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Reverse mortgages | The pros and cons
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Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population, top U.S. bank regulator John Dugan said on Monday. Dugan, who heads the Office of the Comptroller of the Currency, supervising some of the nation's largest banks, said regulators are crafting guidelines to ensure that robust consumer protections are in place for reverse mortgages.
Reverse mortgages are loans targeted at homeowners who are at least 62 years old. In a reverse mortgage, the homeowner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity, then the debt on the property increases each month. In a reverse mortgage, the money received from the lender does not have to be repaid as long as the homeowner resides in the home.
The stock market declined throughout 2008, and early 2009, sapping the value of investment accounts around the world, leaving many seniors strapped for resources. Elderly investors don't have the luxury of being able to wait out the storm.
Most reverse mortgages are insured by the Federal Housing Administration and pose little credit risk. However, Dugan said that “proprietary” reverse mortgages offer little consumer protection, because they frequently waive the counseling required by the federally insured programs. Dugan’s concern is that there could be a significant increase in demand for the proprietary reverse mortgages as the elderly population grows.
If you are considering a reverse mortgage, gather as much information as you can beforehand. Prepare questions prior to meeting with your HUD counselor, get multiple quotes, ask a lot of questions and evaluate the pros and cons carefully before you proceed.
Reverse Mortgage Pros:
- You can continue to live in your home. You retain title, but no monthly mortgage payment is due until you move, sell the home or die. At that time, the loan is due in full, including interest and fees.
- You can receive monthly income from a reverse mortgage as long as you live in the home as a primary residence. You could potentially continue to receive monthly payments regardless of whether your home is worth less than the loan balance. Neither the home owner, nor heirs, will ever owe more than the home is worth. It does not matter how many payments have been received or whether the interest rates have increased.
- Limited income and fixed income is a common impetus behind reverse mortgage inquiries. Eliminating the mortgage payment in favor of augmenting monthly income via home equity provides a financial cushion, making resources available for long-term healthcare insurance, medical expenses, home repair, debt reduction and recreational activities. Reverse mortgages can be set up as a monthly payment, line of credit or a lump sum.
- The money you receive is tax-free.
- Credit scores and income are not part of the qualification process.
Reverse Mortgage Cons:
- Reverse mortgages are expensive. They tend to be more costly because they are rising-debt loans. The interest is added to the principal loan balance every month. The total amount of interest owed increases significantly over time as the interest compounds, consuming most, if not all, of the equity. The initial costs can be staggering. The origination fees are usually higher than for conventional mortgages. The amount varies from lender to lender. It is always wise to get multiple quotes. Some lenders may charge servicing fees. The interest rates are adjustable. There is a HUD Up-Front Mortgage Insurance premium.
- As a homeowner, you retain title to your home. You are responsible for insurance, taxes, maintenance and all other expenses related to the property. Repayment on a reverse mortgage is the sale of the home.
- There is a potential hazard for people who take all of the equity up front and have no existing mortgage to pay off. By placing all proceeds into a bank account at one time, seniors could disqualify themselves from necessary programs like Medicaid.
- There is a potential of no inheritance for heirs. A reverse mortgage is based on the equity in your home. If you use the equity today, you could end up with nothing in the future.
- Unlike a traditional mortgage, the interest on a reverse mortgage isn’t tax deductible until the loan is paid off.
Gathering paperwork and information:
Before you meet with a counselor or call a lender, gather the necessary information together.
- Income and Expense Records: You will need to know your income, your expenses and how much more you need each month. Be prepared to verify expenses, including housing, utilities, food, transportation and health care costs.
- Existing Debt Information: You will need to provide documentation regarding existing mortgages and liens. They will be paid off in the process of doing the mortgage. Knowing the amount owed is crucial when evaluating how much cash or credit will be available.
- Property value: Although you don’t need an appraisal prior to starting the evaluation process, you may want to call a real estate agent in your area or visit Zillow.com to get an estimated value. Given the decline in the housing market, and the importance of assessing equity in determining the merits of a reverse mortgage, an accurate estimate is vital. Once you submit your application to a lender, you will have to get an official appraisal.
- Power of Attorney: If you have power of attorney for a spouse/parent, you’ll need to provide documentation.
- Payment: Before you go into counseling, find out how much you’ll have to pay and when you’ll have to pay. You may have to pay at the time of your counseling session. It may come out of your reverse mortgage proceeds. If you have major medical expenses or another type of immediate hardship, or if your expenses and debt payments are more than your income, you may not have to pay a counseling fee. You will need to provide proof of your hardship. The fee for a reverse mortgage counseling session is usually $125. If you have no hardship, but cannot afford the fee, a counselor from Consumer Credit Counseling Services will review your income, debts and expenses. If your expenses are more than your income, CCCS will allow you to pay your fee from your reverse mortgage payout. If that payout is less than $7,500, the fee is waived.
- Proper Identification: You will have to provide a social security card and photo ID, such as a driver’s license or passport, which will prove that you’re at least 62 years old.
- Proof of Ownership: You will have to provide proof that you own the property and that it’s your primary residence. Usually a property tax bill, utility bills or a deed to your home will establish residency.
- Homeowners Insurance: You will have to have homeowner’s insurance.
- Special Circumstance | Partner's Death Certificate: If the property is held jointly and one of the spouses has passed away, you will need a death certificate.
Counseling:
- The U.S. Department of Housing and Urban Development requires a counseling session for a federally insured reverse mortgage, also known as a home equity conversion mortgage (HECM). Though borrowers can circumvent counseling by utilizing a proprietary lender, the counseling exists to protect the consumer. Take advantage of it. Meeting with a lender’s consultant is not the same as meeting with an independent HUD-approved counselor.
- Reverse mortgage lenders are required to provide prospective borrowers with a list of 10 reverse mortgage counseling agencies. Five of the agencies must be local, with at least one a reasonable driving distance from your home. The other five must be national intermediaries, such as AARP or CCCS. National counseling agencies, as well as local HUD-approved counseling agencies, can be found on HUD’s website. You can also find a counselor through AARP.
- The counselors can meet face-to-face or provide counseling by phone. It takes approximately one hour, more if you have several questions. If conducted via phone, more than one call may be necessary. Counseling in North Carolina can only be done in person.
- Approximately 5% of reverse mortgage counseling sessions conducted by CCCS are conducted on behalf of people who have a legal guardian or someone with power of attorney. If you are a legal guardian, or have a power of attorney, the reverse mortgage counselor will require proof before conducting a counseling session.
- You will receive a certificate of HECM counseling upon completion. The form cannot be filled out until your counseling is completed. To process your application, your lender will have to have an original copy of the certificate signed by you as well as your reverse mortgage counselor, according to HUD. If you’ve had counseling by phone, you and your counselor may be able to send your lender separate original certificates, signed. Borrowers are not obligated to sign any binding agreements and lenders may not charge any fees until the certificate of counseling is received by the lender.
What to expect:
- Information and advice will be provided based on an analysis of your budget.
- Be prepared to discuss your reasons for wanting a reverse mortgage with the counselor. Each individual’s circumstances and ambitions are unique. A reverse mortgage may not be the best solution for you. The counselor will be able to help you assess options more effectively with a clear understanding of your situation and goals.
- Your income and debts will be reviewed, including mortgage payments (if applicable), monthly expenses, medical expenses, planned home improvements, access to emergency funds and the possibility that you’ll move, either into a new home or hospice, within a few years.
- The counselor should be able to provide you with a projection of how much you can expect to receive from a reverse mortgage.
- The counselor will help you compare lenders and decide which payout terms would be best for you.
Customer complaints/issues:
Contact the counseling agency your counselor works for. You can also contact your local HUD office and file a complaint with the person in charge of reverse mortgage counseling. The Federal Trade Commission also handles consumer complaints.
Ask a lot of questions and gather information:
- Call AARP at (800) 209-8085 for a free copy of ‘Home Made Money,’ an useful pamphlet on reverse mortgages. You can order it online. When you order, AARP also sends information on counseling. AARP encourages you to read the booklet before requesting counseling. If there is a possibility that you may select a Home Keeper or Cash Account mortgage, find your counselor through AARP.
- Under legislation passed in 2008, originators of reverse mortgages are barred from offering any other financial products to customers for whom they are originating a reverse mortgage. Select a lender who belongs to the National Reverse Mortgage Lenders Association (NRMLA). These lenders subscribe to a code of conduct that prohibits deceptive or sharp practices. The code, as well as a list of members by state, is available on NRMLA’s website.
- Online calculators: The first three cover the FHA Home Equity Conversion Mortgage (HECM), and Fanny Mae’s Home Keeper (HK) mortgage. The last one covers those plus the Financial Freedom Cash Account (CA) mortgage, which caters to high-priced homes.
www.rmaarp.com
www.revmort.com
www.nrmla.org
www.ffsenior.com
Leslie Davis
Guaranteed Home Mortgage
Follow me on Twitter: @TheSolardiva
P. 866.626.4565
Please email questions to: solardiva@comcast.net
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