The Good and the Bad of Reverse Mortgages

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Baby boomers have the distinct privilege of getting to experience a convergence of events that have combined to change the landscape of retirement. While the word retirement may evoke images days spent golfing in Florida, the new reality can look a lot bleaker and include more years of punching that time clock. Here are just some of the contributing factors that are working to make retirement look more like a pipe dream:

  • People are living longer, which means they have to stretch their retirement savings over a longer period of time.
  • Many baby boomers put retirement funds towards a college education for their kids instead of stashing away retirement funds.
  • The Great Recession hit baby boomers especially hard. Long periods of unemployment meant that workers were not contributing to retirement plans and some were even forced to dip into their retirement funds in order to make ends meet.
  • The rising cost of healthcare and the prevalence of chronic diseases are also depleting retirement funds at an accelerated rate.

Starting around the year 2000, financial institutions began offering seniors who may be facing one or a combination of the above mentioned factors, the option of taking out a reverse mortgage. Since that time, this type of loan has become increasingly popular as more seniors find themselves strapped for cash and putting off retirement. For some seniors, a reverse mortgage may offer a viable solution, but it can also come with its fair share of risk, so you need to make sure that you know all the facts before you sign any paperwork.

How Reverse Mortgages Work:

Reverse mortgages have been especially designed for anyone over the age of 62 who owns their home, but may not have enough regular income to support themselves. The goal is to allow seniors access to the equity in their home without having to sell it and move. Homeowners can choose to receive one lump sum or monthly payments while remaining in their home. They are responsible for paying taxes and insurance and keeping up with repairs.

If the borrower dies or moves to a nursing facility before the entire amount of the loan has been paid out, then the borrower or one of their family members can retain ownership of the home by paying the remaining balance in full. Typically, surviving family members will sell the home to repay the loan.

Why reverse Mortgages Have a Bad Reputation?

As reverse mortgages have become more popular, they have also become the target of some arguably well founded criticism. Here are some examples of why a reverse mortgage may not be the right choice for you:

If the borrower moves out of the home and into a nursing facility, anyone still in the house must move out. This situation happens all too often because borrowers are eligible to receive higher payments if there is only one name listed on the mortgage. It is very tempting just include one name, but it can cause some headaches down the road. For example, if the spouse listed on the mortgage dies, then the remaining spouse will either have to sell the house or pay back the loan. It is something that happens all too often and only adds to the stress of losing a loved one.

Inflation can also present some problems. If you choose to receive monthly payments, the pre-determined amount is not designed to keep up with the rate of inflation. You will be living on a fixed income while the cost of living may continue to increase.

There is also the possibility that the loan debt will be greater than the market value of the home when the borrower dies. This became a problem during the housing bubble when home prices dramatically dropped all over the country. Natural disasters, like Super Storm Sandy, can also leave heirs with a debt far larger than the value of the home. Probably the last thing anyone wants to leave their family with is an insurmountable debt.

There are some measures that have been put in place in order to protect consumers. First, anyone applying for a reverse mortgage must go through a financial counseling session given by an approved organization. While this might seem like a good idea that will make sure people are well informed before making major decisions, the downside is that applicants have to pay upwards of $100 for a session.

The Future of Reverse Mortgages

Recent changes to laws governing reverse mortgages by way of the Reverse Mortgage Stabilization Act of 2013, have put tougher restrictions on who qualifies for a reverse mortgage and how much of their home’s equity they can access. Previously, lenders did not look at credit scores, but starting this month borrowers will have to provide that information and they will be required to set aside money to help cover property taxes and insurance. These new rules are meant to drive down high default rates that were a result of homeowners being unable to pay taxes and insurance.

In addition, there will now be limits on the amount of money you will be able to receive at closing. The lender will have the right to determine how much money will be needed based on your financial situation. Hopefully, this will help people avoid taking unnecessary risks by withdrawing too much credit on their home equity.
Finally, AARP has led efforts to ensure that spouses can no longer be evicted from their own homes in the event that the borrower dies. Lenders will have to adjust previous practices that made it more beneficial to only include one name on the loan.

Conclusion

While these regulations have been put in place to address existing problems and protect both lenders and borrowers, one side effect is that fewer people will be able to qualify for a reverse mortgage loan. More seniors may find themselves in tough financial situations that require them to leave the home where they have spent most of their lives.

Ultimately, reverse mortgages may be the right choice for certain seniors, but they should only be used in worst case scenario situations because there are simply too many uncontrollable variables that could leave you or your family in a worse financial situation than when you began. As with most important decisions, being well informed is key. Yes, reverse mortgages have been getting a bad rap lately, but the truth is that improvements have been made and they may just be the right tool to help baby boomers enjoy retirement.

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