If you have been within earshot of a television or radio in the last year, then you have no doubt heard about reverse mortgages. While the term seems to be self-explanatory, most consumers have no idea how they work and being uneducated is dangerous territory when it comes to making a major financial decision.
A reverse mortgage allows homeowners to convert part of the equity in a home to cash without having to sell the property. In other words, it is a loan against your home that you do not have to pay back for as long as you live in your home. Due to the attractiveness of these loans, some senior citizens are being charged excessive up-front fees for services that are generally available free of charge or at a very low cost through the Department of Housing and Urban Development.
The Better Business Bureau advises consumers to use caution if approached with the opportunity to obtain a reverse mortgage; taking the time to understand the requirements, consider all the factors involved, and learn what free resources are available to help them make an informed decision.
And don’t be swayed by celebrity spokespersons.
The BBB provides the following tips when considering a reverse mortgage:
Know the basic requirements. To apply for a reverse mortgage, all owners of the home must be at least 62 years of age, have equity in the home and sign the loan paperwork. The home must be the primary residence and remain in good condition. Reverse mortgage borrowers continue to own their homes. So you are still responsible for property taxes, insurance, and repairs. If you fail to carry out those responsibilities, your loan could become due and payable in full. The loan process can’t be initiated until the senior receives counseling from a Home Equity Conversion Mortgages counselor.
Consult an HECM counselor. An HECM counselor will help answer questions regarding eligibility, financial implications and other alternatives. The Fair Housing Association does not recommend using any service charging a fee for referring a borrower to an FHA lender as FHA provides all the information free of charge and HECM housing counselors are available free or at a very low cost. For a list of approved counseling agencies, visit the HUD Web site at www.hud.gov.
Involve heirs in the decision-making. Because a reverse mortgage affects the assets of the borrower in case of death, involving heirs will avoid future misunderstandings and family discord.
Make sure a reverse mortgage suits your needs. The amount you can get from a reverse mortgage generally depends on your age, your home’s value and location, the cost of the loan, and who is making the loan. Determine whether it is practical to remain in the home for 5-10 years to make the reverse mortgage economical. Also take into consideration future health care needs as well as safety and ease of use of the home.
Consider all the costs associated with obtaining a reverse mortgage. Be prepared to pay for some of the fees involved in the processing of a reverse mortgage loan, which can include an origination fee, closing costs, a mortgage insurance premium, a servicing fee, and the interest rate.
Understand the repayment terms. A reverse mortgage loan must be repaid in full when the owner dies or sells the home. Other conditions that affect loan repayment include failure to pay property taxes or hazard insurance, allowing the property to deteriorate, and if the borrower permanently moves, has a new primary residence, or fails to live in the home for 12 consecutive months.
Because you make no monthly payments, the amount you owe grows larger over time. As your debt grows larger, the amount of cash you would have left after selling and paying off the loan (your equity) generally grows smaller. But you never owe more than your home’s value at the time the loan is repaid.
Reach Kelvin Collins, the president/CEO of the Better Business Bureau of Central Georgia and the CSRA Inc., at (800) 763-4222 or www.bbb.org.