The ins and outs of reverse mortgages
Carol Thompson/Traverse City (MI) Record Eagle and Mortgage Daily
22 September 2015
It's unlikely the costs of food, heat and medical care will remain unchanged after retirement.
That can provide difficulty when making ends meet, said Kathy Conley, a housing specialist with GreenPath Financial Wellness.
"When you get to be on a fixed income, your income's not increasing with the level of inflation," she said. "Basic needs are increasing in price while your income is staying the same."
Conley spends her days helping clients consider applying for reverse mortgages, loans often sought as a way to stretch a fixed income.
Reverse mortgages are loans that allow a homeowner to turn some of her or his home value into cash, either as monthly payments or in a line of credit. Qualifying borrowers for most loans must be 62 or older, live in their homes, own the homes outright or have a low mortgage payment. Borrowers must pay taxes and insurance in order to keep the home after taking out a reverse mortgage loan.
Payments depend on the borrower's age, current interest rate and home's value. Loans and interest are repaid when the borrower moves, sells the home or dies.
There are three types of reverse mortgages: Single-purpose reverse mortgages, typically loaned by state and local government agencies or nonprofits; Proprietary reverse mortgages, private loans typically targeted at high-value homes; and Home Equity Conversion Mortgages, federally insured loans backed by the U.S. Department of Housing and Urban Development.
Lisa Haggai is a certified reverse mortgage specialist with The Reverse Mortgage Center in Traverse City. She said reverse mortgages have gained popularity during her 17 years in the industry. She credits the shift to increasing education.
She said people who own homes of all values — from those worth thousands to millions of dollars — seek reverse mortgages.
There are still misconceptions about the loans, Haggai said. One is that mortgage companies take away borrowers' homes. That doesn't happen as long as borrowers keep up their end of the deal and pay property taxes and insurance. Borrowers still own their homes and can sell them. They just have to pay off debts and interest after a sale. Most reverse mortgages have clauses guaranteeing borrowers never have to pay more than the value of their homes.
Reverse mortgages aren't right for everyone. Haggai said people who want to pass their homes to their heirs should avoid reverse mortgages, since they have to be paid off when homeowners move, sell their homes or die. Heirs would either have to pay back the loan or qualify for their own mortgage to keep the house.
Reverse mortgages can also carry a lot of fees, said reverse mortgage consultant Vince Halek, of First Financial Reverse. Lenders can charge origination fees up to 2 percent, or as low as zero.
"You need to shop the fees," he said. "That's the number one thing."
Clients considering reverse mortgages should look out for signs that could point to possible scams.
GreenPath, 3210 Racquet Club Drive in Traverse City, is a listed as HUD's local reverse mortgage counselor. Conley said counselors can't give loans, just provide information.
"I honestly believe that there's always a danger of a scam, because scammers are really adaptable and change quickly to take advantage of anything they can," Conley said. "That's what they do."
Conley identified some red flags for those seeking reverse mortgages.
Lenders can't participate in counseling sessions, and they shouldn't ask. Clients should beware lenders who insist on being part of counseling sessions.
Clients should also beware pressure from friends or family members demanding a homeowner get a reverse mortgage.
"It needs to be the homeowner's decision," Conley said.
Learn more about reverse mortgages by visiting hud.gov. Find HECM counselors by calling (800) 569-4287.