A reverse mortgage can be a helpful financial solution for older Americans, but you need to know how they work before you agree to take one out.
It’s still May and that means it’s Older Americans Month! It’s everyone’s favorite month to read about financial issues that face the elderly. That’s why today we’ll be talking about reverse mortgages.
You may have heard about reverse mortgages. Maybe you were looking online for a way to supplement an elderly relative’s income or you were just watching the Game Show Network during the day.
So what exactly is a reverse mortgage? Is it a recurring villain of the DC Comics superhero “The Mortgage?” No, you’re thinking of Flash and Reverse Flash. And unlike Reverse Flash, reverse mortgages seem to be advertised towards the elderly.
Is this because it’s a scam that targets the elderly? Actually, the answer to that question is a resounding NO. But a reverse mortgage can be a big decision and you or an elderly relative should learn all of the necessary details before considering signing on to one.
Which brings us to our first question …
What is a reverse mortgage?
The first rule of signing things is to never sign something unless you know what it is. (The second rule? Never use green ink.)
“A reverse mortgage is a loan,” explained author and attorney M. Reese Everson. “95% of all reverse mortgages are Home Equity Conversion Mortgages (HECM), sponsored by the United States Department of Housing and Urban Development (HUD) (aka the government). When senior citizens own a home free and clear and have paid off their mortgage (or only have a small mortgage balance left) they are eligible to take out a HUD-backed reverse mortgage loan.
“The senior citizen can request to receive the money as a lump sum payment spread out over a monthly basis, or on an occasional basis through a line of credit. With the loan, the homeowner is borrowing against the equity in their home. The collateral for the loan is their home.”
So whereas a regular mortgage, allows you to gradually gain equity (or ownership) in a house over time, a reverse mortgage is giving up some equity in exchange for cash.
A good choice for some.
As Everson mentioned, only senior citizens are legally able to access reverse mortgages. That’s why you’ll only see them advertised to the elderly. And depending on an elderly person’s situation, it could be a good option for them.
“Reverse mortgages don’t ‘target the elderly.’” clarified reverse mortgage specialist Greg Cook. “Only homeowners 62 and older are eligible for the program. It is one of the most highly regulated loan programs available. It’s not a scam.
“The homeowner borrows money against the equity in their home. They are charged an interest rate but, unlike traditional forward mortgages, a monthly payment is not required. The borrowed funds plus interest are repaid when the homeowner passes away or otherwise leaves the home. A reverse mortgage does not affect their ability to bequeath the home to their heirs. Like any other loan, the reverse mortgage has to be repaid when that is done.
“A reverse mortgage can be a good idea but it is not for everyone. HUD requires that prospective borrowers complete a homebuyer education taught by a certified HUD counselor prior to applying for a loan.
“The FHA mortgage not only protects the lender but also protects the borrower and their estate. It is a non-recourse loan so if the home is worth less than the outstanding balance on the mortgage there is no residual liability to the estate. If the home is worth more than the loan balance, the heirs can sell the home and are entitled to the remaining equity.”
Reverse mortgages also come with additional flexibility.
“The greatest advantage is the range of options a reverse mortgage can provide,” explained Jennifer Harder, Founder & CEO of Jennifer Harder Mortgage Brokers. “Payouts can be in the form of monthly payments, a lump sum or a line of credit. You can qualify even if you are still paying a traditional mortgage and the funds can be used at your discretion for whatever purpose you wish.”
But not for others.
As with any loan, you should do as much research possible before signing anything. Or before your elderly friend or relative signs anything, if you’re assisting them. You need to be certain it’s the right choice for their particular circumstances.
“When shopping for a reverse mortgage, consumers should be aware that the interest rates on this type of loan are higher than others, and as that interest adds up over the years, the equity you hold on your home may decline,” warned Harder. “However, you don’t have to make regular payments or pay tax on the money borrowed. This type of mortgage will also not affect Old Age Security or Guaranteed Income Supplement benefits you may receive, which could be why they are seen as being ‘elderly friendly.’ While it does reduce their monthly cost of living, the upfront costs can be much higher.
“Consumers should also be aware of the fees, interest rates, and penalties that may be associated with a reverse mortgage. For example, you may incur a penalty if you sell your home within a certain period of time or the loan may end up being higher than the value of your home when it comes time to repay.”
You should also be certain you’re working with a trustworthy reverse mortgage lender. You don’t want anyone who will try to pressure you or your elder relative into making a decision. As with any lender, only work with someone who is willing to be open and answer all of your questions in a straightforward manner without trying to push you into signing something you may be uncomfortable with.
Greg Cook (@gregcook47) has been a licensed loan originator since 1981 and moved exclusively to reverse mortgages in 2016. He elected to focus on reverse mortgages because as a baby boomer himself, he felt he better understood the challenges facing seniors in preparing for a 20-30 year retirement. Looking out for his client’s best interest has always been his primary goal as a loan officer. Taking out a reverse mortgage can be a retirement changing decision. He takes that responsibility seriously.
Attorney M. Reese Everson is a second-time author of her soon to be released book, “The B.A.B.E.’S Guide to Generational Wealth,”which details hard-earned life lessons with wealth building and inheritance, including taking out $100,000 in student loan debt, graduating during the Great Recession, trying to undo her grandmother’s reverse mortgage and being the target of inheritance theft. M. Reese Everson is formerly the Principal Attorney for the Everson Law Group. The Everson Law Group specialized in Corporate, Municipal, Real Estate and Asset Protection. M. Reese Everson began her legal career as American Bar Associate Fellow on behalf of the Nevada Attorney General’s office. In this role, M. Reese Everson was entrusted to assert Nevada’s right to share a $173M damages settlement from a multi-state class action lawsuit. M. Reese Everson’s proven legal expertise propelled her to be recruited by senior United States Congressional officials to serve as Legislative Counsel to some of the most senior elected members of the United States Congress. M. Reese Everson used her legal skills on behalf of the House Financial Services Committee’s Capital Market and Government Sponsored Enterprises staff, where she also spearheaded a policy conference addressing the student loan debt crisis with world-renowned financial guru, Suze Orman. Ms. Everson received her Bachelor of Arts degree in International Relations from Michigan State University and holds a Juris Doctor and Certificate in International Law from DePaul University College of Law. She is a member of the Illinois Bar.
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