Risk to Heirs Gone with Reverse Mortgage

Cash In On Home Equity To Cover Emergencies

Leah Betancourt, Staff Writer, TheBostonChannel.com
UPDATED: 10:27 pm EDT September 8, 2008

Elderly homeowners have plenty of equity in their homes once their mortgage is paid off, but for those who live on a fixed income, paying for anything outside of normal expenses can pose challenges.

Reverse mortgages can offer senior citizens a way to solve the house-rich, cash-poor dilemma without risk to their heirs.

Reverse mortgages allow homeowners to turn the value of their home into cash, and they don’t have to pay back until they die, sell the home or permanently move from the house, according to AARP.com.

Browyn Belling, the AARP Foundation’s reverse mortgage specialist, said the loans are a relatively new way to tap into home equity for those who are 62 and older.

In a conventional “forward” mortgage, homebuyers borrow a lump sum and make monthly payments, reducing the principal and interest over time. But with a reverse mortgage, there are no monthly payments.


“You don’t have to pay anything back for as long as you stay in your home; 85 percent of our survey respondents want to stay in their homes. Reverse mortgages let them tap that equity,” Belling said.

She conceded that the borrower’s debt grows larger with a reverse mortgage, because there’s no repayment and (so the unpaid interest GB)... is added to the principal.

But it's often worth the higher price tag for borrowers who have few other options, especially since most reverse mortgages have a non-recourse clause that keeps the borrower or estate from owing more than the home’s worth when the loan is repaid, according to the Federal Trade Commission Web site.

(A non-recourse loan means that a borrowers other assets, like savings accounts, other property, investment accounts, etc. cannot be claimed by the bank to help pay off the reverse mortgage loan. So, for instance, it makes sense if you have a credit line on the home to cash it out, if you know the end of your reverse mortgage is looming for one reason or another. Then that money is available to the heirs or for end-of-life costs. GB)

Bob Walters, chief economist of Quicken Loans, said there’s no income or asset requirement for a reverse mortgage application. He said lenders look at the homeowners’ age and appraisal value.
“It’s a wonderful product for people struggling with bills. It gives people a lifeline,” Walters said.

There are four options for distributing the cash with a reverse mortgage, according to AARP.com: a lump sum; a monthly cash advance; a line of credit that lets the borrower decide how much and when to access the cash; or a combination of those methods.

There are three types of reverse mortgages -- single-purpose, federally insured reverse mortgages called Home Equity Conversion Mortgages (HECMs) and proprietary or private loans, according to the FTC Web site. Applicants must be 62 or older and own their homes.

(Owning your own home is often interpreted as have no mortgage at all; however, this is not true. If your mortgage is low enough the Reverse Mortgage loan amount will pay off that loan, relieving you of any mortgage payment. If there is money left over you may receive monthly payments, or set up a credit line, or both. GB)

Belling said HECMs make up 90 to 95 percent of the reverse mortgage marketplace and require counseling before applying. She added that because they are backed by the full faith and credit of the federal government, if anything happened to the lender, the government would step in. (and would continue to service your reverse mortgage according to the loan contract you have. GDB)

Belling said HECMs have been in effect since 1989 and generally provide the most money at the lowest cost.

HECMs follow rules of the U.S. Department of Housing and Urban Development so the loan’s costs and interest rate will be the same regardless of the lender. But closing costs, origination fees and servicing fees vary because they're set by the lenders, according to FTC’s Web site. (However, the maximum origination fee has always been set by law, but the lender may voluntarily reduce those; but that is infrequent due to the extra time and processing the lender needs to do on a reverse mortgage. GB)


Belling said proprietary loans are for higher priced homes, are a small sliver of the reverse mortgage market and are not backed by the federal government.

(However, to be competitive they normally have the same type of contract, uses and services. Normally, they are also non-recourse loans. Due to the larger size of the loans, and the fact that there is no mortgage insurance to protect the lender, the interest rate is usually higher than the dollar-limited FHA HECM loan.)

Belling said the typical borrower is a widowed single woman in her mid-70s who has a modest income. But now the AARP is seeing more couples choosing reverse mortgages.

“It’s gaining more recognition as a viable financial instrument,” Belling said. “Many people who thought they could manage are looking to their house as a more liquid asset than they used to.”

For fiscal year 2005, the average property value of reverse mortgage borrowers was $254,000, the borrower’s average age was 73.8. In addition, 46 percent of borrowers were single women, 16 percent were single men and 38 percent were couples, according to data from HUD.
Belling said the older the homeowner is and greater the value of the house, the more the person can borrow.

As the loans become more commonplace, so are the TV ads about reverse mortgages. Front-end education about the terms, fees and options can be vital in deciding if it’s the best option and is required for HECMs.


“The biggest danger is not understanding how the loan works,” Belling said. For example, she pointed out that it’s a bad idea to take out a reverse mortgage if the homeowner only plans to stay in the house for one or two years. If “The total costs of the loan are spread out over time the costs are much lower. Charges become lower if you spread them out over time,” Belling said.

FTC’s Web site recommends that consumers ask a counselor or lender to explain to them the Total Annual Loan Cost that lays out the loan’s average annual cost over time, including all itemized costs.

(Counseling for the FHA/HECM is mandatory, and banks that lend jumbo loans also require counseling as a matter of course. GB)

Walters said an obstacle with which homeowners may be struggling is that they want the home’s equity for their heirs or they don’t want to touch it for emotional reasons.

(What both borrowers and heirs need to recognize, in many cases, is that the choice is often between the heirs aiding their parents with time and money, and saving the house for inheritance, or for the heirs to keep their money to pay their own bills, save for retirement, and care for their children. They should assist their parents with making sure they get a reverse mortgage through an ethical, reliable lender. Often parents prefer this in order to maintain their financial independence.)

Walters said one of the best features of reverse mortgages is there’s no risk to the borrower’s heirs. If there is still equity in the home, heirs have up to a year to repay the debt by selling the home. (And, FHA allows the heirs a 7% of the loan amount to pay the selling costs. GB)

Belling said the heirs’ responsibility for repaying the debt is usually done by selling the home. She said that sometimes heirs want to keep the home; and they can apply for a conventional mortgage to pay off the reverse mortgage.

A big myth with reverse mortgages is that the bank gets the house. Belling said the borrowers are still the owners, (hold title to the home, GB) and they need to live in the house the majority of the year.

(The borrowers must maintain the home as their permanent residence; and they cannot be out of the house for more than 12 consecutive months. That leaves plenty of room for vacations, time in a nursing or rehab facility, because each time they leave the house the 12 month period starts over. GB)

She stressed that borrowers need to keep up with paying their property taxes and insurance throughout the life of the loan, because failure to do that can result in a default

(Homeowners are always responsible for taxes and insurance, on any kind of loan, or the home becomes subject to foreclosure. On forward mortgages the borrower may have the taxes and insurance included in the mortgage payment; this is not normal for a reverse mortgage. GB)

“You need to do a lot of due diligence of what the costs are to decide whether to apply. Then there aren’t any surprises about fees or charges,” Belling said.

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