I always thought that reverse mortgages were a way to loot money from senior citizens. But after some careful research on reverse mortgages, I found out that they really can give a helpful boost of income to a struggling homeowner. Since reverse mortgages are targeted specifically at an older demographic, there are opportunities for abuse, but as long as ethics are followed and meaningful regulations obeyed, homeowners and their equity will remain safe.
Reverse mortgages work like a standard mortgages, but in reverse.
- They release equity from the house as a lump sum, a credit line, or a monthly payment (tax free).
- The loan is only required to be repaid, if the home is sold or no longer used as their primary residence for 12 months or more.
- If the loan becomes due, the homeowner or heirs can sell the home and pay it off with the proceeds of the sale. They may even keep the house and refinance to receive positive cash flow if the loan on the reverse mortgage payment exceeds the refinance payment.
- The homeowner can never owe more than the value of the home.
- Heirs will never inherit debt and can ultimately choose to sell, refinance and buy it back, or let the lender take the property.
Two facts changed my mind about reverse mortgages:
1. Reverse mortgages require financial counseling.
This assures that homeowners understand exactly what they are getting into. The counselors are a neutral 3rd party and have no incentive to persuade anyone to sign any loan papers.
2. A homeowner with a reverse mortgage will never lose their home as long as they pay their property taxes and insurance.
A specific type of reverse mortgage called a “tenure payment” guarantees the homeowner a monthly payment for life! No matter how long they live, as long as the home functions as their primary residence, they will receive a monthly payment.
Government regulations make it work
Reverse mortgages are a complex financial agreement
The complexity of a reverse mortgage makes it easy to see how they could be used to take advantage of an elderly homeowner, but government regulations keep the homeowner from getting an unfair deal. To qualify for an reverse mortgage, homeowners must receive mandatory financial counseling to cover all the fine points of the mortgage and make sure the homeowner understands what they are signing. There are 5 different types of payment options to choose from, plus tax implications that come with an reverse mortgage. There is even a small chance that an reverse mortgage could affect disability payments. Counselors will make sure that homeowners know about any negative consequences an reverse mortgage might cause.
What about foreclosure?
Another thing that made me feel better about reverse mortgages, is that the lender can NEVER foreclose on the property as long as the homeowner resides there. No matter how long the homeowner lives, as long as it is their permanent residence, they can never lose their home. Also if a homeowner accepts a “tenure” payment, they get that monthly payment FOR LIFE! No matter if they live to 112, as long as the home is their primary residence, they will receive a monthly reverse mortgage payment.
Negative Aspects of a Reverse Mortgage
Although there are some positives, there are a couple negative aspects to consider.
Reverse mortgages are much more expensive than other types of loans. The closing costs associated with an reverse mortgage were about 150% greater than the fees from a traditional loan.
Medicaid and Social Security could be affected
Also it is possible (but not likely) that Medicaid and Social Security payments may be affected by a reverse mortgage. If reverse mortgage payments aren’t spent within the month that they are dispensed, they could accumulate to a level that would not allow Medicaid or SSI eligibility.
Reduced inheritance for heirs
Another negative is that reverse mortgages take inheritance away from heirs. If you wanted to pass down your home to your family, an reverse mortgage will affect that. Once the homeowner passes away, the heir will need to sell the home and the revenue from the sale will go back to the lender. The amount that is left over will be kept by the heirs.
Also there have been instances of unethical companies convincing elderly clients to buy annuities or life insurance with their reverse mortgage cash. This wasn’t illegal, until a couple years ago. A law was been passed in 2008 making it a crime to sell homeowners annuities or other products when taking out their reverse mortgage.
The VAST majority of homeowners are happy with their reverse mortgage
Overall most homeowners that received reverse mortgages reported that they were happy with the outcome. A study by AARP showed that 93% regarded it as a positive experience. The studies show that younger homeowners tend to get the lump sum payment to pay off credit card debt or medical bills. While older property owners used it to pay day to day expenses. But I think the key to a very good outcome, is the type of payment option you choose. The “tenure payment plan” could add a level of financial security to an elderly person’s life. Knowing that as long as you live in the house you will “receive” a monthly mortgage payment can give you piece of mind. When you are past your working years, a reverse mortgage can help you live off the wealth you’ve built over your lifetime.
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This article was included in the Carnival of Personal Finance at Canadian Finance Blog. Thanks for the includsion!