Reverse Mortgage Tips for Consumers
If you need cash, consider alternatives to a Reverse Mortgage first.
Seniors are being told that having a reverse mortgage ends their financial worries. This is not altogether true. Despite the claim that the borrowers don’t have to pay back the loan until they either die or permanently move out of the house, there are ongoing financial obligations that seniors need to keep in mind. Before depleting this last major asset through a reverse mortgage, make sure that this finite amount will be enough to meet your financial needs for the future. Would-be borrowers must think about how much money they will still be paying in continuing expenses once they have a reverse mortgage.
|Borrower Beware-Continuing Expenses with Reverse Mortgages• The borrower needs to stay current on all payments owed for property taxes, homeowners’ insurance and, if applicable, all homeowners’ association fees.
• The borrower is also obligated to adequately maintain the home or the loan may be called, for example, if the borrower cannot repair a leaky roof, wood rot or termite infestation.
• If the senior defaults on the loan, there may be a foreclosure (Borrowers with reverse mortgages can and do experience foreclosures).
Alternatives to Reverse Mortgages
Explore eligibility for less expensive programs or benefits
- Reverse mortgages are very expensive loans, and as such, they should be considered only as a last resort. Before considering a reverse mortgage, a senior should first determine if he or she qualifies for less expensive programs that offer monetary assistance or cost-cutting benefits. These programs include Supplemental Security Income (SSI), Medicaid, prescription drug discount programs, energy and telephone discount programs, City and County grants and low-cost home improvement loans (sometimes called “single purpose” loans), state property tax postponement programs, In-Home Supportive Services, and Veterans pensions to pay for in-home care.
Family Financing: A win-win
- Seniors should also consider whether an inter-family loan might be better for their situation. In an inter-family loan, a family member or family members advance money to the senior instead of having a bank do the lending. If a senior has family members who are able and willing to consider such an arrangement, the senior’s home equity can be used as collateral for this “private reverse mortgage” arrangement. The forwarded money, with interest, is tracked and recorded. When it comes time to sell the home, the investors are able to regain their contributions along with the interest it earned.
- There are several advantages to inter-family loans over the conventional reverse mortgage. First, the costs associated with family investors are typically a fraction of what they would be from an institutional lender. A successful inter-family loan would mean: 1) the senior can stay in the home; 2) the family investors have a secure loan that produces interest, and 3) when it comes time to sell the home, the senior would have preserved more of the home equity to share with the heirs then they otherwise would have if the senior had gone to a bank for the loan. As a practical matter, it is in the ultimate financial interest of the senior and the would-be heirs to preserve the inheritance rather than having the senior’s home being sold in order to pay back an expensive reverse mortgage loan.
- The first step in getting started would be for the senior to talk to his or her adult children and discuss how much money the senior requires. If it is a manageable sum for the would-be investors, then a contract can be drawn up to clarify the terms and to protect those investors. Each investor’s contribution would be tracked on a spreadsheet along with the calculated interest. A senior should contact an estate planning attorney or a Certified Public Accountant (CPA) to set up the necessary paperwork. The setup costs associated with this would be a small fraction compared to the thousands of dollars required to start a reverse mortgage.
Counseling ― Advice for Potential Reverse Mortgage Borrowers
- Attend a face-to-face counseling session with a local HUD counselor rather than the phone counseling that is permitted in nearly every state.
- Do not rely on HUD counseling alone to determine whether a reverse mortgage is appropriate for your needs. Either before or after meeting with a HUD-approved counselor, meet with either a Certified Financial Planner (CFP) or Certified Public Accountant (CPA), and/or with an elder law attorney before deciding on any reverse mortgage. Use this opportunity to discuss personal financial goals in more depth while obtaining specific advice regarding potential options to–or information about–appropriate reverse mortgage products.
- To find local counselors in their area, seniors should consult: https://entp.hud.gov/idapp/html/hecm_agency_look.cfm
or contact the AARP Foundation at 1-800-209-8085
Last updated June 27, 2012