July 9, 2011

USA: What you need to know about reverse mortgages

FORT LAUDERDALE, Florida / Sun-Sentinel / Business / July 9, 2011

By Diane C. Lade, Sun Sentinel

Some sales people aggressively promote reverse mortgages, which allow senior citizens to convert their home equity into cash, as a way to take care of rising medical costs, unexpected home repairs or even travel expenses. But as South Florida's first reverse mortgage fraud case shows, seniors need to be very careful who they buy these complex products from and make sure they understand the risks.

Illustration courtesy: ourhomemortgage.com

Three local mortgage loan officers and a Pennsylvania title agent were charged in federal court last week in connection with a $2.5 million scheme that defrauded a major lender, the federal government and 14 seniors. Some of the seniors now face foreclosure. The suspects pitched the mortgages through a national telemarketing campaign, then fradulently inflated home values so homeowners would qualify, and never paid off the original loans, according to court filings.

Consumer experts say seniors and their families first should check out other financial alternatives, such refinancing or selling the home, or finding government programs that assist seniors with medical or living expenses. A reverse mortgage is not for everyone. Here are some facts to help you determine if it's for you.

What is a reverse mortgage? It's somewhat similar to a home equity loan. You are contracting with a lender to borrow against the equity in your home, while you continue to live there. The lender will give you cash that you can take as monthly payments, a lump sum, a line of credit or a combination. One of the most popular reverse loans is the Home Equity Conversion Mortgage (HECM), which is federally insured. There are private programs as well.

Who is eligible? Property owners usually must be at least 62 years old. If two people are on the title, both must be 62 or older. There are no credit or income requirements.

How much can I borrow? The amount will be based on your age, the value of your home and the interest rate that will be added into the loan. To calculate what you might qualify for, go to the National Reverse Mortgage Lenders Association site at nrmlaonline.org. .

What homes are eligible and how much can I receive? Reverse mortgages are issued only on primary residences. It can be a single-family home, a condo or townhouse, manufactured home or a multi-family home with up to four units, if the owner lives there.

Can I get a reverse mortgage if my home is not paid off? Yes, but you must pay off your existing mortgage either with your reverse loan or your own money. Also, federal law now allows you to purchase a new home with a reverse mortgage.

What about upfront fees? One disadvantage of most reverse mortgages is they carry high upfront fees and closing costs, generally $10,000 to $15,000, according to Time magazine, and the fees are usually taken out of your equity. Some HECM loans may have monthly servicing fees, and you often must pay mortgage insurance. If you are considering leaving your home in several years, the upfront costs may not make a reverse mortgage worthwhile

How does the reverse mortgage get repaid? You or your heirs must repay the money you were advanced or received when you sell the house or permanently move out. The interest compounded over the loan's life will be included in the total due. Ask your lender if the loan would become due, or you would be charged a penalty, if you moved out for an extended time period, such as to go into a rehabilitation center.

What happens if my home loses value? The amount you or your heirs must repay cannot exceed the value of the home. So your family is protected if the home's value drops low enough that when your heirs sell it, the proceeds won't cover the loan repayment. If the proceeds exceed the repayment, your heirs get to keep the extra. However, if your family choses not to sell the house, they must repay the full reverse mortgage, regardless of the home's value.

Can a reverse mortgage affect my government benefits? Possibly. Your Medicare and Social Security will not be impacted. But the money you receive counts as an asset in some states and could keep you from becoming eligible for Medicaid, the federal-state program for the poor that also covers nursing home care.

Who pays for the taxes and the home's upkeep? After a reverse mortgage, you continue to be responsible for real estate taxes, homeowner's and windstorm insurance, and any repairs. You could lose the home if you default on these obligations. If you are having trouble with these expenses or maintaining your home now, a reverse mortgage might not be for you.

Why do I need counseling before getting a reverse mortgage? Counseling about reverse mortgages by consumer credit groups or other organizations approved by the federal government is required by law before taking out a federally insured reverse loan. It's a good idea even if you are considering an uninsured loan. To schedule a session, call the U.S. Housing and Urban Development referral line at 800-569-4287 or go to hud.gov.

What are some things to look out for? Resist telemarketers or sales people trying to pressure you into quick decisions. Be wary of anyone suggesting you finance renovation projects or major purchases with them through a reverse mortgage; there may be less risky ways to pay for these things. In most cases, you have the right to cancel your mortgage contract within three business days if you do so in writing. Send your letter by certified mail and ask for a return receipt. To report fraud: Call the Federal Trade Commission at 877-382-4357 or go to ftc.gov.

How can I find a reverse mortgage lender? Members of the National Reverse Mortgage Lenders Association, an industry group, have agreed to standard practices and a code of conduct. Go to nrmlaonline.org to look for members or call 866-264-4466. The Florida Department of Financial Regulation licenses and monitors loan originators and mortgage brokers. To check a license, go to flofr.com or call 800-848-3792.

Diane C. Lade
E-Mail: dlade@tribune.com .

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