The topic of reverse mortgages is back in the spotlight. Even Tom Selig, the Law and Order actor who’s been stopping crime for decades now, is even getting into the act by pitching them on television. If Tom Selig thinks reverse mortgages are okay for people 62 years and up to consider, they must be, right?
The premise of reverse mortgages goes something like this. Instead of being responsible for making continuing mortgage payments on their home, the homeowner essentially “borrows” from the mortgage company against the equity in their home to convert it back to the homeowner, the borrower, in monthly payments. In other words, the mortgage company pays the homeowner every month instead of the homeowner paying the mortgage company every month. Sounds like a pretty good deal, right?
Not so fast. The Consumer Financial Protection Bureau recently took action against three mortgage companies for falsely advertising and not providing essential stipulations concerning reverse mortgage loan transactions. One key piece of information is that the borrowers must pay the ongoing taxes, insurance costs and upkeep/maintenance costs involved with the homes or else the homes go into default.
Other red flags that may be involved with reverse mortgages include
1. They are applicable to primary residences only.
2. Lenders do not loan the home’s full purchase price so the homeowner must have other assets to make up the difference in the equity borrowed and the “full” price of the home… assets such as savings, the sale of other property or having family members co-sign the loan.
3. The debt on the home may eventually grow into more than the home is worth.
4. There is an upfront mortgage insurance premium on reverse mortgages of 1.25% annually. And, interest rates on reverse mortgages run higher that traditional mortgages so that the eventual payoff to the mortgage company when the home is sold may be much higher than the total payments the borrowers received due to the structure of the loan…this according to Allan Shayanfekr, CEO of Great Necks Sharestates, an online platform for reverse mortgages.
5. The monthly proceeds are, in fact, borrowed funds, not income. Steven Klein, the reverse mortgage director at AmCap Mortgage in Greenville, South Carolina, says that some public assistance programs such as Medicaid may be affected by those reverse mortgage loan payments.
6. If the homeowner is a parent with adult children, those children may see the home as their rightful inheritance. However, when the parent or borrower dies, the heirs have one year to sell the house and use the proceeds of the sale to pay off the loan, interest rates and fees involved with the reverse mortgage transaction.
All in all, reverse mortgages are very complicated transactions, no matter what Tom Selig says about them on television. You as a professional real estate agent can be a first line of defense for your clients by making sure that they have ALL the necessary information about reverse mortgages and that they understand it.
