The Problems with Reverse Mortgages
USA Today recently published an eye-opening story on senior citizens who were shocked to suddenly face foreclosure. The cause? Reverse mortgages.
As experienced elder law attorneys, we are familiar with reverse mortgages, which are often sold as “too good to be true,” principally because they are. Some dishonest companies target the elderly with confusing or misleading promotional materials that obscure a borrower’s obligations. If you or someone you care about has been approached with information about a reverse mortgage, you should tread carefully.
What is a Reverse Mortgage?
When a person pays down their mortgage, they build up equity in their home. However, there is no easy way to tap this equity. For example, you can sell your home, but then you need to move somewhere else, so you’ll either have to rent or buy another house. Many senior citizens don’t want to move out of their homes but would like to tap the equity nonetheless. This is where a reverse mortgage comes in.
Those aged 62 and older can qualify for a loan; in exchange, the lender takes a mortgage on the property. The loan is repaid when the homeowner is no longer living in the home, either because they have sold it or have passed on. The lender has a security interest in the home (that’s what a “mortgage” is) in the amount of the loan plus interest. This security interest entitles the lender to a portion of the proceeds when the home is eventually sold.
Although homeowners don’t need to make monthly payments, they still must pay their property taxes and maintain homeowners’ insurance. If they don’t, they can default, and the lender can start foreclosure. The USA Today story stated this is not an uncommon occurrence.
What to Watch Out For with Reverse Mortgages
There are legitimate lenders out there, and federal rules require that all borrowers undergo a counseling session before they can take out a reverse mortgage. However, not everyone should take out this kind of loan:
- Analyze why you need the money. You might need to pay for home repairs or medical bills. Often, it is better to put these expenses on a credit card or get an unsecured personal loan. If you run into financial trouble, you can file for bankruptcy.
- If you need supplemental income, you should consider whether you qualify for government assistance programs. These can reduce your monthly expenses.
- Make sure you understand your obligations and ask a friend or family member to help you if you are confused. You need to fully understand how foreclosure can happen before agreeing to the loan.
You also should discuss with your children that you are taking out a reverse mortgage. Many children assume they will inherit your home when you die. It will be a surprise to learn that they need to pay off a lender to live in the home or to get the full value of the property.
Millhorn Elder Law Planning Group is an established law firm serving The Villages in Florida. If you have a legal question, our estate planning attorneys in The Villages have answers. For help, please call us toll-free at 800-743-9732. We offer a free consultation.