Many people don’t fully understand how reverse mortgages work, and the resulting confusion can leave borrowers with regrets, a Washington Post article suggests.
“Do a lot of homework before getting a reverse mortgage, because you may end up stuck in a bad situation,” writes Post columnist Michelle Singletary.
Following another article she recently wrote, Singletary received several questions and concerns about reverse mortgages from readers. One reader inquires about loan counseling and says, “It is recommended that the prospective borrower seek the guidance of a counselor.”
To this, Singletary responds that counseling is not recommended, but required by the Department of Housing and Urban Development (HUD).
“Borrowers have to use HUD-approved housing counselors, who discuss not just how a reverse mortgage works and its eligibility requirements but the financial implications of getting this type of loan,” she writes. “Their job is to help guide people to make their own decisions about whether the product is right for them.”
Another reader asks about using a home equity line of credit (HELOC) as opposed to a reverse mortgage. The reader notes that it can serve the same function as a reverse mortgage at much lower costs and with the potential of being able to withdraw a larger percentage of equity.
“The problem with a line of credit for cash-strapped seniors is that they may not qualify for the loan and they have to make monthly payments,” Singletary writes. “The appeal of a reverse mortgage is that no monthly payment is required.”
In addition to these questions, Singletary received a note from a senior in Florida who expressed concerns about the ever-present non-borrowing spouse issue. She had signed over her rights to the home to her husband, who was taking out a reverse mortgage, so he could access more equity.
“The younger spouses are talked into quit-claiming their interest in the home by mortgage brokers to generate higher draw on equity,” said Jean Constantine-Davis, senior attorney with AARP Foundation Litigation. “The couples virtually never understand that under the terms of the mortgage, when the borrowing spouse dies, the surviving spouse will be foreclosed on and evicted.”
That’s what happened to the Florida reader. And when faced with adding her name back to the mortgage after turning 62, she found out refinancing was required, which she couldn’t afford.
On Aug. 4, changes were made to the reverse mortgage program, making more proceeds available to borrowers and giving more protection to non-borrowing spouses because of cases like the Florida reader’s.
Still, the law does not apply to borrowers who took out a reverse mortgage before Aug. 4, a concern for Singletary, who says overwhelmingly people don’t fully understand how the product works.
Written by Emily Study