If you’re 62 or older – and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses – you may be considering a reverse mortgage. It’s a product that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.
Reverse mortgages can be a benefit to older people, at or near retirement. But, like many things in life, they have aspects that can create unexpected hardships, not only for the retirees, but for their heirs.
This is the second part of a two part series on Reverse Mortgages. Reverse Mortgages Part I: The Good, the Bad was a comprehensive description of reverse mortgages, reprinted from the FTC Consumer Information website. Anyone considering a reverse mortgage, or having a family member (e.g. your parents) contemplating such a loan should definitely visit the FTC web site. In Part II, we’ll look at several aspects of reverse mortgages to be careful about.
Reverse Mortgages: Part II, What to Be Careful About
All mortgages have costs, but reverse mortgage fees, which can include the interest rate, loan origination fee, mortgage insurance fee, appraisal fee, title insurance fees, and various other closing costs, are extremly high when compared with a traditional mortgage. Costs vary but can be as high as $30,000 or $40,000. This cost is not paid out of pocket, but rolled into the loan. www.dummies.com
Leaving the Home Pay Back:
Another potential issue to be aware of is the requirement to pay back the loan if you should permanently move out of the home. This may not sound like a problem now, but if you ever need to enter a full-time care facility, the loan would become due if you left your home for a year or more. www.dummies.com
Having to deal with the sale of a long time family home from a bed in a nursing home isn’t a pleasant picture, for you or your family.
Keeping the Family Home:
When the parents pass away, it’s not uncommon for surviving family members to have a desire to keep the family home. The law governing reverse mortgages provides a path for them to achieve this goal but many heirs are not aware, and not informed by the lending institution. The New York Times ran an article about this on March 26, 2014.
Under federal rules, survivors are supposed to be offered the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are increasingly threatening to foreclose unless heirs pay the mortgages in full, according to interviews with more than four dozen housing counselors, state regulators and 25 families whose elderly parents took out reverse mortgages.
Some lenders are moving to foreclose just weeks after the borrower dies, many families say. The complaints are echoed by borrowers across the country, according to a review of federal and state court lawsuits against reverse mortgage lenders.
Others say that they don’t get that far. Soon after their parents die, the heirs say they are plunged into a bureaucratic maze as they try to get lenders to provide them with details about how to keep their family homes.
Lenders must offer heirs up to 30 days from when the loan becomes due to determine what they want to do with the property, and up to six months to arrange financing. Most important, housing counselors say, is a rule that allows heirs to pay 95 percent of the current fair market value of the property — a price that is determined by an appraiser hired by the lenders. Mr. Bell of the National Reverse Mortgage Lenders Association said that lenders are strictly abiding by the 95 percent rule.
The difference offered by the 95 percent rule can be critical. After the financial crisis, when housing prices tumbled, the disparity between the current value of the home and the total balance on the mortgage often means the difference between keeping a home and losing it to foreclosure. New York Times, March 26, 2014
If children have any intention of retaining the family home, it’s imperative that they become knowledgeable of the regulations concerning the settlement of the reverse mortgage after the deaths of their parents. A family attorney might be a good place to begin.
The final downside to the reverse mortgage affects your estate. The reverse mortgage will almost always decrease the equity in your home, which will leave less money to your heirs. www.dummies.com
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