A Reverse Mortgage May Not Be the Right Choice
Disclaimer: The views and opinions expressed in Bob’s Blog are that of the author and do not purport to reflect the views and opinions of the Office on Aging or its staff. Posted September 22, 2022
People approaching retirement or those already retired may find the money they will get or are getting from Social Security and, possibly, Pension Benefits is not enough for them to live on. They look for ways to supplement their income.
They see ads for a Reverse Mortgage on Television. Several Hollywood stars have promoted these.
While he was alive, Fred Thompson was one. You may recall he was one of our U.S. Senators.
Currently, it’s Tom Selleck.
The Commercials Imply a Reverse Mortgage is the Answer
For most, it is not.
A Reverse Mortgage is different from the mortgage you may have on your home. It is for people 62 years of age or over. It is for those who have paid off their mortgage or whose home is worth far more than they owe.
There are several different types of Reverse Mortgages. The one I am going to talk about here is the most common one – the Home Equity Conversion Mortgage (HECM).
The HECM allows the borrower to borrow money against the equity in their home. It provides cash to them to use as they want. Most use it to supplement their monthly income.
There are no monthly payments required. The money has to be repaid when the home is no longer the borrower’s primary residence or the borrower sells the home or dies.
Unlike a regular mortgage where the amount the borrower owes decreases with every monthly payment until it is paid off, interest is charged on the HECM every month from the time it is taken out until it ends. The balance owed increases.
At the time the home is no longer the borrower’s primary residence, the home is sold or the borrower dies, the balance to be repaid will be much higher than the original amount borrowed.
The HECM is insured by the Federal Housing Administration (FHA) against default. This makes it much easier for a lender to loan the money.
In addition to being 62 or older and having quite a bit of equity in the home, there are certain other requirements the borrower has to meet before they can get a HECM:
- The home has to be their primary residence. It can’t be a vacation home or a rental.
- Reverse mortgage counseling with a HUD approved Counselor is required.
- The borrower can’t be delinquent on any federal debt. They can’t have failed to repay any student loans or owe back income taxes.
- They have to prove they have the ability to pay ongoing housing costs.Once a borrower gets a HECM mortgage, they cannot be away from the home for longer than 6 months for a non-medical reason and there is no co-borrower living in the home. This simply means they can’t spend more than six months living with a child or children elsewhere. The time increases to 12 months if they go into a Hospital, Nursing Home, Rehabilitation Center or Assisted Living Facility and there is no co-borrower living in the home.
Once a year, the Lender or Servicer requires the borrower to state the home is still their principal residence.
If the borrower’s spouse was under 62 at the time the HECM was taken out, he or she is an “Eligible Non-Borrowing Spouse.” Once a year, the borrower has to specify they are still married and the home is still their principal residence.
An Eligible Non-Borrowing Spouse can continue to remain in the home if the borrower is in a healthcare facility for longer than 12 months or passes away.
The Borrower has to pay property taxes annually and maintain homeowner’s and flood insurance, if required, at all times. They also have to pay any property or condo association fees and any special assessments.
At the time of the loan, the lender will determine if the borrower has enough money to pay their property taxes and homeowners’ insurance on an ongoing basis. If the borrower doesn’t. the lender will set aside money from the loan to pay for these. If the lender sets aside money from the loan to pay the future property taxes and homeowner’s insurance, they will either
- pay these directly, or
- send the borrower the money so they can make these payments.
The Borrower Has to Maintain the Property
After a borrower gets a HECM, they are required to maintain the property. This is to protect the value of the property for the lender. The lender has the right to have the property inspected.
If repairs are necessary, they can require the borrower to have the repairs made within 60 days of the notice.
If the repairs are not made, the lender can start to foreclose on the property.
Challenges with a HECM
The upfront costs to take out a mortgage like this can be much higher than those for a traditional mortgage. In addition to regular closing costs, here are the other fees:
- The Borrower has to pay the cost of the required counseling with the HUD Approved Counselor.
- Mortgage Insurance is required. There is an upfront fee and then a monthly one. These are higher than those on a regular FHA mortgage.
- The lender can charge an origination fee of up to $6,000.
Most borrowers roll these costs into the loan. They pay interest on these right from the time they take the loan out.
A Borrower Outlives the Mortgage
Some borrowers fail to realize at the time they get a HECM that they may outlive the mortgage. Thirty years down the road, they will not only owe the full amount they borrowed but also the interest that accrued over the years. They may have to sell the home to pay off what they owe. Most of what they get from the sale may go to cover this and they may not have much left to move or to live on.
Leaving The Home to Children or Heirs
If they planned to leave their home to their children or heirs, the only money they will get is what is left after the mortgage is paid off. That may not be much.
Over time, every home deteriorates. A new roof or other major repairs may be needed. If the borrower does not have the money to make the repairs, the Lender may foreclose. The borrower will have to move. They may not be able to afford a comparable place to rent or buy.
If the lender does not pay property taxes, the county they live in can sell those. The Lender can sell the home. An investor can pay the property taxes and place a lien on the home. They can also buy the home and force the borrower to move.
Borrower Becomes Disabled Later in Life
If the borrower becomes disabled and has to go into a nursing home for 12 months or more and has a son or daughter living with them, the lender might foreclose and force the son or daughter to move.
Borrower Remarries After They Get the HECM
If a borrower remarries after they took out the mortgage, the new spouse would not be an “Eligible Non-Borrowing Spouse.”
If the borrower passes away before the spouse, the new spouse doesn’t have many options available to stay in the home.
The best way to avoid a problem is for both of them to pay-off the existing HECM if they can and see if they can take out a new one. If they can’t, they may want to sell the home and try to buy a new one.
Home Worth Less Than Amount Owed at the End of the Mortgage
In 2022, the value of almost all property increased substantially in Knox County. That doesn’t always happen. In 2008 and several years after, property values decreased quite a bit.
If there is a significant drop in a home’s value at the end of the HECM, the borrower may actually end up owing more to the Lender than they can get from the sale of the home. They would be responsible for paying the difference to the Lender out of any other funds they have.
A Horror Case in Knox County
Early in 2022, a lady in her 80’s got a letter from an Investment Group indicating they owned her home and she was going to be evicted. She lives in Karns and reached out to the Office on Aging in Knox County for help.
This lady’s income was low. Several years ago, she took out a HECM to supplement it.
This lady was responsible for making monthly payments for her property taxes to the servicer on her mortgage. She had been late sometimes in making these payments.
The original servicer sold her mortgage to another servicer. They notified the woman of the sale.
The lady overlooked the letter. She continued to make the monthly payments for the property taxes to the original servicer. It wasn’t until late in 2021 they sent her a check for the money she sent to them incorrectly.
Since the new servicer didn’t receive the checks for the property taxes, they did not pay them. Knox County sold the property taxes to an Investment Group.
That group then turned around and paid off the amount she owed on her mortgage to the servicer. At that point they owned the home and sent her that letter saying they were evicting her.
The Property Taxes Were $3,385.75
After she contacted the Office on Aging, its Rise Above Crime unit got involved. They investigated the case fully. They found the woman had documented all of the property tax payments she had made to the original servicer. That servicer never sent the money to the new servicer. They also didn’t return it to the lady until months later.
Both servicers were contacted. They were advised of what happened. However, neither wanted to do anything to help the woman.
The Rise Above Crime Unit had to secure the help of a local attorney. He sent letters to the investment group and both servicers.
In his letter to the servicers, he explained how this lady suffered because of what happened. He asked them to correct what they had done. After they got his letter, they did reverse it.
After the investment group got his letter, they apologized for what happened. They asked the servicer to refund to them the money they had paid.
The lady has kept her home. She currently is paying the new servicer the back due taxes of $3,385.755. She is making 25 payments of $135.43
A HECM Mortgage Does Fill a Need. However, It May Not be Right for Everyone.
People with good credit and savings may have other options. For people who can qualify, better alternatives are Home Equity Loans, Home Equity Lines of Credit and Cash Out Refinances.
A HECM may be right when a borrower does not have the credit score or the funds available to pay the closing costs, property taxes, and homeowners’ Insurance.
Before considering any of these mortgages it’s always best for a person to talk to a financial adviser they trust. That adviser will review their finances with them and suggest what is best.
If you have any comments on what you have read in this post, I would love to get them. Please email them to me. Also – if you have any ideas about subjects you would like to see discussed in future posts, please send me an email and let me know. My email address is email@example.com