Debthelper: About Reverse Mortgages

    After their children leave home, many couples are splitting up and finding out they have nothing in common anymore. Some older couples are divorcing simply to protect their assets when faced with high medical expenses for fear of losing everything. Regardless of the reason for the divorce, there are financial implications that usually result from leaving a spouse. Loss of income, loss of medical benefits, or even an impending foreclosure may a good reason to consider a reverse mortgage.

A reverse mortgage is an option for people aged 62 or older that owe little to nothing on their conventional mortgages. It is a loan that allows the person to take out an equity loan without making any payments as long as they live in their home. The loan only comes due if the person leaves their home for any reason, (selling, passing away, eminent domain, etc.) taking out new debts against the home or adding a new owner to the title. Also, there are some clauses that state filing personal bankruptcy may also cause the loan to become due. The homeowner can receive their home’s equity paid out to them in monthly payments, a lump sum or a line of credit. The homeowner does not have to claim the proceeds taken from the reverse mortgage as income, because in actuality; it is debt.

One of the great benefits of taking out a reverse mortgage is that the homeowner doesn’t have to make any monthly mortgage payments, because to be eligible for a reverse mortgage all liens against their property must be paid off before they are eligible for the loan. (Including their conventional mortgage)  There are a lot of people that take out a reverse mortgage to pay off their conventional mortgage. Imagine how much cash the homeowner would have in their pocket by simply eliminating the need to make a mortgage payment. It almost sounds too good to be true. The most common type of reverse mortgage is the HECM. (Home Equity Conversion Mortgage) HECM loans are insured by HUD and they are all non-recourse loans. Non-recourse means that the homeowner is never going to owe more on the loan than the appraised property value of the home at the time the loan comes due.

All homeowners are required to complete HUD-approved counseling before taking out a reverse mortgage through a non-profit credit counseling agency. (If divorcing, one spouse may have to quit claim on the deed.) This ensures that the homeowner knows what financial implications and costs are involved in this type of loan. It is also to make sure that the homeowner is competent enough to know what they are getting into. It makes sure the homeowner knows they are still going to be the owner of the home, and that they are not selling the home to the bank. It allows the homeowner to ask questions from an unbiased source who is not trying to sell them a loan. 

At the end of the counseling session, the homeowner is issued a certificate that allows them to proceed with the process of obtaining a reverse mortgage if they choose to. The most important consideration for many homeowners is the impact a reverse mortgage may have on their heirs. When the homeowner passes on, no one is held accountable for the debt. 

If keeping the home in the family is a concern for the heirs, they need to know that they have a year to pay off the reverse mortgage. This usually involves securing a conventional mortgage to pay off the reverse mortgage. If heirs decide they would like to sell the home, they would have a year to sell the home. Once the reverse mortgage is paid, any equity that is left over would still go to the heirs. If the heirs have absolutely no interest in keeping or selling the home, then the lender will sell the home to pay off the reverse mortgage and any equity leftover will still go to the heirs.

A reverse mortgage is an expensive loan. It is also a loan that some homeowners may never have to repay. Again, that depends on your personal situation. It can be very costly for homeowners that are interested in selling their homes in less than five years. Closing costs are very high on a reverse mortgage. Depending on the value of the home, or the lending limit in your area, closing costs typically range from $10,000 to almost $18,000. There are only two costs that can vary from lender to lender, the origination fee (lender’s profit) and the monthly servicing fees. All other costs are the same no matter which lender you choose. 

So, how do you determine if a reverse mortgage suits your needs? As a counselor, I always encourage people to discuss the decision to take out a reverse mortgage with family members or people they trust. There are also many resources available for free. Homeowners should reference HUD’s web site when choosing a lender. (www.hud.gov) AARP also has a lot of resources available for information. They offer a free book, called "Homemade Money” that gives an excellent overview of the reverse mortgage process. (To order the book, call 1-800-209-8085.) This will also prepare you for your HUD counseling session and you will know what questions to ask your counselor.

Jennifer Lane is a certified credit counselor and is taking questions I can answer in upcoming articles. Please feel free to e-mail your questions to me at jlane@debthelper.com.