Reverse mortgages are mortgages available to older adults (age 62 and older)
that allow them to borrow money based on the value of their homes. By
accessing the equity in their homes, the idea is that seniors will be
able to eliminate their monthly mortgage payments and use the money saved
for other expenses. Borrowers won’t have to immediately pay back
the debt, either – it can be deferred until the person either moves
out of the home or passes away, meaning that the payment will be taken
out of their estate or from the proceeds of the sale of the home.
Sounds straightforward, right? Unfortunately, while reverse mortgages can
be helpful as part of a well-conceived financial plan, they can prove
disastrous if they are entered into without fully understanding how they
work. In fact, a study conducted in 2015 by the Consumer Financial Protection
Bureau concluded that people who saw ads for reverse mortgages on television
had several misconceptions about exactly how the loans work. Sadly, there
have been many stories of people who obtained a reverse mortgage and later
lost their homes because they didn’t fully understand what they
were getting into.
Considering a reverse mortgage? Here’s what you need to know:
- In a reverse mortgage, the amount of money available to a borrower depends
on the value of their home, how much they still owe on the mortgage, and
the age of the borrower. Borrowers can choose to receive their payment
as a lump sum, a monthly payment, or a line of credit. Repayment is not
due until the borrower moves out of the home or passes away. When the
home is sold by either the borrower or an heir, the proceeds from the
sale go towards paying off the loan.
- Reverse mortgage borrowers will still own their home. The bank places a
lien on the property and has first claim to any proceeds from its sale.
Borrowers must use the home as their primary residence.
- Reverse mortgages may be helpful for seniors who want to avoid selling
off stocks or other assets to cover unexpected costs. They may also opt
for a reverse mortgage to pay down or eliminate payments on existing mortgages
or other debts.
- In a traditional mortgage, interest is paid monthly. In a reverse mortgage,
because the borrowers do not make payments during the life of the loan,
interest payments add up and can threaten to “eat up” the
remaining equity in the home. Borrowers must take these costs into account,
as well as other costs related to the loan, like taxes, homeowner’s
insurance, homeowners association fees, and more. Failure to pay these
costs can result in default and the loan will require immediate repayment.
- Reverse mortgages are not just something couples need to consider –
it’s actually a family decision. Talk to your family about a potential
loan and discuss how it will affect their estates and their heirs’
Reverse mortgages aren’t right for everyone. You should never feel
pressured to take out a reverse mortgage, and with so many scammers preying
on seniors, you should rely on the assistance of a legal professional
before making any decisions. If you are considering a reverse mortgage
to free up funds and pay down debts,
consult with a Chicago consumer lawyer at Sulaiman Law Group, LTD for sound legal advice.
Consultations are available when you call (312) 313-1613.