Buyer Beware: The Truth About Reverse Mortgages
A reverse mortgage can be an attractive financial vehicle for older homeowners who wish to tap into the equity of their homes without selling them. However, like any financial product, it comes with its own set of advantages and disadvantages. It is important to understand the full scope of the financial tool before “signing on the dotted line.”
Unlike a traditional mortgage, where the homeowner makes monthly payments to the lender, with a reverse mortgage, the lender makes a single payment or payments to the homeowner. The loan is repaid when the homeowner sells the home, moves out permanently, or passes away. Most reverse mortgages provide protection to the homeowner and heirs that they will never owe more than the home’s value once the loan is called, but it is important to make sure that the terms of the contract include a “non-recourse” clause. There are also supposed to be additional protections for the homeowners including mandatory counseling (which can be done over the phone) but other than signing off that it was done there are no real checks and balances that the counselor did what they were supposed to do, including explaining alternatives to taking out a reverse mortgage.
The loan terms of all reverse mortgages require that the homeowner maintain the property as well as keep up with property taxes and homeowners’ insurance. Failure to make a SINGLE payment on time can result in the start of foreclosure proceedings. This is extremely scary because the very purpose of the reverse mortgage is to allow a person to age in place. The idea that it can be called so easily and quickly, per the terms of the loan contract, can result in homelessness which arguably flies in the face of the government’s original intent in supporting the lending program.
For people on a fixed income, a reverse mortgage can provide access to cash which, ideally, is used to pay for home health care needs to allow people to age in place. However, it is important to understand that there are no restrictions on how the funds are used. In fact, when the homeowner needs the money most it could all be gone as well as the entire equity in the home.
Reverse mortgages can be expensive. They often come with high upfront costs, including mortgage insurance premiums, origination fees and closing costs. These fees can add up and reduce the amount of money the homeowner receives. In addition, interest and FHA mortgage insurance premiums on a reverse mortgage accrue over time, and since no payments are made, the amount owed continue to increase. In fact, over the course of time the amount owed can far exceed any equity left in the home. We have seen instances where a homeowner’s income after exhausting the reverse mortgage funds is well under the total cost of living expenses, property taxes and the homeowners insurance premium. Where they could, the older adults’ family members had to step in and help pay for their needs in order to keep a roof over their loved one’s heads.
The additional income or resources, depending on how the reverse mortgage is drawn down (lump sum or monthly), can also potentially affect eligibility for need-based entitlement programs such as Medicaid. It’s imperative to understand how a reverse mortgage might impact these benefits before proceeding.
As with any major financial decision, it’s essential to thoroughly understand both the benefits and the risks.
If you or your loved ones are thinking about taking out a reverse mortgage LMR Elder Care is available to consult with you and your trusted financial and legal advisors to help holistically determine if this is an appropriate tool for your long-term care planning needs.