What are the risks with reverse mortgages?
My mother is a widow and lives in the home where I grew up. She's on a fixed income and she's interested in a reverse mortgage, but I'm worried that she might lose her home -- her only real asset. What are the risks with this kind of loan?
The bottom line is there are very few risks with these kinds of loans, provided that you and your mother do your homework, find a trustworthy lender, and make sure she's the right candidate for a reverse mortgage.
The most important thing to understand is that the bank can't take your mother's house. She'll never give up title to her home until she sells the house or passes away. Even if she eventually owes more than the house is worth, she can stay in it for as long as she wishes.
In effect, your mother will buy that peace of mind by paying mandatory Federal Housing Authority insurance fees in the closing costs of the loan. Those insurance fees are used to pay back the lender in the event that your mother outlives the life of the loan or needs to sell the house for less than her reverse mortgage is worth.
Because of those insurance and other assorted fees, reverse mortgages have high closing costs compared to other types of home equity loans (which offer another good way to generate cash against the equity in your house.) Closing costs are usually rolled into the principal of the loan and amortized over time, which means if she doesn't sell her house or move, they won't have much impact. However, if your mother has any plans of selling her house or moving to a nursing home in the next few years, she's probably not a good candidate for a reverse mortgage because she'll have to pay off the principal of the loan as well as the bulk of those fees with the proceeds from the sale of the house.
You should also talk to your mother about her estate planning before she takes out a reverse mortgage. If it's important to her to leave her house to you or your siblings or children, then a reverse mortgage might not be right for her. Although her heirs will have the opportunity to pay off the loan if she dies, she'll have a much lower ownership stake in her house after receiving the payout from the loan.
Also, depending on the state she lives in, money from a reverse mortgage may affect your mother's Medicaid eligibility.
Still, if your mother's home equity is her largest asset, and if she's facing a daunting stack of monthly bills, she might be a good candidate for a reverse mortgage. Many older people who take out reverse mortgages opt to receive the money as a line of credit rather than as one lump sum, giving them a financial safety net in case of unexpected home repair bills or medical expenses.
In that type of emergency financial situation, drawing down from a reverse mortgage line of credit is certainly better than filing for bankruptcy.
Very good answer from Barbara.
I would add just a couple of items :
There are ways of structuring the payout on a Reverse Mortgage to minimize the impact on Medicaid Eligibility.
Reverse Mortgages can be structured similar to an Annuity, providing a fixed monthly income, guaranteed for life, a line of credit or a combination of both.
Agreed that the costs of a Reverse Mortgage are not conducive if the plan right now is for her to be staying in the home a couple of years. The average length of a Reverse Mortgage, however, is 5-7 years.
A less expensive alternative, especially when the planned stay in the home is shorter, is a standard Bank Home Equity Line or HELOC.
The advantage is very low closing costs, and the disadvantage is that payments on the loan have to come from the line of credit itself, and there is no FHA Insurance to make sure there isn't an issue if the Line of Credit is exhausted in the future.
We can provide a comparison of a HELOC to a HECM (The FHA's name for a Reverse Mortgage) that helps folks make the best decision for themselves and their loved ones.
We did it ~ took out a Reverse Mortgage ~ on our home that we owned outright. The fret and worry about bill paying was a very large burden on me especially, the "financial officer" of this outfit. We have a roof over our heads, till H_ _ _ freezes over, if need be. Bill paying and retirement is so much nicer today. We both continue to work, extra funds though still minimal, are not going toward high interest payments. Our five kids are doing better than mom and pops, thankfully, and our meger two acres and homestead with its out buildings are of no interest to them. The Reverse Mortgage has been an absolute blessing to us! As noted by another, do your research, select a highly "rated, by the industry" company with whom to deal. Enjoy life again. Gene and Linda Newcomb
The agency is the Federal Housing Administration, NOT Authority. Kinda reduce's this article's credibility, huh?
The risk is 100% to the borrower and include loss of property, equity, quality of life, homelessness and dependence on government social service programs at the end of life. The borrower alone has responsibility to determine if a reverse mortgage is in your best interest. There is one reason to get a reverse mortgage: Use as a tool in your financial strategy, meets your financial goals, and provides financial security through retirement. A reverse mortgage is a complex financial instrument with lifelong consequences for seniors. You need financial and legal advice to understand those consequences and if they are acceptable to you because once you sign on the dotted line it is very difficult to recover from the financial damage. I welcome calls from consumers, consumer advocacy agencies, legal and financial professionals. Sandy Jolley, Reverse Mortgage Suitability and Abuse Expert.
What are the risks with this kind of loan?
She can lose her home if she doesn't pay her property taxes or homeowners insurance, or neglects maintaining the property. But a traditional Forward Mortgage has the same risk.
A reverse mortgage has been a blessing for us. We have been able to live a good retirement. However, should you "run out of equity" you will no longer have that luxury. This is the case for us. My wife passed away in September of 2012 and my health is not good. Sure I can remain in the home until I pass. My youngest child now lives with me as a partial caregiver. He would like to remain in the home when I am gone but I fear the mortgage will be too much for him. Any suggestions would be appreciated.
If your Son wants to keep the house, he can refinance the Reverse Mortgage with a Conventional Mortgage. He should start preparing for that now. He'll need good credit, two years of employment at the same line of work, income, and assets help too. He should meet with a Mortgage Banker or Broker, and see what it's going to take to do the refinance. If the Reverse Mortgage is negative when it's due, he can get the house for 95% of the appraised value.
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