Reverse mortgage has pros and cons
There are a lot of misconceptions, or flat-out lack of understanding, when it comes to reverse mortgages.
That's according to John Ruybalid of Gateway Mortgage Group. He's been doing reverse mortgages in New Mexico, including several in the East Mountains and Estancia Valley, for over six years.
People sometimes think reverse mortgages are some sort of scam, he said.
"People don't even investigate, when this is something that could really make their lives better right now," he said.
Unlike a traditional mortgage, where the borrower pays back a loan over many years, a reverse mortgage pays the borrower. The loan is taken out against the home equity. According to Ruybalid, it is usually done to get out from under a monthly mortgage payment.
According to the rules of the loan, a 62-year-old person can borrow up to half the appraised value of the home.
So if, for example, the homeowner owes $100,000 on a home that is worth $260,000, he or she could take out a reverse mortgage for up to $130,000. At that point, the homeowner retains the title, but there is a lien, or debt, against the home.
The homeowners can opt for monthly payments and the debt accrues, with interest, or they can establish a line of credit they draw down against. The advantage is that the loan only comes due when the homeowner passes away, sells the home or moves out permanently.
That could make a lot of sense for people in the later stages of life who are struggling to make ends meet.
The AARP cautions that a reverse mortgage should be approached with caution. They may be seen as a "loan of last resort," and homeowners should certainly explore other options as well.
But, for people who are having trouble making monthly expenses, a reverse mortgage can be a ready source of cash, and they can be used for existing mortgage payments. The homeowner may even have some money left over to pay for health care, a credit card debt or other needed expenses.
"It's such a powerful product," Ruybalid said.
The kind of reverse mortgages Ruybalid generally deals in are called Home Equity Conversion Mortgages. These loans are covered by the U.S. Department of Housing and Urban Development's Federal Housing Authority. That means that the loans are federally insured. This protects the family if, for example, the homeowner passes away and then the home is sold for less than the outstanding debt from the reverse mortgage. In that case, the FHA will cover the difference, Ruybalid said.
But it should also be noted that the borrower continues to own the home, despite the lien on the property. That means the homeowner is responsible for paying property taxes and homeowners insurance, and for keeping the house in good repair.
The AARP — which has filed its share of lawsuits against Housing and Urban Development on behalf of people who are dealing with reverse mortgages — also warns that letting property taxes slide is a quick path to foreclosure.
According to the AARP, it is also critical to understand the status of spouses or domestic partners who aren't named in the loan. Should their partner pass away, the surviving heir may find he or she has to repay the loan or sell the house and find a new place to live.
The same applies to the homeowner's children. What that means is they might not, and in all likelihood won't, inherit their parents' property. And for some seniors, that's really the rub.
"A reverse mortgage isn't perfect for everyone," Ruybalid said. "If you really do want to leave the equity to your heirs, maybe a reverse mortgage isn't right for you."
There are other pitfalls to consider.
The Federal Trade Commission warns consumers to be wary of a lender's sales pitch. These kinds of loans can be used to pay for home improvements, for example, but that may not be a wise decision. The FTC Web site states:
"Keep in mind that the total cost of the product or service is the price the seller quotes plus the costs – and fees – tied to getting the reverse mortgage."
It is also a good idea to do one's homework before sitting down with a lender.
To find out more about advantages and potential problems, enter "reverse mortgage" in the search bar of the Department of Housing and Urban Development web site, www.hud.gov.
There are also several articles on reverse mortgages on the AARP web site, www.aarp.org.
Despite their drawbacks, Ruybalid said for some homeowners, a reverse mortgage is simply a relief.
"I've been in the mortgage business for 26 years, and reverse mortgages are the most gratifying," he said. "To see people improve their situation in the latter stages of their life is just very gratifying."