How to avoid the pitfalls of reverse mortgages – Forbes Advisor
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Reverse Mortgages are loans designed for people over 62 who are secured by their greatest asset – their home. While this can be a useful tool for leveraging equity without paying the monthly loan payments while at home, it can also be risky if the borrower is not fully aware of what they are doing (and his heirs) could engage.
This is in part why the government recently cited some reverse mortgage lenders for deceptive and deceptive lending practices, which have resulted in elderly homeowners losing their homes in some cases.
For example, last month the Consumer Financial Protection Bureau (CFPB) cited the American Advisors Group (AAG) for allegedly misleading people with “inflated and misleading house estimates to trick consumers into taking out loans. reverse mortgages ”. The CFPB, responsible for overseeing consumer financial protection laws, declined to comment on the consent order.
In a statement, AAG said: “The case involves direct mail articles that included estimates of the value of third-party homes. AAG has fully cooperated with this investigation, has already started taking action to address CFPB concerns, and is happy to resolve the issue.
This is the second time that the CFPB has accused AAG of false advertising. In late 2016, the agency cited AAG and two other reverse mortgage lenders, Reverse Mortgage Solutions and Aegean Financial, in a consent order for a wide variety of deceptive claims. And earlier this year, the CFPB obtained a consent order with Nationwide Equities Corporation for sending deceptive reverse mortgage emails to hundreds of thousands of older borrowers.
First, let’s explain what a reverse mortgage is and how it works to help you determine whether or not it is right for you.
What are reverse mortgages?
Reverse Mortgages allow homeowners aged 62 and over to convert part of their home’s equity (the home’s current value minus the remaining mortgage balance) into cash in the form of a loan or line of credit. Typically, homeowners will receive their funds monthly and are not obligated to repay the loan while they live in the house, or until you or your heirs sell the house. It’s one way to tap equity without selling the house.
Once the borrower moves or has passed away, the loan must be repaid. Sometimes the property has to be sold for the loan to be repaid. It also means that the heir to your house will have to do it. However, there are other ways to pay off what is owed, including refinancing the reverse mortgage to a traditional mortgage and repaying the amount in installments.
The most popular reverse mortgage is called the Home Equity Conversion Mortgage (HECM), which is the only government-insured reverse mortgage available. Borrowers can access HECMs through lenders approved by the Federal Housing Administration (FHA)
As home prices and home equity have skyrocketed over the past year overall, homeowners 62 and older have also seen their home equity rise 3.4% to $ 9 trillion. in the first quarter of 2021 compared to the previous quarter. And as people use reverse mortgages to finance their retirement, the number of reverse mortgages has increased in recent years.
There were 49,207 HECM reverse mortgages issued for the fiscal year ended September 30. This volume exceeded all HECM loans in 2020, which reached 41,859. In 2019, the total number of HECM loans was only 31,274.
What to know about reverse mortgages
While accessing the equity in a home without having to pay it down (as long as you live in the home) can be tempting, there are risks. involved in obtaining a reverse mortgage. This is especially true if you do not understand the terms of your loan or if your lender is misleading.
The terms of reverse mortgages differ among lenders and product types, so it’s important that borrowers understand the rules that govern their specific mortgage.
Among the most pronounced disadvantages of a reverse mortgage are the rules regarding the landlord’s lease and when the loan must be repaid. For example, lenders require the borrower to live in the house in order to defer repayment. However, if there is a medical emergency and the borrower has to stay in a hospital or facility for an extended period of time, some lenders will require that the amount owed be paid in full. Otherwise, they can seize the property.
“I tell my clients if you have to go to an assisted living facility for 15 months, tell your kids to take you home for a night so you don’t break this rule,” says Michael Harrell, owner of the Michael Harrell Group. , a reverse mortgage company in Dallas.
Another common landmine for the elderly is not paying property taxes. It can also lead to foreclosure of the property. Some older people may be confused about exactly how much they have to pay, especially when signing a 200-page document, says Ingrid Evans, a lawyer who has represented older people in elder abuse cases.
Evans says married borrowers also need to make sure their partner is protected. She says there have been cases where homes have been foreclosed by reverse mortgage lenders when a spouse dies and the living spouse is not on title to the home.
When HECMs might be a good option
There are many paths that could lead homeowners to need a reverse mortgage: from wanting to access their home equity in an emergency or being in financial difficulty if they are dependent on income. fixed retirement pension.
Either way, Harrell says that all good reverse mortgage applicants have one thing in common: they have a plan for the loan, and they are financially responsible. In other words, they won’t take out a reverse mortgage just to spend all of their capital on vacations and other non-essential expenses.
“Reverse mortgages are good loans, but it’s definitely not for someone who’s going to blow up equity,” Harrell says. “I tell all of my clients not to touch the money, to leave that money in the line of credit because their expenses aren’t fixed, but their income is. This money should be used in emergency situations.
For example, homeowners who had home equity lines of credit (HELOCs) during the financial crisis might recall that banks were freezing lines of credit back then. This could be worrisome for people who need this cash on hand for emergencies or unforeseen expenses. The advantage of HECMs is that the lender cannot reduce or freeze your line of credit.
Finally, not having to pay the monthly mortgage payment can be a huge relief for fixed income homeowners.
Understand your costs and fees
Reverse mortgage applicants also need to understand the high closing costs and ongoing charges that often come with the loan.
However, not all lenders charge the same fees. There are many lenders who do not charge an ongoing service fee. Additionally, some lenders will lower their origination fees, so it’s worth negotiating.
Closing costs typically include:
- Original fees (which cannot exceed $ 6,000)
- Closing costs (these may include fees for services such as title research, appraisals, inspections, and surveys, among others)
- Initial mortgage insurance premium
Ongoing charges generally include:
- Service charge
- Annual mortgage insurance premium (0.5% of the mortgage balance)
- Property taxes
- Home insurance
The longer you wait to pay off your reverse mortgage, the higher your balance and the more money you will pay in fees.
“When people take out mortgages, there are so many pages that they just start signing. It’s really important that a third party, either a lawyer or a trusted advisor, read every page, ”says Evans. “You can’t count on the agent getting a commission for it. “