It is important that one understands how a reverse mortgage works and know what can and cannot be done. There sometimes is confusion between what one believes a reverse mortgage can do and the way the reverse mortgage functions. For example, many consumers, for example, struggle with understanding how quickly their loan balance will go up and their home equity will fall.
The top complaints about reverse mortgages include:
Distress about the inability to add new borrowers to an existing loan: Reverse mortgages prohibit spouses, heirs, and dependents from taking over the loan. This is because loan amounts are, in part, calculated using a borrower’s age and the loan repayment is triggered when the last borrower moves out or dies. This can be a problem for surviving spouses and children. Family members complained about not being able to be added to the loan so they could keep the home.
Frustration with runarounds when trying to pay off the debt: When the borrower dies, heirs can sell the home, repay the loan balance, or pay 95 percent of the property’s assessed value. Consumers complain that loan servicers do not provide a clear process to allow them to settle the debt.
Struggles with foreclosure due to issues with property taxes and homeowners’ insurance: Reverse mortgages require no monthly mortgage payments but borrowers are still responsible for property taxes and homeowner’s insurance. Nearly 10 percent of reverse mortgage borrowers are at risk of foreclosure because they have failed to pay these expenses.
A question from a daughter wanting to know more about reverse mortgages for her mother.
Question – So this is a real estate question – not for my business but for my family. My mom needs to retire and she can only retire without a mortgage but doesn’t have the money to buy outright. She’s been told she can get a reverse mortgage. My sister has the money to buy and carry a mortgage. Does it make sense for my sis to buy the property so that when my mom can no longer live alone, she will have a property worth something or better to get the reverse mortgage and let the bank have it when mom no longer needs it? I know it’s not great to bet on appreciation. Can someone at least tell me how I would calculate which is the smartest move from a money standpoint?
Answer – Most lenders are doing a HECM reverse mortgage. HECM stands for Home Equity Conversion Mortgage. They are FHA reverse mortgages. The fees are almost identical if you were to take out an FHA mortgage or refinance. The basic qualifications are that a person must be 62 or older, have at least 50 equity or less if the person is older. There is a credit check to see if the person will be able to pay for taxes and insurance and a required education class that must be taken prior.
With a reverse mortgage it opens a lot of options. Monthly payments are optional. A person can make a payment so that interest does not accumulate and eat up equity. But you can make no payment at all also. If there is enough equity, a person can receive monthly payments, take out a lump sum or use the the equity as an equity line of credit, of sort. There are other options also that go into more detail.
The other great thing about a reverse mortgage is that you can make a new purchase. If your current home does not fit your needs or want to down size, you can purchase using a reverse mortgage. The same benefits happen as above. You do need to come in with at least 50% down payment but those numbers decrease the older you are.
Also, a qualifying spouse can remain in the property until they pass or sell or refi.
Yes there are negatives like your equity shrinks, because you are using it and you need to see if this financial tool fits into your financial plans and lifestyle.
It is great to ask questions to know your options.