A slight turn on reverse mortgages
They can be a smart move, but do your homework
My views on reverse mortgages have become somewhat more favorable.
When I started writing about them five years ago, I believed, along with many financial advisers, that reverse mortgages should only be used as a last resort.
Reverse mortgages are for older homeowners (62 years or older), allowing them to access their home equity in a lump sum, regular payments or a line of credit. They make no monthly mortgage payments; their loan is repaid when they die, sell or move out of their home.
The problem was that too many people took the loans on without understanding the risks. Many believed there was no chance they would ever face foreclosure. However, those who could not hold up their end of the bargain — i.e., maintaining their properties and paying real estate taxes and insurance premiums — faced foreclosure.
So why am I adjusting my opinion of reverse mortgages now? There are two reasons. First, under legislation passed in 2013, the Federal Housing Administration introduced guidelines reducing the risks associated with reverse mortgages. Second, more lenders now offer them with much lower closing costs and more attractive line-of-credit options.
The FHA guidelines make it more difficult for families in poor financial condition to obtain approval for a reverse mortgage. They also allow younger surviving spouses to stay in their homes. It used to be that those younger than 62 could not be included on the mortgage. When the older spouse died, the younger spouse had two unpleasant options: either repay the outstanding loan balance or sell the property.
Another development that makes reverse mortgages more attractive is the lower closing costs offered by a few lenders, some as low as $125. Two companies known for low closing costs are Reverse Mortgage Funding and Reverse Mortgage Solutions.
Note, however, that it is rather difficult to comparison shop for costs. Unfortunately, there are no tools yet to enable you to compare costs online. In order for you to obtain the best deal, you have to approach several lenders and compare options and costs. Also note that one trade-off for low closing costs is usually a higher interest rate.
Some lenders spend a great deal of money promoting reverse mortgages on television. These companies are not necessarily offering the most cost-effective contract.
When a reverse mortgage borrower chooses to take the distribution of funds in the form of a line of credit, it can offer several significant advantages over a standard home equity loan. First, as long as you maintain the property, pay the taxes and insurance premiums, and continue to live in the home, your line of credit cannot be canceled. The risk with a standard home equity loan is that it you may not be able to renew it when the initial term is over.
Second, unlike a standard equity loan, which obligates you to repay the interest and principal within a given period, with a reverse mortgage, as long as your contract is in effect, you do not have to repay the principal or interest from current income. You have the choice of simply having your loan balance increase and never repaying the loan.
Third, with a reverse mortgage your credit line can increase over time. (The lower the interest rate, the higher the potential increase.) Shelley Giordano, author of “What's the Deal with Reverse Mortgages” (People Tested Media), does an excellent job explaining this.
The bottom line is that if you do your homework, a reverse mortgage may be advantageous to you if you intend to stay in your home for a long time. I recommend that, before entering into an agreement, you have the contract reviewed by an independent party, either your attorney or a financial planner with expertise with reverse mortgages.
PREVIOUS ARTICLE
