages for seniors are becoming increasingly popular. This is according to an article that appeared recently in the real estate newsletter The Real Deal.
The Federal Trade Commission explains that a reverse mortgage permits you to convert a part of the equity in your home into monthly payments. In this arrangement, it is the lender that pays you. If your parents get a reverse mortgage the money is usually tax-free. Your parents won’t have to repay it so long as they live in their home.
The Federal Trade Commission also points out that when your parents die, sell their home or move out the remaining spouse or the estate would then be required to repay the loan. Of course, this can mean selling the home to raise the money to repay it.
The three types
There are actually three types of reverse mortgages. They are single-purpose reverse mortgages, proprietary reverse mortgages and mortgages that are insured by the federal government called Home Equity Conversion Mortgages (HECMs). Single-purpose reverse mortgages are generally offered by some state and local governmental agencies and some nonprofits. Proprietary reverse mortgages are private loans.
To be eligible for an HUD-insured HECM your parents must be over the age of 62. They should also own their home outright or have a mortgage loan with a low existing balance. This should be a balance that could be paid off with proceeds from the reverse mortgage. They will also be required to get free consumer information or at a very low cost from an HECM counselor before getting their loan.
Do the calculations
There are several reverse mortgage calculators available online including those offered by ReverseMortgage.org, ReverseMortgageAlert.org, and mortgagecalculator.org. A good way to start would be to have your parents use one of these calculators. You should assist them in determining what they could expect from a reverse mortgage in terms of a monthly payment.
The pros of a reverse mortgage
The biggest pro of a reverse mortgage is, of course, the fact that it will generate a steady stream of income by using your parents’ biggest asset — their home. A reverse mortgage will also eliminate any existing mortgage, which could be a load off your parents’ backs as they would be able to stay in their home and without monthly loan payments. Another important benefit of a reverse mortgage is that you (and your siblings) would not be personally liable if the payoff balance exceeds the value of their home.
The cons of a reverse mortgage
Probably the biggest con of a reverse mortgage is that the value of your parents’ estate will decrease over time as they spend proceeds from the loan.
Second, the fees they will be charged are typically higher than with a traditional mortgage such as the loan origination fee, the initial Federal Housing Administration (FHA) mortgage insurance premium and the ongoing FHA mortgage insurance premiums.
Reverse mortgages will use up the equity in your parent’s home, which means fewer assets for you (and your siblings). However, most reverse mortgages have something called a “non-recourse” clause. This means that if you and your siblings want to repay the loan and keep the house instead of selling it, you won’t be required to pay more than its appraised value.
They’ll owe more
Your parents will owe more over time. This is because as they get money through their reverse mortgage interest will be added onto the balance that they owe each month. As a result, the amount your parents would owe grows as the interest on their loan increases over time.
Let your parents beware
According to the Consumer Financial Protection Bureau, there are three lenders that have employed illegal and deceptive advertising practices. They are American Advisers Group, Reverse Mortgage Solutions, and Aegean Financial.
Their advertising has falsely stated that borrowers can’t lose their homes. Not only that, they could not be required to leave. They will also always continue to own their homes. The truth is that the contracts for reverse mortgage require borrowers to continue paying their real estate taxes and homeowner insurance and that they must maintain their property and observe some other requirements. In the event that your parents fail to do all these things then the lender can legally foreclose on the home. And if the property is foreclosed your parents will lose their home, will be required to leave and will no longer own it.
No government benefit
Another thing the CFPB is concerned with is how reverse mortgages are advertised. It is mentioned that a reverse mortgage is a loan from the government or some kind of government benefit. Neither of these is true. Also, lenders are now prohibited from implying any kind of an affiliation with the federal government.
Some of these companies that offer reverse mortgages have also stated or inferred that there are no fees associated with getting a reverse mortgage. The truth is that there will probably be title insurance costs, flood certification fees, an appraisal fee, credit report fees and the other incidental costs associated with closing a loan.
What your parents must understand
Your parents must understand that they must meet all the requirements of their loan agreement. At least, if they want to get a reverse mortgage, stay in their home and avoid foreclosure. If they are not sure they can continue to pay real estate taxes and homeowner insurance and maintain the property, they should not get one of these mortgages. In addition, urge them to have their loan agreement reviewed by a certified financial planner or an attorney before signing a contract.
Do the homework
A reverse mortgage could be a good option for your parents but you or they must do the homework. You also need to first help them determine if a reverse mortgage would be their best option. If they decide to move ahead it’s critical that you help them comparison shop. The initial and recurring costs, in addition to interest rates, can vary dramatically from lender to lender. Not only that, don’t think that the lender that has the most ads necessarily has the best product.
Here’s a video from the Today Show with Jean Chatzky explaining more about the pros and cons of a reverse mortgage including an explanation of the three ways your parents could get their money.
Frequently Asked Questions about reverse mortgages
Q. What are my parents’ options if they can’t meet the obligations of a reverse mortgage?
A. If your parents are having a problem with property-related expenses paid by the reverse mortgage servicer they may be able to get a repayment plan. This plan involves spreading the amount due over a 24-month period. Alternately, they might be able to get a debt consolidation loan and use the funds to cover the property-related expenses.
Q. Can your parents leave their home to their heirs?
A. Yes, they can. Their heirs can choose to retain the property and satisfy the reverse mortgage debt. This can be done by paying the lesser of the mortgage balance due. Or you can pay 95% of the then-current appraised value of the home.
Q. Could my parents add a borrower to the reverse mortgage?
A. No, co-borrowers cannot be added to a reverse mortgage after the loan has been originated
Q. What happens if my parents receive a foreclosure notice?
A. Even if this occurs, it may not be too late. They will need to contact the company that services their reverse mortgage to determine their options. If they are unable to pay off the balance of the reverse mortgage they may be able to do a Short Sale or a Deed-in-Lieu of Foreclosure.
Q. What is the role played by the reverse mortgage company or servicer?
A. It will require your parents to certify annually that they are living in the property and maintaining it. In addition, the mortgage company may remind your parents about their property-related expenses. This includes their insurance payments and property taxes. However, these expenses are your parents’ responsibility and they need to make sure they’ve set aside enough money to pay them and on time.
