January 23, 2012

USA: Reverse mortgages may not be for everyone

SOUTHGATE, Michigan / The News-Herald / Nation / January 22, 2012

With fixed incomes and increased living expenses, many senior citizens are turning to reverse mortgages as a way to receive extra cash.

Depending on their situation, these mortgages may not be for everyone.

"For some people they (reverse mortgages) absolutely are the best choice, for others if they have other options, it's very wise to look at other choices," said Kate White, executive director of Elder Law of Michigan, a Lansing-based non-profit organization that provides legal advice for seniors and individuals with disabilities.

Reverse mortgages allow seniors to turn equity into cash while keeping ownership of their home.

According to the AARP, more than 600,000 reverse mortgages have been issued since the start of the program in the late 1980s, nearly three-quarters within the last five years.

Most recently, TV advertisements featuring celebrities such as Pat Boone began promoting the program to seniors.

Due, in part, to the state of the economy and housing market, more seniors are looking into the program.

"More and more (people) are having to look at reverse mortgage when previously they would have pursued the sale of the home," White said.

The "reverse" mortgage is just that: the property owner receives a payment either in a lump sum, line of credit, monthly or a combination from a lender instead of making a monthly mortgage payment.

As the loan increases, the amount of equity in the home decreases. Payment is due when the borrower dies, no longer lives in the home or it is sold. Throughout the course of the loan, the borrower must continue to pay property taxes, housing insurance and properly maintain the house.
To qualify, applicants must be at least 62 years old and the home used to secure the mortgage must be the primary residence.

Many who received reverse mortgages are now running into problems because of not understanding conditions of the program, such as maintaining homeowners insurance and paying property taxes and are now may lose their home as a result.

"A growing number are at risk of defaulting," she said.

Borrowers use the money to pay for a number of expenses.

According to the AARP, 50 percent use the funds for everyday expenses; 47 percent for home repair and 28 percent for health and disability expenses.

Applicants have their choice of three reverse mortgage types: Single Purpose, Proprietary and Home Equity Conversion, the latter being the most popular. HECM's are backed by the Federal Housing Administration, which guarantees those federally approved lenders will meet their obligations.

Different loans have different fees attached as well as terms.

As part of their closing costs, applicants are required to receive loan counseling, which is done on a case-by-case basis.

"The challenging thing about reverse mortgages is there are a lot of factors to take into consideration when advising a person such as what the home is worth, what their health looks like, whether the home is suitable for aging in place and if it's realistic to manage as expenses increase," White said.

In addition, advisers must look at the individual's short- and long-term goals and other financial situations that will impact the amount of money they need. They also address what the person will do once the money runs out and how they will continue to pay taxes, maintain the home and homeowners insurance.
After receiving advisement, many people decide to sell their home or transfer into a different living situation instead of receiving a reverse mortgage because they get a chance to look at the big picture, she said.

Applicants do have a number of rights, especially with tougher government regulations within the industry.

After signing, individuals have the right of rescission within three days of closing to cancel the mortgage without penalty.

In addition, the federal Truth in Lending Act requires lenders to disclose costs and terms of reverse mortgages, including the Annual Percentage Rate and payment terms.

Individuals who are over age 60 who need general legal advice regarding housing issues can call Elder Law of Michigan's free legal hotline at 1-800-347-5297 or the National Council on Aging at 1-800-510-0301.
© Copyright 2012 The News Herald

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