When you have most of your wealth tied up in your home, it’s referred to as being “house rich, cash poor.”
Many seniors who find themselves in this position may be enticed by the commercials offering salvation. They are wooed by a chance to tap into their home’s equity with a reverse mortgage. Smooth television ads make it appear to be a no-brainer. It’s actually much more complicated.
The most appealing quality of this type of loan is that, unlike a traditional mortgage, you don’t have to make monthly payments. The lender doesn’t collect until the homeowner moves, sells or dies. Once the home is sold, any equity that remains after the loan is repaid is distributed to the person’s estate.
To qualify, you have to be 62 or older. The reverse mortgage market isn’t huge — about 1 percent of all mortgages — but reverse mortgage lenders are likely to pump up the volume in coming years as more seniors retire. For a lot of people, the only source of big money for them is the equity in their homes, says the Consumer Financial Protection Bureau.
In 2013, a typical household had only $111,000 in 401(k) or IRA savings, according to the Center for Retirement Research at Boston College. The center found that too many people are dipping into their retirement accounts during their working years, causing what is called a “leakage.”
But a lot of seniors have equity in their homes — about $3.84 trillion, according to one mortgage industry survey. They can tap into that equity by selling or taking out a home equity loan or line of credit. But selling isn’t an option if they want to stay put, and they would have to make payments on the line of credit or loan. Given those options, it’s no wonder a reverse mortgage can be appealing.
The CFPB, in a report analyzing 1,200 reverse mortgage complaints received from 2011 to the end of last year, found that many people are confused about this type of loan.
The fact that counseling is required from a government-approved agency for loans made through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program is an indication of the complexity of this financial product. Still, many seniors don’t understand what they are getting into.
People complained to the CFPB about their loan terms, the loan servicing companies, and not being able to add a borrower. Adult children complained that lenders refused to add them as an additional borrower or allow them to “assume” the loan for an aging or deceased parent, the report said.
To help, the CFPB has issued some tips about reverse mortgages. Here are the three important things the agency says you or your relatives should know:
▪ Double check that your loan records accurately reflect who is on the mortgage.
▪ Be sure to understand the risks of not including a spouse on the loan. Often an older spouse will take out a reverse mortgage in his or her name only because older homeowners are able to borrow against a greater percentage of the home’s equity.
“Non-borrowing spouses submit complaints distraught that they are facing foreclosure and about to lose their home after their husband or wife dies,” according to the report. “Other non-borrowing spouses submit complaints worried about their ability to remain in their home should the older spouse die first.”
If you decide it’s financially better for just one spouse to take out a reverse mortgage, be sure to have a plan for the non-borrowing spouse. Can a surviving spouse stay in the home? The Department of Housing and Urban Development has attempted to address the issue of non-borrowing spouses. Under certain conditions, some spouses may be able to stay but others may not get that protection.
The CFPB recommends that if only one spouse is on the mortgage, you should find out if the loan servicer will permit the non-borrowing spouse to qualify for a repayment deferral allowing him or her to remain in the home.
▪ Talk to your heirs. If you have adult children or other relatives living in the house, be sure they understand what could happen if the reverse mortgage becomes due.
Go to the CFPB web site at www.consumerfinance.gov and click the link for the agency’s consumer advisory on reverse mortgages.
There are some pros to a reverse mortgage. But the complexity of the product means you better be just as aware of the cons.
Hear Michelle Singletary’s personal finance reports on www.npr.org. Readers may write to her c/o The Washington Post, 1150 15th St., NW, Washington DC 20081.