Reverse mortgages offer options to senior homeowners who are struggling to maintain a certain lifestyle. Although they have advantages, they’re not right for every homeowner. An attorney real estate can explain the legalities of a reverse mortgage and the impact on finances and home equity.

The Facts About Reverse Mortgages

A reverse mortgage is a federally backed FHA loan that enables senior homeowners who are 62 years old or older to convert part of their home’s equity into cash. Reverse mortgages were established to help retirees with limited income use accumulated wealth in their homes to pay for basic living expenses and health care. A reverse mortgage must be the primary lien on the home. The existing mortgage is typically paid off using the proceeds from the loan.

A reverse mortgage loan, also called a home equity conversion mortgage (HECM), allows senior homeowners to stay in their homes without making monthly mortgage payments. Unlike mortgage relief programs, the borrower is not required to make monthly payments towards the loan balance while he/she is living in the home, and the borrower is not required to pay back the loan until the home is sold or vacated. However, the borrower must stay current on homeowner’s insurance, property taxes, and homeowners association dues (if applicable).

According to current federal laws, a homeowner can borrow up to a maximum of $625,500, depending on the value of their home, prevailing interest rates, and their age. The higher the property value, the older the borrower, and the lower the interest rate, the more money a homeowner can borrow. With a reverse mortgage, the bank makes payments to the homeowner in a lump-sum payment, a stream of payments, or a line of credit based on the amount of equity in the home.

When the last surviving borrower dies, a reverse mortgage becomes due and payable. If the property is left to the borrower’s heirs, the heirs or estate can pay off the HECM debt. They must pay the loan balance that’s due, or 95 percent of the current appraised property value, whichever is less. Since this can be a complex financial situation, an attorney real estate is often necessary to oversee the transaction.

Types of Reverse Mortgages

Home Equity Conversion Mortgage

A Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage. It’s issued by a mortgage lender, but regulated by the U.S. Department of Housing and Urban Development and insured by the Federal Housing Administration (FHA). The borrower is charged a a yearly insurance fee that totals 1.25 percent of the loan balance. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance.

Proprietary Reverse Mortgages

Proprietary reverse mortgages are insured by private mortgage companies. They are not as heavily regulated as HECMs, but most mortgage companies provide similar protection for borrowers as HECM mortgages, including mandatory counseling. An attorney real estate can provide legal information that will help to compare features of both types of mortgages.

Disadvantages of a Reverse Mortgage

Although a reverse mortgage provides a good financial solution for many seniors, disadvantages should be explained by an attorney real estate. Here are five important disadvantages to consider:

• High Fees – A reverse mortgage is a loan, so there are loan-related fees. Since a reverse mortgage isn’t based on a borrower’s income or credit, origination fees, insurance fees, and other fees are typically high to offset risks to the lender.

• High Interest Rates – The interest rate on a reverse mortgage is often higher than interest rates on a more traditional home equity loan. Between up-front fees and high interest rates, the borrower loses a lot of money to the lender.
• Home Upkeep – With a reverse mortgage, the borrower is still responsible for home repairs and maintenance, property taxes, and homeowner’s insurance. Depending on the borrower’s income, age and health, keeping up the home may present a financial burden.
• Inheritance for Heirs – A borrower doesn’t have to make mortgage payments while living in the home, but the loan must be paid off in full when the borrower dies or leaves the home. Heirs will have to pay back the loan before they inherit the house. According to an attorney real estate, heirs are often forced into a short sale or refinance, or turning the house over to the lender.
• Early Repayment – If a borrower dies, the reverse mortgage loan becomes due in full. However, death isn’t the only thing that triggers repayment of the loan. If a borrower moves to a care facility or other place for more than one year, the loan becomes due. This scenario is a real possibility for aging seniors.