John E. Pytte
Advertisements for reverse mortgage loans are a staple of late night television, direct mailings, and telephone “robocalls.” While such loans can be beneficial to senior citizens when used for paying off debt or as a means of supplemental income in a homeowner’s retirement years, many homeowners do not have a complete understanding of how such loans work and have found themselves in danger of losing their homes at a later time.
How a reverse mortgage works
In a reverse mortgage a lender will make a loan to a homeowner based on the amount of equity in the homeowner’s primary residence. In many cases the loan amount is around 50% of the available home equity. The loan can be disbursed to the homeowner as a lump sum or in monthly payments depending on the homeowner’s needs. Although the homeowner is no longer making mortgage payments, he or she must continue to pay all taxes and insurance premiums for the residence that was used to secure the loan. The loan is repaid when the last signer of the reverse mortgage dies or permanently moves out of the residence and the residence is then sold to repay the lender.
In general, the qualifying requirements to obtain a reverse mortgage are:
The youngest homeowner, if married, must be at least 62 years oldMust use their home as their primary residenceMust have enough equity in their home to justify a reverse mortgage loanMust meet any other requirements set by Housing and Urban Development (HUD) and the lender
The requirements set by the lender can be complex and in some cases may not be completely understood by the borrowers. These terms should be carefully reviewed by the borrower with the assistance of an attorney who is not affiliated with the lender or loan broker.
The benefits of a reverse mortgage
Since a reverse mortgage is a loan, the proceeds of the reverse mortgage are usually not subject to taxation at the federal and state levels. Although there are usually no restrictions on how the loan is to be used, many homeowners use the loan for paying off debt from their original mortgage and use the money that would have gone to mortgage payments for paying down debt such as consumer finance and credit card debts.
The loan becomes due upon the death of the last signer of the loan or when the last surviving signer permanently leaves the residence. At that time the residence is sold and any funds remaining after the debt is settled go to the inheritors of the borrower’s estate or to the surviving borrower. If the sale does not completely repay the loan, the estate is usually not responsible for the unpaid balance.
The downside of reverse mortgages
Since a reverse mortgage is a loan, it will carry an interest rate that is subject to change over time. This interest rate can lead to a situation where the loan balance exceeds the amount of equity in the home and can result in the loan becoming due and payable. If the borrower cannot meet the repayment request the home can be foreclosed and sold by the lender.
Reverse mortgages have been advertised as a way for retired Americans to use the equity in their homes to pay for living expenses or as a way to reduce their consumer debt. Although these reverse mortgage loans are attractive, there have been so many reports of deceptive advertising and deliberate fraud by companies that market such loans that anyone considering these loans is strongly advised to consult a consumer debt attorney before making a final commitment to such an agreement.
As is true for any financial instrument that sounds too good to be true, it probably is just that for most people. Don’t fall for the allure of “free money” in your golden years- talk to us first! Georgia Debt Relief is here to help.
Reverse mortgages are advertised as a way for retired Americans to use equity in their homes to pay living expenses or to reduce their consumer debt.