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Tags: finance, home equity loans, reverse mortgage pros and cons
 A few weeks ago I talked about a reverse mortgage. To refresh your memory, it is where elderly people can use their home’s equity to get monthly cash payments as long as they live in the home. Both the National Council on the Aging and the National Reverse Mortgage Lenders Association has stated that it can help over 13 million elderly people take care of their care and independence.
Be that as it may one needs to look at the reverse mortgage pros and cons before deciding to go with such a program. The advantage of such a program is that it is tax free. You can take the money either in one lump sum, in monthly installments or as a line of credit.
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And since it is a non-recourse loan, heirs are not liable for the amount borrowed. And if one gets it through the Home Equity Conversion Mortgage or HECM it is federally insured by the U.S. government. Now let’s talk about reverse mortgage cons. While the program does not require a repayment of the loan as long as you live there, the FHA does state that "when you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender." What this means is that if you go live somewhere other than the home you used as equity, the lender will call the debt due on the loan.
This is because you need to use the property as your primary residence. The problem with that is since people who avail of the program are senior citizens, it is possible that they will move either to a home somewhere warmer or move into an assisted care facility. When any of those things occur, the loan will be in default and the residence sold to cover the balance.
Of course any amount of above what is needed to repay the loan will be returned back to the owner. You will also be paying higher fees and it will be at an adjustable interest rates or ARM. And don’t expect the monthly check to be the actual amount that was shown to you before.
This is because in a reverse mortgage, escrow payments such as taxes, insurance, and other such fees, are taken out of the monthly payments to you. So if the initial monthly payment to you is at $1000 expect it to be less than that, say around $800 or less just to be on the safe side.
And you need to also be aware of potential reverse mortgage fraud such as false claims that HECM loans are limited to certain geographic areas only, or that the money you will get is not a loan (which it is), or that the lender has government affiliations. This program is one way to take care of the financial needs of your elderly relations but as I pointed out it is fraught with danger.
Do not think of it as the final solution to your financial needs. I recommend talking to financial experts in that regard so that in the end, you don’t lose your home along with the shirt off your back.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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