Reverse mortgages under scrutny
Like good wine, humans improve with age or at least we like to think so. Whether age actually improves us can be debated, but the thing that can’t be is that the senior population is steadily growing. In 2009, when the most recent numbers on the aging population were published, 12.9 percent of the population was 65 or older. By 2030, that number is expected to be 19 percent, and of course, since we live in a state seniors migrate to, we can expect Florida’s senior population to be even higher.
One of the questions I get asked a lot is what is a reverse mortgage and how does it work. I have covered this topic several times, but the industry is dynamic and appears to be changing as the population is aging. Last month, the Consumer Financial Protection Bureau issued a report on reverse mortgages and said it was seeking information about consumers’ experiences with the loans with an eye toward increased regulations.
A reverse mortgage is essentially a home equity loan available to borrowers age 62 and older. The loans allow homeowners to tap into the equity in their homes without making monthly payments. The borrower is responsible for paying the taxes and insurance on the property and also maintaining the property at his/her expense. When the homeowner is ready to sell or dies, the bank takes its share of the proceeds from the sale, and the estate receives whatever is left.
Sounds simple and straightforward, however, reverse mortgages are complicated and not for everyone. The industry advises that you not take out a reverse mortgage if you are too young, since you may run out of money as you age. The older a borrower is, the more money he or she can borrow. Seniors are encouraged to consider regular home equity options or to investigate state and local programs that could help reduce property taxes and other homeowner expenses first.
If a reverse mortgage is the final choice, you will have several options. You can chose a line of credit withdrawing funds as you need them, a monthly payout to cover living expenses or a lump sum payment. Regardless of which plan you choose, you will be required by the federal government to attend housing counseling as a condition of the loan.
Since in a reverse mortgage interest is added to the loan balance each month, what happens if the value of the property either doesn’t increase or actually decreases? Since reverse mortgages are FHA insured loans they are termed a non-recourse loan. This means that even if the home value has exceeded your loan balance, you will still be able to withdraw funds based on your original agreement with the bank. As long as all other loan terms are met, the loan cannot be in default.
If you want to sell the home and the reverse mortgage is upside down, it will be considered a short sale, and you will need to work with the lender. If you pass away and the loan balance is higher than the value, your estate has no financial obligation and the lender will allow the home to go into foreclosure and attempt to get compensated through FHA for his/her loss.
There is a lot of information on line about reverse mortgages published by the National Reverse Mortgage Lenders Association at www.reversemortgage.org. Also the Consumer Financial Protection Bureau has an on line brochure which provides information on getting in touch with counselors before you make a final decision.
I guess the one good thing about aging is being among a large group with a fair amount of clout, which is also the bad thing, since seniors can be an equally large target for scam artists. Know the facts before entering into a reverse mortgage so you can grow old gracefully while sipping some nice aged wine.
