Is a Reverse Mortgage a Good Idea?
Wells Fargo and Bank of America are pulling out of reverse mortgages. The two banks account for more than 40% of all this type of home loan.
The news has left some elderly borrowers, who rely on reverse mortgages to fund their retirement concerned.
Both banks say that people who already have reverse mortgages need not be concerned, they will continue to honor them.
A Wells Fargo’s sales manager, said “We will continue to service all of our portfolio. Don’t expect any changes in terms.”
John Lunde of Reverse Market Insight, said people should have no trouble in finding a reverse mortgage in future, but the providers might change.
What is a Reverse Mortgage ?
Officially called Home Equity Conversion Mortgages (HECMs), they were created by the HUD in 1987 for home owners aged 62 or more. They are federally insured and make it possible for owners to borrow money against their home.
The loan is repaid when the owner of the home dies, leaves the home or if it is sold.
Some people find their reverse mortgage a godsend but there are other people who advise against them.
In a press release Wells Fargo gave two reasons for getting out of reverse mortgage:
1) Unpredictable home values.
2) HUD restrictions “that make it difficult to determine seniors’ abilities to meet the obligations of homeownership and their reverse mortgage”
If property values fall and unpaid fees start mounting up, the amount owed can exceed the value of the property.
This may lead to foreclosure.
Mandatory counseling before the loan is agreed is designed to protect borrowers, as some who need money to fix up their home, might be better off finding their loan elsewhere rather than via a reverse mortgage.
Is a Reverse Mortgage Good for You?
According to some a reverse mortgage is rarely the right option.
If you are 62 or older then a reverse morgage may seem appealing. Your lender will give you some cash and still let you stay in your house. There are no monthly payments and you only pay the mortgage back if you leave your home (i.e. when you die or move out).
The bank gets its money back when you sell your home, die, or if your home is no longer your “primary residence”.
There are three types of reverse mortgage
1 Single-purpose – made available by state and local government agencies or non-profit organizations
2 Federally-insured reverse mortgages, aka Home Equity Conversion Mortgages (HECM) backed by the Department of Housing and Urban Development
3 Proprietary reverse mortgages, – private loans from private companies providing the loan.
Reverse Mortgage Features
They are not taxed, and generally have no impact on any Social Security or Medicare benefits.
You retain the title to your home.
There are no monthly repayments.
The loan is paid back when the last living borrower sells the home or dies or if the home is no longer their principal residence.
A HECM loan allows you to live in a medical facility or nursing home for a maximum of 12 consecutive months before you are obliged to repay the mortgage.
However, there are disadvantages :-
The mortgage provider may end up owning your home. Some people refer to reverse mortgages as “Generational Theft”.
Banks are in business to make money not friends.
There is usually an origination fee, mortgage insurance premium (for federally-insured HECMs), plus additional closing costs.
The amount you owe on a reverse mortgage increases with time. Interest is added to the outstanding balance each month.
Reverse mortgages can destroy the equity in your home, thus you and your heirs may be left with very little.
You are still liable for property taxes, insurance, utilities, maintenance, fuel and other expenses. If you fail to keep up with the payments of any of these you may be required to repay the mortgage.
Interest is not deducted from income tax returns until you pay the loan off in full or in part.
Finally – make sure you shop around. With reverse mortgages you usually have 3 business days to cancel them, without penalty, but you must inform the lender by certified mail with a return receipt.
Further details available here – reverse mortgages