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Saturday, July 6, 2019

Reverse Mortgages and Older Americans

Perhaps you’ve seen the catchy commercials for a reverse mortgage stating that many older Americans are struggling to get by because they currently do not have enough in savings and retirement funds to manage their expenses, but yet many have equity in their homes. To solve the financial difficulties, the commercial recommends using a reverse mortgage to access that equity.

 

Suppose you’re one of the many individuals such commercials are targeting. You’re struggling financially but have significant equity in your home – perhaps you paid off your mortgage ten years ago. How exactly does a reverse mortgage help you?

At a basic level, a reverse mortgage is a loan from a bank secured by your house – just like a regular mortgage. The primary difference is that for a reverse mortgage, you receive a lump sum payment or continuous payments from the bank and do not make payments on the principal balance. Whereas in a regular mortgage you take out a loan and then make monthly payments, a reverse mortgage doesn’t require any payments to be made until a specified event occurs, such as your death, the sale of the property, or another event identified in the loan agreement.

What about interest?

Interest still accrues in a reverse mortgage. However, you do not make recurring principle or interest payments. Thus, if you take out a reverse mortgage, your outstanding principal balance will continue to rise as interest accrues.

If interest accrues, what happens if the principal balance exceeds the home’s value?

Federal regulations ensure that the debtor cannot be liable for the difference if the principal balance exceeds the home’s value when repayment is required. When making a reverse mortgage, the bank is taking the risk that the principal balance may exceed the home’s value. There are two reasons that the principal balance can exceed the home’s value. First, the individual may live longer than anticipated and thus interest accrues in excess of the home’s value. Second, a market downturn can cause the home’s value to drop below the principal balance.

What should I do if I’m interested in a reverse mortgage?

The reverse mortgage can be a great option for many older Americans who have significant equity in their homes, but they are complex financial instruments that should be carefully considered. Keep in mind what a reverse mortgage means to your heirs upon death.

Some key points to consider. When the borrower dies, the lender must be repaid. However, if one spouse has died but the surviving spouse is listed as a borrower on the reverse mortgage, he or she can continue to live in the home, and the terms of the loan do not change. With the death of the last spouse, the reverse mortgage needs to be dealt with, and done so quickly. Heirs will need to immediately settle on a course of action. A lender will typically explain options for paying off the loan to the borrower's estate. They heirs can keep the property, sell the property or turn the keys over to the lender. Heirs only have 30 days to decide what to do. That decision is almost always driven by whether there's equity left in the property.

If the heirs decide to not turn the house over to the mortgage company, they have six months to sell the property or pay off the reverse mortgage, possibly with a new mortgage. The heirs will have to pay the full loan balance or 95 percent of the home’s appraised value, whichever is less. Heirs can request up to two 90-day extensions. To get that full year, they must show evidence that they are arranging the financing to keep the house, or they are actively trying to sell the house, such as providing a listing document or sales contract. Insurances must be kept on the home the entire time as well. But your heirs won’t have to pay more than the full loan balance or 95 percent of the home’s appraised value, whichever is less.

If you are considering a reverse mortgage, please make sure you know and fully understand all the requirements that will be place don you and that you can meet those requirements so that the loan does not become due during your lifetime. You should also consider the burden the reverse mortgage will be on your heirs. As for the heirs, upon the death of borrower, being aware of the rules that are in place can keep the heirs from making poor decisions when trying to resolve the issue with the reverse mortgage.

Chip LoCoco

Attorney at Law

Many & LoCoco Law Firm

 


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