By Treva Lind
The Spokesman-Review
Legal experts still advise caution, but reverse mortgages are showing a mild resurgence both in the Pacific Northwest and nationally. As baby boomers age, the trend could grow.
Some seniors consider them when cash-poor and house-rich, or facing major medical costs, if they’ve built equity in a home. Still, issues can emerge for them and heirs, so it pays to read the fine print, said Julia Dooris McGann, Washington state assistant attorney general in the consumer protection division.
A reverse mortgage is a type of home loan allowing homeowners who are 62 or older to access the home equity they’ve built up and defer payment of the loan until they die, sell or move out. If approved, homeowners borrowing against equity take the cash in a lump sum or as monthly income, as a line of credit to tap when needed, or a combination.
“The bottom line is, it’s not free money,” McGann said.
“There are some circumstances under which reverse mortgages make sense, but they’re rare,” she said. “It really depends on the need and their circumstances. I’d urge caution whenever anyone is considering a reverse mortgage, and it’s well worth a second look before getting into them.”
Money gained isn’t free because the loan balance grows over time and must be repaid eventually, she said. Other costs can be similar to a regular mortgage such as origination fees, closing costs, interest charges, and sometimes a loan service fee and mortgage insurance premiums.
The U.S. Department of Housing and Urban Development tightened lending criteria for reverse mortgages in recent years. Changes require that lenders determine whether would-be borrowers have enough income to keep up with property taxes and homeowners insurance so they don’t default on the loan and, possibly, lose their home.
Under financial pressures
Many people who get reverse mortgages do so because they’re strapped for monthly income and want to stay in their homes, said Jack Tenold, a Spokane branch manager for Caliber Home Loans. If a loan amount comes due because of death or a move, he said he’s found that most banks will work with families.
“The banks I’ve found have been very good at working with heirs and survivors to let them market the home and sell it,” he said. “They send letters and try to help people.”
Tenold says another kind of reverse mortgage borrower might be a professional who just turned 62.
Some younger seniors would rather have it arranged as a line of credit that grows over time and is tied to the course of interest rates, with unused portions converted to monthly income years later. Others might need immediate cash for a specific reason.
“Up until a few years ago, you could take all of it in cash in one big lump sum, but that has changed,” Tenold said. Now, people can receive a bulk amount to pay against an existing lien, but otherwise, “only 60 percent can be given to you during the first 12 months.”
Money received is usually tax-free, McGann said.
Dick Sayre, a Spokane elder law attorney, has seen scenarios of homeowners with a high-value home but large costs to maintain that house and very little income, so they seek a reverse mortgage. But generally, he said, “They aren’t appropriate for most people.”
In December, the Consumer Financial Protection Bureau took action against three reverse mortgage companies for deceptive ads, including claims that consumers couldn’t lose their homes.
The CFPB ordered American Advisors Group, Reverse Mortgage Solutions, and Aegean Financial to cease such advertising practices, implement systems to comply with laws, and pay penalties.
AAG commercials often depict actors Tom Selleck or Fred Thompson, two people who portrayed TV characters in positions of trust, a police commissioner and district attorney, McGann said.
“When commercials say, ‘All will be good,’ to me, this should be your last resort,” she said. “If you default, don’t pay insurance or maintenance and taxes, you could lose your house.”
Understanding a reverse mortgage’s terms is what really matters, or people should consider having a real estate or estate planning attorney read over legalities, McGann said.
Some conditions allow a homeowner to move into a care facility for a certain number of months without requiring repayment, if the home is looked after, she said. In most cases, an eligible spouse who is younger also can stay in the home if the other spouse dies, depending on terms.
She cautions people also should realize they still have to pay home-related costs, including property taxes, insurance, utilities and property maintenance. Adult children might end up resolving issues.
“It seems people will go into them hoping they’ll have extra cash in later years, but they end up working a hardship upon their heirs,” McGann said.
“Many reverse mortgage contracts have a clause that says when the surviving of two spouses dies or leaves the home, the entire balance of the reverse mortgage is due within 30 days,” McGann said. “The heirs may have to immediately sell the house or let it go to foreclosure, unless the heirs have money to pay off the reverse mortgage balance.”
Loss of equity
People arranging estate matters consider equity in a home as part of what is passed on after someone dies, said Michael Whipple, of Whipple Law Group in Spokane.
“Among general concerns I have about a reverse mortgage is you lose all your equity,” Whipple said.
Some homeowners might consider reverse mortgages as they face costs from aging in place and look for ways to qualify for Medicaid. But Whipple cautioned that people should consider other lending vehicles.
“I don’t think people want to crunch the numbers,” he said. “Certainly it’s a way to cash out equity in the property and receive money, but you need to look at the terms. If I take out a reverse mortgage and I die three days later, what happens?”
The loan amount has to be paid back, or the institution that did the lending would sell the home to get money owed, he said.
Whipple suggests three crucial questions when reviewing terms:
What is the rate, and calculation of all costs?
How does that compare to another financial vehicle such as home equity loan or line of credit?
What happens after you die or for a spouse to remain?
McGann gave the example of a 2016 news segment about a case in Florida, when the daughter of deceased parents who had a reverse mortgage got named in a foreclosure and received attorney letters and calls. However, the bank had made a mistake and should have taken over ownership before the home sat empty, property value declined and it went into foreclosure.
“So things can go very, very wrong,” she said.
If the woman had contacted the bank and made sure the home was sold, she might have received a portion from the sale long before the value declined. Home sale proceeds beyond the amount owed belong to a spouse or estate, which means any remaining equity can be transferred to heirs, and no debt is passed along to the estate or heirs, HUD information says.
If someone suspects any questionable lending practices, McGann said people can file a complaint online at www.atg.wa.gov.
People can locate an FHA-approved lender or find information to contact a counselor by going online at www.hud.gov and searching under Home Equity Conversion Morgage. AARP also offers information at www.aarp.org (search for reverse mortgages).
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