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Reverse mortgages: too good to be true? Better do the homework

Reverse mortgages have been somewhat slow to catch on with older homeowners, but that is changing, and why not? They allow older homeowners to convert part of the equity in their homes into cash, which in most cases can be used as the homeowner wishes, without having to sell their homes or incur additional monthly bills. In essence, the lender pays the homeowner, providing increased income and lower monthly expenses for cash-strapped seniors.

While this may sound too good to be true, it is not; however, as with any other financial tool reverse mortgages have their drawbacks, are not for everyone and require close scrutiny by eligible homeowners.

“We only did three reverse mortgages last year, but we’ve already doubled that this year,” said Shari Crook, loan officer with Trustmark Mortgage Services. “I had five inquiries this past week.

“I believe that in the next five to 10 years as Baby Boomers continue aging, it will become more and more popular.”

Not all built the same

Reverse mortgages began in the late 1980s as a pilot program before being permanently established as part of the Federal Housing Administration’s offerings in the mid-1990s. (Since then, Fannie Mae and Financial Freedom Senior Funding Corporation have added programs.) The idea behind them is to offer an attractive, readily-available financial tool for those nearing, at or beyond retirement age who need funds in their latter years but whose options are limited. The goal is for senior homeowners to obtain and maintain financial independence and freedom by using their homes’ equity.

There are three basic types of reverse mortgages. Certain state and local governments offer single-purpose reverse mortgages as low-cost loans. However, as the name implies they can only be used for one purpose specified by the lender, such as home improvement, and in most cases only homeowners with low or moderate incomes are eligible.

Private companies offer a second type, proprietary reverse mortgages. They are almost always the most expensive reverse mortgage type. However, homeowners with higher valued homes may get larger loan advances from a proprietary loan compared to the other two types.

The third type of reverse mortgage is federally-insured mortgages, known as Home Equity Conversion Mortgages (HECMs), which are backed by the U.S. Department of Housing and Urban Development (HUD) and are by far the most widely utilized of the three. Approximately 95% of all reverse mortgages are HECMs.

The up-front costs for HECMs can be higher than single-purpose reverse mortgages, but it provides many advantages, including offering more choices to homeowners as to how the loan is paid to them (lump sum, line of credit, etc.), larger loan advances and no income or medical requirements. There is also no limitation as to how the cash is used by the homeowner.

HECMs are offered in all 50 states, the District of Columbia and Puerto Rico. To qualify applicants must be age 62 or older; own their home or have a very low mortgage balance; the home must be a single-family residence, a condominium or part of a planned urban development and occupied as a primary residence (some manufactured housing is eligible); and, the home must be at least one year old and meet HUD’s minimum property requirements.

Great, but…

There are things to beware of with reverse mortgages. For one thing, they are not cheap. The closing costs are numerous and steep. (However, they can be “financed” by adding them to the loan balance.) The homeowner is also still responsible for paying property taxes as well as repairs and/or modifications to the home, and risks defaulting on the loan if these responsibilities are not met.

Some reverse mortgages have fixed interest rates, others variable. The amount owed on a reverse mortgage generally grows over time — interest is charged on the outstanding balance and added to the amount owed.

Thus, reverse mortgages have the potential to consume all or some of the home’s equity. And interest on the mortgage is not tax-deductible until the plan is paid off in part or in full.

Perhaps the biggest concern, however, are older homeowners getting fleeced or not understanding the minuses before signing. Homes represent most peoples’ largest personal investment, and seniors often offer an attractive target for the unscrupulous. Fortunately, there are built-in safeguards against this.

All HECMs require face-to-face counseling. Homeowners are asked questions, sometimes redundantly, to insure they understand the program, and homeowners, in turn, can have their questions answered. As a further safety net, homeowners are sent a certificate showing they have been told of the advantages and disadvantages a reverse mortgage offers.

Crook said this is good for another reason. Taking out a reverse mortgage is not only costly, it is time consuming, as well.

“Reverse mortgages don’t close quickly,” she said. “It usually takes 45-60 days. So, I want them to know up front what they are doing before they waste a lot of their time and money.”

Honey of a deal for some

The pluses of reverse mortgages are as numerous as the minuses. Depending on the plan, reverse mortgages become due with interest only when the homeowner permanently moves, sells the home, dies or reaches the end of a pre-selected loan term. With the exception of single-purpose reverse mortgages, the money can be used for any purpose, such as living expenses and healthcare costs.

Reverse mortgages also do not affect Social Security payments or Medicare eligibility, though they can affect Supplemental Security Income or Medicaid benefits.

So after weighing all these pros and cons, who can benefit from reverse mortgages and who cannot? It depends on the individual and the circumstance, particularly the age of the homeowner, value of the home and future living plans.

According to www.seniorlivingstrategies.com, these loans are not beneficial to homeowners who are not planning on staying in the home, those with the possibility of long-term care placement in the future and/or those planning on leaving the home for their heirs.

For everyone else, they are worth at least a look.

Contact MBJ staff writer Wally Northway at northway@msbusiness.com.

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