Legalese — Reverse Mortgages

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Reverse mortgages are things that have come up a lot lately, and there seems to be a lot of misunderstanding about what they are and how they are used, so I thought I’d explain the basics here.

Reverse mortgages in the United States are actually “Home Equity Conversion Mortgages.”  They are only available to people who are over 62 years of age.  The idea behind a reverse mortgage is that older people have been paying on their mortgages for some time and may actually own their homes outright.  Their homes have increased in value quite a bit since they bought them decades ago.  Now, they are only responsible for paying for a small part of the equity and the taxes and insurance.  They are sitting on a lot of value in the equity of the home, but that valuable equity can’t pay for food or medicine.  Reverse mortgages at their best are a way to tap into that equity so that it is useable in the present.

If an older person is on a low fixed income or disabled and cannot work, but owns a home outright that they have inherited, this may work very well.  Through a reverse mortgage, they can borrow up to the amount of equity in the home and aren’t required to pay it back.  The interest is simply added to the principle.  When the borrower dies or sells the house, then the loan would have to be repaid, but only up to the sales price.  In other words, you can never be ‘upside-down’ with a reverse mortgage.  Some reverse mortgages require repayment if the borrower moves out – like to a nursing home – so pay attention when you sign the documents.

There are mixed opinions on whether or not reverse mortgages are a good thing.  They can benefit older people who have no income but who have valuable homes.  However, they are very complex financial instruments that can be difficult to understand, and many people don’t understand that by taking out a reverse mortgage they won’t be able to leave the house they live in to their children and grandchildren.  There is a high rate of people – 12% in the United States – who have reverse mortgages and then default on their insurance or taxes, and then get foreclosed on because of that.  They think because they don’t have mortgage payments this can’t happen, but it isn’t true.

If you have a reverse mortgage, you can get all the money in one lump sum, you can get monthly payments, or you can get a line of credit like a home equity loan, or any kind of combination of those.  You can use it to fund a nursing home or residential care or for a one-time expense like a new car or to renovate your home by adding a wheelchair ramp.  You can pay off the reverse mortgage during your lifetime, and then it would no longer exist, just like any other paid-off mortgage.

If you are considering a reverse mortgage, make sure you have good financial advice before you do it.  Don’t just talk to the person trying to sell you the mortgage or your neighbors and friends.  Talk to an independent financial advisor or a lawyer – someone with real independent expertise.  There are pros and cons, advantages and dangers, and a lot of con artists out there trying to take advantage of the senior population.  Be safe and make sure your loved ones are, too.

Nothing in this article should be construed as legal advice.  it is being offered for informational purposes only.  

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