Not So Obvious Factors to ConsiderAbout Reverse Mortgages
Article by R. Joseph Ritter, Jr. CFP® EA
Besides the costs that are associated with a reverse mortgage, there are other factors to consider on which you should be fully informed before agreeing to a reverse mortgage.
1. The bank considers a reverse mortgage in default upon your death, vacating the residence, or selling the residence. The default simply means that any unpaid fees/costs, accrued interest, and principal will be due at that time. Thus, if you are unable to remain in the residence after you begin a reverse mortgage and relocated to a life care facility or a family member’s home, the balance on the reverse mortgage will become due. Most likely the only way to satisfy the balance is to sell the home, unless you have other assets available.
2. You must continue to pay the property taxes, insurance, property association assessments, and maintenance/upkeep on the residence. This means that you must have another source of income or assets or plan to use part of the reverse mortgage money to pay these items. The bank may consider your failure to keep up these payments as a default. In Florida, the state government has developed a program funded by federal and state taxpayer dollars to assist homeowners who are in default on reverse mortgages because they failed to keep up with these payments. The income that is required to keep up with these payments was greatly reduced with the investment market collapses in recent years, thus, the financial problems facing senior citizens have been compounded by numerous circumstances outside their control.
3. You can choose to receive money from the reverse mortgage all at once in a lump sum, in regular monthly amounts over a set period of time or your life expectancy, a line of credit on which you have the right to draw, or a combination of these methods. You can use the lump sum proceeds to buy a home or pay off an existing mortgage. If you are considering using the money from a reverse mortgage for anything other than your living expenses, we strongly suggest that you speak with an independent financial planning professional to determine whether there may be less expensive alternatives to you. The reverse mortgage is an expensive product to use to buy a home or refinance an existing mortgage.
4. The amount you receive from a reverse mortgage can jeopardize other benefits which may be available to you through federal, state or local/private assistance. If you think that you may need to participate in an assistance program at some point, then some careful planning must go into the method by which you choose to receive money from the reverse mortgage. This can be a very difficult planning area because it is nearly impossible to forecast your future financial situation. However, if you are considering a reverse mortgage because your cash flow is insufficient, then you may want to consider other sources of assistance before choosing the reverse mortgage.
5. Because reverse mortgages have become expensive to the federal government and its taxpayers, a reverse mortgage known as the HECM (Home Equity Conversion Mortgage) Saver was recently introduced. Under this product, borrowers receive less (10% to 18% less according to HUD) and do not have to pay the full initial mortgage insurance premium. The initial premium for the Saver program is 0.1% compared to 2.5% for the standard reverse mortgage. The 1.25% annual premiums must still be paid, so the overall cost outlay with the HECM Saver is not substantially different from the standard reverse mortgage. The primary difference is the amount you can received in payments.
One of the reasons for introducing the HECM Saver is to slow the pace of losses incurred by FHA by reducing the amount you can receive. Dollar for dollar, the HECM will not save the borrower much money, so you must look carefully at your options before agreeing to the traditional or Saver reverse mortgage.
6. If you have an outstanding federal debt, the proceeds of the reverse mortgage may be required to satisfy the federal debt first, reducing the amount you may otherwise expect to receive.
There is some good news in a reverse mortgage:
1. A reverse mortgage is generally “non-recourse,” which means that the lender cannot collect more than the value of the residence as payment in full at the end of the reverse mortgage or upon default. This means that if you owe more on the residence than it is worth, the bank cannot collect the difference from you, your heirs or any other source.
2. There are reverse mortgage products which have a growing credit line feature. This means that, if the payment option you elected is to have a line of credit available from which you could draw, the amount available in the credit line grows at the same rate as your interest rate. Thus, from month to month you may have slightly more available from which to draw in the line of credit. Homeowners who elected this payment option will probably receive more than a homeowner who took a lump sum or regular monthly payments.
3. Repayment of the reverse mortgage is delayed until the last surviving borrower dies or vacates the residence. This means that during your lifetime you do not need to pay back any amounts for as long as you maintain the same residence, and you can remain in the home without fear of being forced to move. To receive this full benefit, however, you cannot be in default on the reverse mortgage.
