Items in Caring Currents tagged with Reverse Mortgages

Storm Watch: What About Reverse Mortgages?

Stephanie Miles — Fri, 22 Aug 2008 07:00:00 -0000

As Hurricane Fay hits shore, and storm warnings dominate the news, older homeowners in the affected regions may be asking themselves: What happens to my reverse mortgage if my home is damaged in the storm?

With hurricane season upon us -- and in the wake of the recent Southern California earthquake -- it's important for reverse mortgage holders to understand the implications of natural disasters and the damage they can cause.

Because the bank may very well end up owning the home in the event the mortgage holder dies, reverse mortgage lenders typically require that applicants agree to keep their home in good condition (along with a host of other requirements, including staying up to date on property taxes and homeowner's insurance) for the life of the loan.

In the event that the bank determines the house is damaged beyond repair -- even if the damage was caused by natural disaster -- the lender has the right to demand that the entire loan be paid in full, a new article in US News & World Report reminds us:

"If there is hurricane or flood damage to the home that you can't repair, the loan is due," cautions Prescott Cole, an attorney and eldercare advocate who has worked with numerous reverse-mortgage borrowers. "If you can't repay the loan, you will lose your house."

Some reverse mortgage fans are undeterred. Even if that situation occurs, your parents can never owe more than the value of their home, counters Peter Miller at the Reverse Mortgage Guide blog. Despite the financial risk that comes from severe property damage, Mr. Miller is still a proponent of reverse mortgages (which isn't entirely a shock, given the name of his site.) "In effect, with a reverse mortgage in such a situation, you have sold it, woeful condition and all," he writes. "You may well have done far better than neighbors with a forward mortgage where the loan amount is due and payable regardless of what happens to the property."

Still, If your parents live in a hurricane-heavy area or otherwise have a hard time keeping up with their property, a reverse mortgage may not be the best choice for them.

Photo by Flickr user Chad Purser, used under the Creative Commons attribution license.

New Type of Loan Turns Insurance Policies into Cash

Stephanie Miles — Fri, 08 Aug 2008 07:00:00 -0000

Cash-strapped seniors have seemingly few options when it comes to getting their hands on more money. But now there may be one more possibility.

Similar in concept to reverse mortgages, LegacyLoans, soon to be offered through Legacy Funding Group, will allow older adults to take out a loan against their life insurance policy. They can use the proceeds of the loan for monthly expenses or simply to cover the costs of their life insurance premiums. When they die, the amount of the loan is deducted from the payout to their beneficiaries. There are other insurance companies, including New York Life, which are starting to offer similar products.

Seniors can already sell their life insurance policies, a transaction known as a "life settlement." For many people, this is a good way to use their existing policies to generate cash during their lifetime. The downside to life settlements is obviously the fact that by selling the policy, there is no payout to your beneficiaries. But by taking a loan out agains the life insurance policy (and in the case of LegacyLoans, you are also required to take out a second smaller policy as collateral) there is still the possibility that the policy beneficiaries will see some money after the policy owner dies.

Some columnists, like Saul Friedman of Newsday, believe that this type of loan is a safer bet for seniors than typical life settlements. "Instead of giving up your policy, you may wish to borrow money on it, like a reverse mortgage, without having to pay it back -- unless you want to. And, like a reverse mortgage, you keep the policy," Friedman writes in his column. He also notes that to be a good candidate for this type of loan policy holders should:

Be over 70 years old.
Have had a life insurance policy of at least $500,000 for at least two years.
Have an expected life span of another 10 to 15 years.

Because they are so new -- and are also somewhat complex in structure -- it's important that seniors thoroughly research the pros and cons of this type of loan before signing up for anything that may impact the security of their insurance. But for people who meet the above criteria, such loans may be a good way to tap into life insurance policies during their own lifetimes.

Photo from Lisa F. Young/Big Stock Photo

Reverse Mortgages: Dragged Down By The Mortgage Mess?

Stephanie Miles — Fri, 01 Aug 2008 07:00:00 -0000

The new mortgage bill includes provisions intended to make reverse mortgages more attractive to wary seniors. But is it a case of too little, too late?

This week President Bush signed legislation intended to address the foreclosure and mortgage mess that's devastated the housing market all year long. Included in the wide-ranging bill are dramatic overhauls to the rules governing reverse mortgages for seniors. What do these changes mean for your parents if they are considering a reverse mortgage?

To start with, under the new rules, your parents:

Can qualify for much larger loans, depending on where they live. The previous loan limit of $417,000 has been increased to as much as $625,000 in high-cost areas.
Can now use FHA-insured reverse mortgages to purchase second homes
Should see reduced lenders' fees
Are protected by new restrictions on lenders, which make it harder to cross-sell financial products like annuities to reverse mortgage applicants

But are the new provisions enough to calm seniors shaken by the mortgage crisis? Some financial experts think not. The recent shutdowns of banks like IndyMac, which was also the parent company of reverse mortgage giant Financial Freedom, "... brought deep-rooted questions of reliability from many people who have nothing more to rely on than their home," writes columnist Tom Kelley on HeraldNet.com.

Seniors may react with more emotion and wariness to bank closures than other banking customers, because they're on a fixed income or they've lived through bank closures in the past. These seniors may also now worry about the security of their monthly reverse mortgage payments -- or opt to steer clear in the future of any type of loan that seems at all risky.

Although the FDIC has so far guaranteed that reverse mortgage holders will continue to receive their loan proceeds even if their bank has been taken over by the government, "It's not just about the actual money," says Kelley. "It's more about trust, perception, promises, and putting older people in the position of worrying about their financial future."

Photo by Pavel Losevsky/Big Stock Photo

Going For Broke? Seniors Turn to Newer Loans To Avoid Cash Crunch

Stephanie Miles — Fri, 06 Jun 2008 07:00:00 -0000

As the economy continues to falter, senior citizens are turning to more aggressive -- and in some cases riskier -- ways to generate cash to pay bills and buy groceries and gas, according to a front page story in the Wall Street Journal (online subscription required.)

In record numbers, seniors are raising money by turning to products like:

Reverse mortgages
REX loans, which pay out lump settlements in exchange for a chunk of future equity gains
Life insurance settlements
401k loans and hardship withdrawls

Though these loans and products may seem like a convenient way for income-strapped seniors to get quick money, some carry tax consequences and higher fees than traditional loans and home equity financing. The article blames the trend on the usual culprits: falling home prices, dwindling jobs, and a sharp increase in food and energy prices.

Seniors who buy into these types of products won't necessarily lose their money or assets, but there is the risk of jeopardizing future investment returns (say, by cashing out a 401k early) or reducing the size of an estate that your parent may want to leave to future generations (like with a life insurance settlement.)

If your parent is considering any type of loan or other product that offers up-front cash in return for high-fee or high-interest payments down the line, it's important that they talk over all their options with a financial advisor experienced in elder finance issues. Other resources to help you help your parents make smart financial decisions include:

Seniors who opt for one of these "riskier" options may wipe out whatever financial safety net they've worked to create over long years of saving and planning. On the other hand, in the words of one man in the story who emptied his retirement accounts at the age of 51: "Why plan for retirement if you can't make it today?"

Image by Flickr user Kevin Dooley, used under the Creative Commons License.

Reverse Mortgages: Time to Look at Other Options?

Stephanie Miles — Fri, 16 May 2008 07:00:00 -0000

If you're looking into a reverse mortgage, two new articles may give you pause.

Under a reverse mortgage, the homeowner converts the equity he has built up over time into cash, in the form of either a lump sum, a monthly payment to the owner, or a line of credit. Unlike a traditional home loan, a reverse mortgage has no monthly payments -- no repayment is required until the owner sells the home or is no longer using it as a principal residence. Many homeowners like the flexibility and cash that come with reverse mortgages, but the loans do come with a price: notoriously high closing costs.

Now, The Los Angeles Times is reporting, some homeowners are opting for something known as a deferred payment loan. As the paper explains, with deferred payment loans, "there are no origination fees, and insurance and premiums and closing costs, if any, are very low." Interest rates are also capped at low rates, and part or all of the loan may be forgiven if the homeowner stays in the house for a long period of time. However, unlike reverse mortgages, which can be used for any type of expenses, deferred payment loans can typically only be used for certain home repairs or improvements. Although the Times cautions that these loans can be hard to find and have strict eligibility rules, it may be worth contacting your city or county's housing department to see if you or your parent qualifies.

At the same time, some bloggers are up in arms about the Department of Housing and Urban Development's recently updated reverse mortgage regulations. Under the new rules, complains blogger Peter Miller at the Reverse Mortgage Guide, lenders are explicitly allowed to pay the $125 fee for the so-called independent counseling that is required for all reverse mortgage applicants. The purpose of the counseling session is to determine whether the applicant is a good fit for a reverse mortgage and to make sure they are aware of all fees and costs associated with the loan.

As Mr. Miller asks in his blog post: "Could the potential for conflict be any more obvious?" Would you feel comfortable with your parent receiving "independent" loan counseling from their lender? Or would you advise your parent to find a different or more conventional loan?

Image by Flickr user smrainone, used under the Creative Commons License

Reverse Mortgages: Looking for Trouble?

Stephanie Miles — Mon, 03 Mar 2008 00:00:00 -0000

Reverse mortgages--a loan for people ages 62 and older that pays homeowners based on the equity they've built up in their house--can be a great way for our parents to pay off medical bills, pay for home improvement projects, or take that trip they've been dreaming of for years.But the loans aren't right for everyone, as the New York Times reminds us in an article about the pitfalls of reverse mortgages. Although the loans are highly regulated (homeowners are required to meet with an independent counselor before even applying) some lenders still deploy sleazy sales tactics including:

Rushing through the fine print and glossing over closing costs and interest rates
Offering financial incentives to so-called independent mortgage counselors
Pushing homeowners into questionable investments with the proceeds of the reverse mortgage

If you're concerned because your parents are thinking about taking out a reverse mortgage--or already have one--there are some simple things you can do to help safeguard their finances:

Accompany your parents when they meet with their reverse mortgage broker and review all loan documents
Check with the Department of Housing and Urban Development Web site to make sure your parents' reverse mortgage lender and counseling service are approved by HUD
Avoid any brokers who also try to sell your parents investments, insurance, or other financial products
And if you need more information, take a look at this Buyer's Guide to Reverse Mortgages to get fully educated about the risks and benefits of this type of loan.

As the New York Times' piece pointed out, there are federal regulations designed to protect senior citizens who take out reverse mortgages. But I wonder how reassuring those rules and regulations are to those who encounter unscrupulous lenders? Is any amount of money worth that kind of stress and fear?