It’s estimated that within the next ten years, over 55 million people in the U.S. will be 62 or older, and many of them are homeowners who either own their homes outright or have built up a substantial home equity.
There are frequently ads on TV targeting senior citizens that talk about how beneficial a reverse mortgage can be in alleviating financial or health problems for the senior citizen and/or family members.
According to John C. Dugan, comptroller of the Currency, administrator of National Banks, U.S. Department of the Treasury, “There is another mortgage product that has not yet been widely accepted in the market, but has the possibility for rapid growth in the very near future and poses significant compliance risks, the reverse mortgage.”
Dugan said that while reverse mortgages can provide real benefits, they also have some of the characteristics as the riskiest types of subprime mortgages, and “that should set off alarm bells.”
“I believe that now is the time to get out in front of this issue, before real problems develop — so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers.”
DUGAN’S BASICS ABOUT REVERSE MORTGAGES—
What is a reverse mortgage?
A reverse mortgage is a loan secured by your home that lets you receive payments from the lender —either over time or all at once — based on the value of your home at the time of the loan. As you receive payments, these amounts are added to your loan balance.
Interest is charged on the outstanding balance so even if you don’t receive any further payments from your lender, the loan balance continues to increase.
Who can obtain a reverse mortgage?
Generally, you must be a homeowner at least 62 years old, must use the home as your primary residence, and must have either no current mortgage or a mortgage balance low enough that you can pay off with funds from the reverse mortgage.
Are there different types of reverse mortgages?
Yes, and the difference can be important. Most reverse mortgages are made under a Federal Housing Administration (FHA) program and are called Home Equity Conversion Mortgages (HECM), with government insurance that protects not just the lender but the borrower.
If the lender becomes unwilling or unable to make payments due to the borrower, the government steps in to make them. Other reverse mortgages do not have this guarantee.
How much can I borrow?
Generally, the amount of your loan will be larger the older you are, the more valuable your home is, and the lower that applicable interest rates are.
How much will it cost?
Reverse mortgages have both interest and fees charged over the life of the loan and up-front costs due at closing. The up-front costs can be “financed,” not paid out-of-pocket at closing but added to your loan balance.
Reverse mortgages may have relatively low interest rates, but they can be expensive compared with other home loans because of mortgage insurance premiums and other up-front costs. Interest rates may be variable, increasing or decreasing with the “prime rate” or some other measure of market rates.
How do I repay the loan?
You don’t make monthly payments of principal and interest to the lender. Instead interest and fees are added to your home loan balance.
Unless you make escrow payments to your lender, you are still responsible for paying property taxes and insurance when they are due.
When do I repay the loan?
You generally don’t need to make payments until you stop using the home as your primary residence — when you sell the home, no longer live there or pass away.
The loan then becomes due and your obligation to the lender will be limited to the lesser of the amount due or the value of the home at the time, unless you or your heirs want to keep the home, in which case the full amount of what you received, plus all accumulated interest and fees would have to be paid.
Can I lose my home before I’m ready to move?
Yes, under limited circumstances. With a reverse mortgage, you keep title to your home, but you remain responsible for property taxes, insurance and home repairs, and if you fail to make these payments or keep up your home, you could lose it through foreclosure. If your lender requires a monthly escrow payment for property taxes and insurance, that risk can be reduced.
Rule of Thumb: Keep other options in mind, such as standard mortgages or home equity lines of credit, depending on your financial situation and needs.
A reverse mortgage usually makes more sense the longer you are planning to stay in the home, and it is important to have a realistic understanding of not just your life expectancy, but how long you can afford the expenses related to your home.
The average HECM borrower remains in the home for only six years after obtaining the reverse mortgage, said Dugan.
“We strongly recommend that you consult with a qualified, independent housing counselor in a face-to-face counseling session before making this decision,” he said.
Access to a large amount of money can make you a target for aggressive sales pitches for expensive and inappropriate products or services such as annuities, long-term care insurance, investment programs, or home repair services along with a reverse mortgage, Dugan said.
Find housing counselors at the US Department of Housing and Urban Development and enter “Talk to a housing counselor in Search,” www.hud.gov/.
The National Council on Aging provides information about government assistance programs and other alternatives to reverse mortgages online, www.benefitscheckup.org/.