LANSING – After finding themselves in dire financial straits, some homeowners will look to reverse mortgages as a solution to their money woes. As we come to the end of Financial Literacy month, Attorney General Dana Nessel re-issues her Reverse Mortgages alert to inform residents of the pros and cons related to this kind of loan.
A reverse mortgage is a type of home equity loan extended, in most cases, to those who are 62 years of age or older. It can be used to make home repairs, pay for medical expenses, or to supplement retirement income. A lender makes monthly payments to you based on the equity in your home, using your home as collateral. As long as you retain ownership of the home and pay the property taxes, the loan will not become due.
“While reverse mortgages can provide financial relief for some, they also come with significant risks and obligations,” said Nessel. “Financial literacy means recognizing the potential pitfalls and long-term impacts a reverse mortgage can have on your financial future. I urge all homeowners considering this kind of loan to seek professional guidance and carefully weigh their options before signing on the dotted line.”
According to the Consumer Financial Protection Bureau (CFPB), other requirements to qualify for a reverse mortgage, in addition to being 62 years of age or older, include:
- Home must be your principal residence.
- Home must be owned outright or have a low mortgage balance that can be paid off when you close on the reverse mortgage.
- Cannot owe any federal debt, such as federal income taxes or federal student loans. The reverse mortgage can be used to pay off these debts.
- Part of the reverse mortgage funds must be set aside for expenses like taxes, insurance, maintenance, and repairs.
- Home must be in good shape. If not, the lender will require repairs before paying the reverse mortgage.
- Completion of HUD-approved reverse mortgage counseling to discuss eligibility, financial implications, and alternatives, like:
- Refinancing – a new traditional mortgage could lower monthly mortgage payments;
- Downsizing – selling your home in favor of a more affordable residence may be your best option for reducing expenses;
- Lowering expenses – many states and localities have programs offering help with property taxes, utilities, and repairs.
- Home equity line of credit (HELOC) – this might be a cheaper way to borrow cash against equity, but qualifying for one depends on your income and credit. They also carry risks and usually require monthly payments.
- Waiting – you can wait until you are older to take out a reverse mortgage when you have less income and higher healthcare costs.
Several types of reverse mortgages are offered, and it is important to understand which one will be most beneficial for you.
- Home Equity Conversion Mortgage (HECM) – This is the most popular type of reverse mortgage. It is insured by the Federal Housing Administration (FHA), which guarantees that the federally-approved lenders meet their obligations.
- Single-Purpose Reverse Mortgage – Often only available to low-to-moderate-income homeowners, the payments from his type of reverse mortgage must be used for the specified purpose indicated by the homeowner, such as home improvements, home repairs, or property taxes.
- Proprietary Reverse Mortgages – These are not FHA-insured and not backed by the companies that provide them. They are a bank’s own loan instruments.
If you decide that taking out a reverse mortgage is the right option for you, the CFPB has a list of scams targeting older homeowners that you should be on the lookout for, such as:
- A family member or caregiver coercing an elderly homeowner into applying for a reverse mortgage, or impersonates the elderly relative during the loan process.
- A bad actor uses an elderly homeowner’s identity, Social Security number, or other personally identifiable information without their knowledge to secure the loan.
- A scammer tells reverse mortgage holders they should use the loan money to invest in a “sure thing” or tries to convince them to take out a reverse mortgage to pay for expensive repairs.
- A scammer convinces reverse mortgage borrowers to sign over their power of attorney, giving the scammer sole access to the reverse mortgage loan money.
AG Nessel recommends homeowners protect themselves by not only seeking advice from a financial counselor, but also confirming whether the loan is federally insured, whether the reverse mortgage repayment is limited to the value of your home once the loan becomes due, and if the mortgage payments are made directly to you. Remember that most reverse mortgages come with a right of rescission, which means you can cancel them within 3 days of closing without penalty.
Reverse mortgages can be a lifeline if you are an older homeowner whose expenses surpass your income. If you know the potential pitfalls of this type of loan, you can proceed with caution. Understanding the risks associated with these financial instruments is key to protecting your financial future and your home equity.
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