Understanding the Myths and Truths about Reverse Mortgages
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by Scott Kaul
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by
Scott Kaul
There’s
a saying that old habits die hard; I think the same thing can be
said for old stereotypes. There has been a lot of national attention
surrounding Reverse Mortgages recently, from NBC Nightly News, to
CNN, to the Rush Limbaugh show, to AARP, to local newspapers and
other radio shows. The common theme among most of these programs
has been that Reverse Mortgages make sense, but that many people
aren’t willing to learn about them because of a pre-conceived negative
stereotype.
The fact is, however, that Reverse Mortgages are
up in volume 109% compared to last year, and over 500% the past
four years. Why? Most Seniors would prefer to live at home the rest
of their lives. A 2005 study by The National Council on Aging (NCOA)
shows that 85% of seniors would prefer to remain at home, but of
those, 74% are living with physical and mental impairments making
it hard to remain home. Considering the fact that most seniors live
on a fixed income and a limited budget, finding the money to make
these home modifications is difficult. The senior is then left with
the difficult decision of selling the home and moving into a retirement
facility, or obtaining a conventional loan from the bank to make
home modifications and being forced to make monthly payments on
that loan.
Many people are either unaware of the third option…….a
Reverse Mortgage……or based on pre-conceived notions, are unwilling
to investigate it further in order to determine for themselves if
the product meets their needs. As with any negative stereotype,
it’s important to understand how and why it was formed, whether
the facts of the situation remain the same, and then form your own
opinion. Here are some commonly asked questions regarding Reverse
Mortgages which may help you to determine if this product is right
for you:
What is a HUD Reverse Mortgage?
Plain and simple, a HUD Reverse Mortgage is a U.S.
Government backed loan based on the value of your home, the age
of the youngest borrower, and the area in which you live. There
are no income, credit or health requirements. And as opposed to
a conventional loan, you do not make monthly payments; instead,
the payments are made to you, hence the word "reverse".
Designed exclusively for Senior Citizens, a Reverse
Mortgage allows seniors, age 62 years and older, to borrow from
the equity in their home, but make no loan payments until they sell
their home or permanently leave their residence. This mortgage program
was designed and is insured by the Federal Government to not only
assist seniors, but also to protect them and allow seniors to maintain
their financial independence.
Why Have Reverse Mortgages Developed a Bad Reputation?
Although Reverse Mortgages have been around since
the mid 1960’s, it was a fairly unregulated industry until the 1980’s.
A few unscrupulous lenders used Reverse Mortgages to take advantage
of seniors, and in many cases, ended up taking their houses away
from them. Because of the actions of these dishonest lenders, the
bad reputation Reverse Mortgages received was definitely deserved.
Realizing that the concept of a Reverse Mortgage
was right, but the application was wrong, the U.S. Government became
involved with them in the 1980’s and regulated the industry through
The Department of Housing and Urban Development. Strict government
restrictions were implemented assuring such occurrences won’t happen
again. However, old stereotypes die hard, and the misguided belief
that the senior will lose their home is still the single largest
miss-conception and the industry as a whole is still struggling
to overcome that stigma.
How Can I Be Sure I’m Not Being Taken Advantage
Of?
First and foremost, confirm the type of Reverse
Mortgage you are looking at is a HUD insured Reverse Mortgage. The
majority of Reverse Mortgages (roughly 95%) are HUD insured, but
a handful of them are not. Just because a Reverse Mortgage isn’t
HUD insured doesn’t necessarily mean it’s a bad product, but with
HUD Reverse Mortgages you can be assured that both the lender and
the loan broker adhere to stringent HUD standards, and that it is
backed by the Federal Government.
Secondly, confirm the loan broker you are dealing
with is approved by HUD and is a member of the National Reverse
Mortgage Lenders Association (NRMLA). In order to be HUD certified,
a broker must agree to have an independent audit performed on their
business on an annual basis covering financials, policies, procedures,
employment practices, and various other internal operations. Needless
to say, maintaining a HUD certification is no easy task. Those loan
brokers who are also a member of NRMLA should provide an additional
level of confidence for the borrower, as NRMLA members are required
to adhere to a strict Code of Conduct which are in addition to the
standards imposed by HUD.
And finally, all HUD Reverse Mortgage candidates
are required to meet with an independent HUD certified counselor.
The counselor is not an employee of either the lender or the broker,
and is charged with the responsibility of ensuring the senior understands
all the options available to them (including options to obtain money
other than through a Reverse Mortgage).
How Can I Be Assured My Home Won’t Be Taken
From Me?
One of the biggest changes HUD made when regulating
the Reverse Mortgage industry was to keep the homeowner on title
to the home. Whereas this didn’t use to be the case, the homeowner
who has a HUD insured Reverse Mortgage remains on title to the home.
The loan isn’t paid back until both the occupants (or the single
occupant for those living alone) leave the home permanently. Since
there are no payments to make on a Reverse Mortgage, defaulting
on the payment isn’t a possibility. Even if the amount of the loan
ends up being greater than the value of the home, HUD guarantees
the senior (or their estate) will never owe more than the value
of the home, and that no other assets will be used to pay off that
debt.
When Does a Reverse Mortgage Not Make Sense?
Although many of the loan costs are similar to
a standard Home Equity Loan or a conventional Mortgage, depending
upon how the senior wants the money distributed (either in a lump
sum, monthly payments, or in a line of credit) can make the cost
of a Reverse Mortgage a little more expensive. For that reason,
if a senior is not planning to remain in the home for a period of
3-5 years after the loan is taken out, it may be advisable to consider
other alternatives. These loan costs, however, can be included in
the loan itself, thus eliminating any out-of-pocket expenses.
If you have further questions about Reverse Mortgages,
or would like to speak with someone regarding your particular situation,
feel free to call Senior Life Solutions at 360-944-9004, or toll
free at 877-944-9004
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