For many seniors, a financial instrument called a reverse mortgage provides a solution in tight economic times. A reverse mortgage — also called a home equity conversion mortgage (HECM) — may allow an eligible consumer to stay in his or her home and receive cash payments based on the equity of that home.
Reverse mortgages were explained in a recent Bangor Daily News article (BDN, Dec. 28). We’re revisiting that topic to stress that reverse mortgages are not for everyone and that they should be entered into only after thorough research with an approved counselor.
That’s not a suggestion — it’s the law. To receive a reverse mortgage, the National Housing Act mandates counseling from a nonprofit agency approved by the Federal Housing Administration. The counselor provides unbiased information about the reverse mortgage process to help the consumer make an informed decision.
That’s not necessarily the kind of information you’ll get from the “as seen on TV” outfits. The stars of yesteryear may believe they’re acting in your best interest … or they may simply be playing a role. Outright scammers are also on the scene, sometimes using reverse mortgage schemes to cheat seniors out of the equity they’ve built up.
Reverse mortgages are designed for homeowners age 62 and older. To qualify, the borrower must live in the home as his or her principal residence and have either no mortgage or just a small amount left on the mortgage. The reverse mortgage allows several methods of payment to the resident, based on the amount of equity in the home.
Let’s say you have more monthly expenses than available income. Under one reverse mortgage arrangement, you might receive monthly payments allowing you to cover those expenses. Perhaps you are expecting some sizeable medical bills; a line of credit might be another scenario. A third option might be a combination of the two.
All of this is not cheap. A few years back, FHA increased the mortgage insurance premium borrowers pay from 0.5 to 1.25 percent of the balance on the reverse mortgage. The borrower pays that, plus compounding interest charges, loan origination and servicing fees, plus closing costs. There’s also a $125 fee for that counseling we mentioned, although members of the Reverse Mortgage Counseling Association (HUD-approved counselors) can waive or delay payment of those fees.
That’s not all. Homeowners are expected to perform normal upkeep on their property. They’re also responsible for paying property taxes and homeowners insurance premiums. If you fail to do those things, the lender can foreclose.
The previous BDN article noted a report to Congress by the Consumer Financial Protection Bureau, forecasting a rise in the use of reverse mortgages by baby boomers. Many have been taking their qualified amounts in a lump sum and refinancing their homes. The Bureau predicts the effect will be to “chip away at their remaining home equity over time.”
It’s all food for a large meal of thought —and counseling — before taking out a reverse mortgage. Will Lund, Superintendent of Maine’s Bureau of Consumer Credit Protection, says senior homeowners might be better served by taking out a home equity loan or home equity line of credit.
For more information, visit the HUD website ( www.hud.gov) and search for “reverse mortgage.”
Consumer Forum is a collaboration of the Bangor Daily News and Northeast CONTACT, Maine’s all-volunteer, nonprofit consumer organization. For assistance with consumer-related issues, including consumer fraud and identity theft, or for information, write Consumer Forum, P.O. Box 486, Brewer 04412, visit http://necontact.wordpress.com or email email@example.com.