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Reverse mortgages: Pros, cons and recent changes
SHERRY KARABIN
Legal News Reporter
Published: October 31, 2017
It’s been about a year since 86-year-old Tallmadge resident Bill Parthe took a reverse mortgage on his home.
Parthe, who is widowed, said he was having trouble making ends meet and it seemed like his best option.
“I had heard about reverse mortgages, so I did some research,” Parthe said. “I met with a counselor who discussed the details and helped me complete the process.
“It has worked out well for me,” he said. “My house was paid for so it was like borrowing from an investment that I had already made.”
While Parthe is happy with his decision, Steve Baughman, housing specialist at Fair Housing Contact Service in Akron, said a reverse mortgage is not the right solution for everyone, but it is worth investigating.
“Some people may have a large existing mortgage to pay off, which a reverse mortgage may not fully pay off,” said Baughman, who counseled Parthe. “While another person could be in a better situation with a small mortgage to pay off or no mortgage to pay off, like Mr. Parthe.
“One homeowner’s financial situation is different from the next homeowner, so what may work for one may not work for the other,” he said. “But they are certainly an option worth considering to see if one can benefit from it or not.”
Baughman said there are a number of variables and requirements that homeowners need to be aware of before deciding if a reverse mortgage is their best option.
First, the home must be a primary residence and the person taking the mortgage must be at least 62.
“The most important consideration is whether there is enough equity in the home to make it work,” he said. “If the homeowner has a high mortgage on the property in relation to its appraised value, a reverse mortgage may not be an option.”
The homeowner/borrower must meet certain income and credit requirements as well.
“Underwriters are required to do a financial assessment to determine whether or not the potential borrower(s) have had a good history of a willingness and ability to pay creditors, property taxes and insurance on time,” said Baughman.
“Depending on this assessment, underwriters may require a set-aside for taxes and insurance to help fully pay or partially pay them for the lifetime of the youngest borrower. This may reduce the amount they could access, and sometimes if it’s a large enough set-aside from the loan proceeds, may prevent them from having anything left over for other needs.”
Marta Williger, a certified elder law attorney at the Williger Legal Group, said a reverse mortgage is often not the right option for a person who wants his/her heirs to have an asset that is “worth something.
“A reverse mortgage lets the homeowner pull out a portion of the equity in the home while accruing high interest costs as years go on,” said Williger. “Depending upon the amount of equity borrowed and how long the homeowner lives, the heirs could be left with a home that is worthless.
“Although the compound fees and interest may eat up all of the value of the house, the borrower or his/her heirs will never owe any more than the total value of the house,” she said.
“If a Transfer on Death deed is used to pass on the real estate to the beneficiary, the beneficiary will have to satisfy the debt.”
The U.S. Department of Housing and Urban Development (HUD) does require the homeowner to undergo a counseling session before the process can proceed.
On Oct. 2, HUD instituted new rules governing reverse mortgages also known as Home Equity Conversion Mortgages that affect just how much of the equity a senior homeowner can borrow.
Barbara Cripple, a reverse mortgage specialist, who owns Affinity Home Equity Solutions said under the new rules a homeowner will be allowed to borrow approximately 6 to 11 percent less.
Cripple said she is seeing about a 7 percent decrease on average.
“Interest does accrue on the loan, but the homeowner does not have to pay it,” Cripple said. “The interest is taken out of the proceeds of the sale when the house is sold.”
Williger said the homeowner could receive the equity in a lump sum, as monthly income or as a line of credit.
The reverse mortgage does not absolve the homeowner from paying property taxes, insurance and any association dues on the property.
“If a homeowner cannot afford to make those payments, they could still lose the home,” Cripple said. “The other consideration might be if your adult children are living with you, whether they will be able to pay off the debt on the home after you are gone. If they can’t they will have to sell the home to satisfy the loan, leaving them with nowhere to live.”
Other changes that took effect on Oct. 2 include an increase in the up-front mortgage insurance premium from 0.5 percent, which was available to some borrowers, to a flat rate of 2 percent.
“Prior to Oct. 2, homeowners borrowing less than 60 percent of the available equity during the first year of the loan paid the lower rate,” said Cripple. “Those who borrowed more than 60 percent paid 2.5 percent.
“This change does eliminate a lot of the confusion,” she said.
There is some good news, said Cripple.
The annual ongoing insurance premium has been reduced from 1.25 percent to 0.5 percent.
Several years ago, HUD made another change that allows a non-borrowing spouse to remain in the home after his/her spouse passes away as long as certain conditions are met, including that the non-borrowing spouse was married to the borrower at the time of the reverse mortgage closing and that the spousal status was disclosed.
Cripple said the popularity of reverse mortgages is on the rise.
“This used to be the last resort and the borrower was older and often a widow,” Cripple said.
“Now we are seeing a trend in which the borrower is between 62 and 65 and the homeowner is using a reverse mortgage to finance the purchase of a new, smaller home, usually closer to friends or family.”
Williger said given the fees and other variables involved, it is “a terrible idea” to take a reverse mortgage to purchase luxury items such as a new car or a vacation home. “If that is the goal, it is best to go with more traditional loan options,” said Williger.