Citing a 2015 study by the Consumer Financial Protection Bureau that revealed consumers’ lack of understanding about reverse mortgage products, a new article at Fox Business written by reporter Linda Bell aims to address what potential borrowers “need to know” about taking a reverse mortgage.
“While reverse mortgages can help some older homeowners meet their financial needs, the CFPB report cautions that the loan could jeopardize seniors’ retirement security if not used carefully,” the article reads. It then addresses eight questions that Mike Sullivan, personal finance consultant and director of education at Take Charge America in Phoenix, Ariz., says should be answered before a borrower engages in a reverse mortgage transaction.
What a reverse mortgage is, what fees are associated with it
The first two questions to be answered, according to Sullivan, is what exactly a reverse mortgage (in this case a Home Equity Conversion Mortgage) is, and what the associated fees will be for a borrower to undertake.
“There’s the mortgage insurance premium, typically two percent as well as annual payments,” Sullivan says. “There’s a high origination fee and there are monthly service fees. So it’s a very expensive way to borrow money compared to other means.”
Despite the persistence of a belief in the presence of monthly servicing fees, however, seeing them incorporated into a HECM loan in today’s market is unusual.
What can happen to an existing mortgage, taxes to be aware of, and upkeep
The fact that you can’t have a forward and reverse mortgage at the same time was also pointed out by Sullivan in addressing what happens to a borrower’s previously-existing traditional loan.
“If you already have a mortgage, you have to pay that off before you can take any of the other cash from the HECM,” he says. “The first part of the reverse mortgage proceeds has to pay off the existing mortgage.”
The fact that a certain amount of the proceeds have to be set aside in order to cover property taxes and homeowners insurance is also emphasized by Sullivan, who advises potential borrowers to keep these necessities in mind when trying to discern how much money will ultimately be available to them after these other obligations are satisfied.
The requirement to keep up with the home’s maintenance needs is also emphasized by Sullivan.
“If you have to put a new roof on that house, if you have to replace the water heater or make other kinds of repairs or improvements to the house, you can’t take another loan out against the equity in the home,” Sullivan says. “You have to keep enough cash so that you can pay those required maintenance costs.”
Loan repayment, equity balance and counseling
In describing the scenarios in which the loan must be repaid – either upon the death of the borrower or at the time they move out of the home – a reverse mortgage may not be a good option for an eligible senior if they’re in poor health or intend to leave the home within a few years.
“If your days of independent living are numbered and you know you are going to have to live with one of your children, go into assisted living or something like that, your home equity loan is basically due. It is done at that point,” he says.
In terms of how much equity a reverse mortgage borrower’s home has, Sullivan warns that their home equity is reduced by the amount of the loan when it is taken out. This is why he describes reverse mortgages as “much less popular with the seniors’ children than they are with the seniors [themselves],” though reverse mortgage originators have previously pointed out that this can lead to an incorrect assumption about who “really” owns the home when the loan comes due.
The actual process of going through the HUD-mandated counseling session is also described by Sullivan.
“There is a class that can be done over the phone or in-person,” he says. “It usually takes not much more than an hour or two. A certified counselor has to help the seniors understand the loan terms, tax implications and also to discuss alternatives.”
Value for those with a cash need
In terms of whether or not he actually recommends pursuing a reverse mortgage loan, Sullivan illustrates the potential necessity for a borrower in decidedly stark terms.
“It certainly is better than eating cat food,” Sullivan says. “If this is where your assets are and the only way you can get money for medicine, food or other things you need to have, then you should probably consider it. But it’s still a loan and a very expensive loan.”
This is a derivation on the idea of using a reverse mortgage loan as a ‘last resort.’ Prominent industry educators have taken issue with this characterization for years, but recent signs indicate that this perspective may be beginning to turn around.
Read the full article at Fox Business.