The Pros and Cons of a Reverse Mortgage...Does it Make Sense for You?
By Don Drake, Connelly Law Offices, Ltd.
"Anyone who watches television has probably seen Tom Selleck hawking reverse mortgages," stated professional fiduciary and certified elder law Attorney RJ Connelly III. "To review, a reverse mortgage is a loan and, like a traditional mortgage, allows homeowners ages 62 and above to borrow money using the home as collateral. When you take out this type of mortgage, your home remains in your name, but unlike traditional mortgages, with a reverse loan, borrowers do not make monthly mortgage payments."
"The money is repaid when the borrower no longer lives in the home, and interest and fees are added to the loan balance each month, and the balance continues to grow," said Attorney Connelly. "With this loan, homeowners continue to pay property taxes and homeowners insurance while using the home as their primary residence."
"But here's the catch, with a reverse mortgage, the amount the homeowner owes the blended goes up over time, not down," Attorney Connelly pointed out. "This is because interest and fees are added to the loan balance monthly, and as the loan amount increases, the home's equity dwindles. The money is eventually paid back when the home is sold, and this is where many are shocked about just what little money they have left in their largest investment."
Like so many others, Suzanne saw the late-night ads for reverse mortgages. She and her husband, Tony, took out a reverse mortgage when the pizza parlor they owned began to fail after the town around their business implemented a new traffic pattern. "We took out a mortgage to dig ourselves out of the debt we accumulated to keep the business afloat and remain in our home that we planned to retire in," said Suzanne.
But things changed quickly. "Tony was diagnosed with a serious heart condition and suddenly died," stated Suzanne. "That's when the reverse mortgage company started giving me problems. A few months after burying my husband, I got a letter from the company stating I was in default on the mortgage since I was no longer occupying the house."
With a reverse mortgage, living in the home is a requirement. Suzanne sent the company proof that she was indeed residing in the house. She heard nothing more from the company until months later when a foreclosure notice was advertised in the local newspaper.
"I again called the company and spoke with a representative who stated that it was an oversite and that it would be straightened out," said Suzanne. "Two days later, the home was sold. The company treated me like it was no big deal, but I had nowhere to go. The company said they did a drive-by inspection ten times, and the home was unoccupied."
After she obtained records from the company, it turned out they were doing drive-by inspections of the vacant pizza parlor next to the home. "I was furious," said Suzanne. "Why would any sane person think a seventy-three-year-old widow would be living in an empty restaurant? Common sense would dictate that a follow-up phone call would be made to clarify the situation, but they did not even give me the respect to do that."
Then things got worse for Suzanne; they sued her to vacate the property. That's when she engaged legal help.
"Suzanne was correct about the company representatives lacking common sense," stated Attorney Connelly. "Think of the irony in the company's final act. They accused Suzanne of not occupying the property and then sued her to vacate a property they claimed she did not occupy. Things did work out for her in the end, but the stress they put her through was unconscionable, and you're left wondering how many others go through such problems."
Although this was a negative story about reverse mortgages, there are also positive outcomes, but the homework must be done to see if it makes sense in your situation and research done on the history of the lender. Before we look at the pros and cons of reverse mortgages, let's examine the history of these loans.
The History of the Reverse Mortgage
"Believe it or not, the first reverse mortgage occurred in 1961 when a football coach's widow wanted to stay in the marital home," said Attorney Connelly. "A creative thinking bank employee at a small bank in Portland, Maine, came up with an idea that resembles today's reverse mortgages to accommodate the woman. Twenty years later, the reverse mortgage caught the federal government's attention."
Indeed, it did. By the mid-1980s, these reverse mortgages received federal government backing via mortgage insurance through the Federal Housing Administration. Eventually, the Department of Housing and Urban Development (HUD) created a pilot program to offer government-insured reverse mortgages. The Housing and Community Development Act of 1988 was signed into law, establishing the current (with continuous revisions) reverse mortgage.
"As the new century arrived, the 'great recession' sent the demand for reverse mortgages soaring," said Attorney Connelly. "This caused HUD to partner with the American Association of Retired Persons (AARP) to improve counseling policies as many borrowers struggled to pay property taxes and insurance payments. Reverse mortgages became an increasingly viable solution for cash-strapped older homeowners."
Ten years later, the Reverse Mortgage Stabilization Act came into law, limiting the amount borrowers can access during the first year and addressing issues of non-borrowing spouses to continue residency in the home after the borrower left.
"Historically, lenders make money on the accrued interest of the loan balance and may also make money by charging an origination fee and selling loans to secondary market investors," Attorney Connelly said. "The important takeaway from the reverse mortgage history is that rules and eligibility criteria seem to be in a constate state of flux, making decisions about which reverse mortgage to select challenging, which is why the television ad market for these loans is so busy."
The Preference to Age in Place
"As our society ages, so does the need for housing for older adults," said Attorney Connelly. "Because care in assisted living or nursing homes is cost prohibitive for most who want to pay privately, and Medicaid funded facilities are limited in availability, Americans who owned homes wanted to age in place."
"Many government programs now center on providing partial or long-term care in private homes, so it makes sense for many older Americans to choose to age in place. Unfortunately, for many of these individuals, reduced income levels decrease the practicality of staying home. However, homeowners with a minimum of fifty percent home equity may be eligible for a reverse mortgage to provide the necessary cash flow. But there are pros and cons of these loans."
The Pros and Cons of Reverse Mortgages
Let's start with the advantages of a reverse mortgage:
Access to home equity – A reverse mortgage allows homeowners aged sixty-two or older to access a portion of their home equity through loan proceeds. A reverse mortgage can be helpful for retirees with substantial equity tied up in their homes but limited income and savings.
No monthly mortgage payments – One of the significant benefits of a reverse mortgage is that borrowers are not required to make monthly mortgage payments. The loan is typically repaid when the homeowner moves out, sells the home, or passes away.
Flexibility in fund use – Borrowers can use the loan proceeds as they want, whether for daily living expenses, home improvements, medical expenses, or other financial needs.
Homeownership retention – Reverse mortgages can help seniors remain in their homes while supplementing their income, which can be especially valuable for those who want to age in place.
Now, the disadvantages of reverse mortgages:
Accumulated interest and fees – Over time, interest and fees accrue on the reverse mortgage loan, which can significantly reduce the remaining equity in the home. The interest and fees mean fewer assets will be available for heirs or other purposes when the loan is repaid.
Potential impact on inheritances – Reverse mortgages can impact the inheritance homeowners can leave to their heirs. If the loan balance exceeds the home's value when sold, the lender typically absorbs the loss, and heirs may not receive any remaining equity.
Homeownership obligations – Borrowers must continue to meet certain obligations, including maintaining the property, paying property taxes, and keeping up with homeowners' insurance and any necessary repairs. Failure to meet these requirements could result in foreclosure.
Complex terms and risks – Reverse mortgages are complex financial products with varying terms and conditions. Before entering such an agreement, borrowers must understand the risks, such as the potential impact on government assistance programs, as additional income can alter eligibility.
Seeking Legal Advice
"Reverse mortgages typically fall under either a real estate or elder law category," said Attorney Connelly. "Real estate law deals with legal matters relating to property, including mortgages, leases, and transactions, which this office handles as we have Attorney Caitlin Cabral, a real estate attorney, on our staff. Elder law focuses on legal issues affecting older adults, like retirement, long-term care, and financial matters."
"Since seniors commonly use reverse mortgages as a financial tool, our attorneys at Connelly Law have the expertise and a wealth of knowledge in both areas to provide comprehensive guidance to our clients."
How Elder Law Fits In
At Connelly Law, Certified Elder Law Attorney RJ III can assist in several ways when considering and obtaining a reverse mortgage. He will explain a specific reverse mortgage's legal implications and requirements, ensuring that his client thoroughly understands the financial product's terms, conditions, and potential consequences related to their situation.
Connelly Law can negotiate with the lender or other parties on the client's behalf if any issues or disputes arise during the reverse mortgage process. The attorneys at the firm can advocate for the client's interests, helping to reach a fair resolution.
"We can help avoid a potential foreclosure with options such as repayment plans, loan modifications, or other alternatives available under the law," stated Attorney Connelly. "We can address the effect a reverse mortgage may have on your estate and inheritance plans."
"Under the right circumstances, a reverse mortgage can give older homeowners options to pay for at-home elder care that they might otherwise not be able to afford. Money can also be used to make necessary modifications to the home. We can help you select the right reverse mortgage product and align it with your needs and legacy."