Live comfortably and worry-free in your later years by tapping the equity in your home with a reverse mortgage!
Who wouldn’t be lured by that advertising message?
It appeals to many seniors — who need unbiased professional advice and a comprehensive exam of their financial well-being, as well as some soul searching, before signing up.
“We will always be in a buyer-beware situation, not necessarily because reverse mortgages are evil, predatory things, but because they have features and have to be managed well, like other financial things in your life,” said Stephanie Bray, head of the Foreclosure Relief Project through New Hampshire Legal Assistance, and an attorney who specializes in helping seniors with reverse mortgage woes.
“Lots of people read the monthly statement from a reverse-mortgage lender and have no idea what it means.”
A reverse mortgage is a loan which gives homeowners 62 or older cash based on their equity in the home. The loan must be repaid when the borrower sells the home or dies.
Some applicants are counseled online and not through nonprofit agencies. They may not understand the strict requirements of them as homeowners, such as having to live at their primary residence for at least six months of the year, and being absent for no more than 12 for medical reasons, although extensions are sometimes granted with the lender’s permission.
They may fail to think through the financial ramifications. A reverse mortgage drains the equity in their home, and what they’ll net should they sell it. It can also nix the possibility of leaving the property to heirs, because the lender sells it when the owner dies to collect the balance owed, unless the estate pays the accumulated total.
“It’s a certain product that fits certain people,” said Joseph Moriarty, a retired reverse mortgage broker and former owner of Guardian Mortgage in Manchester.
Mandatory counseling is required before reverse mortgages are issued, and applicants must score at least five out of 10 on a competency quiz to prove their understanding. The laws pertaining to reverse mortgages have tightened in the past two years, reducing the amount seniors can draw, and requiring credit checks and a full assessment of assets, income, living expenses, consumer debt, tax liens and other financial obligations.
The loan amount is based on creditworthiness, the current interest rate, the assessed value of the primary residence and the applicant’s age — with older people qualifying for larger amounts. Reverse mortgages can’t be taken out on vacation homes or investment real estate.
The youngest person signing must be age 62 or older. This can leave younger spouses in danger of losing the house when the elder, signing partner dies, because reverse mortgages come due when the signer sells, moves or passes on — regardless of whether a spouse or family member is still living there.
Outliving the cash
Another danger arises when elders outlive the money paid out by the reverse mortgage, and are still required to meet its terms: paying for property taxes, homeowner’s insurance and maintenance that can become prohibitively expensive on dwindling budgets.
Experts advise setting aside emergency or slush funds to cover these potential expenses. “You tend not to think long term because you’re on the tail end,” Moriarty said. “It’s important to keep a cash reserve.”
Property tax reductions and deferrals are available to seniors 65 and older who reside in New Hampshire towns, and can shave up to $175,000 off the taxable value of the home, depending on your age and municipality. The deadline for applying for a tax abatement is typically the end of February.
Another life raft is available from the U.S. Department of Housing and Urban Development: an At-Risk Extension, which is available to anyone 80 or older who has a supported terminal illness, a substantiated long-term disability or a unique occupancy need.
It grants a year’s extension on delinquent property taxes and prevents a reverse mortgage lender from foreclosing for 12 months, with extensions possible, said Bray, who represents seniors struggling with terms that have become difficult or impossible to meet.
Sometimes their problems boil down to failing to open or answer the mail: Homeowners with reverse mortgages are required to return a statement verifying that they still live in the property. One woman in her 90s never responded, and a foreclosure sale was conducted and an eviction notice was posted while she was living inside. Bray was able to get the decision reversed in court.
The best preventive medicine for bumps and snares is seeking the advice of a HUD-certified reverse mortgage counselor who can be available in person and by phone before and after you get the loan to explain confusing terms and numbers and offer money-saving suggestions as well as ways to strategically communicate with the lender when problems arise or fester.
Samantha Canton, a housing specialist and certified reverse mortgage counselor at Ahead, a nonprofit affordable housing agency in Littleton, goes over benefits available to cut home and living expenses for seniors, as well as sensible alternatives to reverse mortgages. “If it isn’t really going to fix things, if it’s not going to solve financial problems long term, it’s not worth it because of the expense involved,” Canton said.
A wiser solution may be a home equity loan, which is less expensive initially and over time, but requires monthly payments. Sometimes it’s better to refinance an existing mortgage, or use a reverse mortgage to pay off a conventional one. Occasionally it makes sense to take in a renter, she said.
And it’s always crucial to take stock of your continued ability to afford the home. This may mean coming to the realization that it’s smartest to sell and downsize.
“There are a lot of emotions tied up in it,” Canton said. She’s had clients in New Hampshire and Vermont report, after consulting her for reverse mortgages, “Letting my home go and moving into a senior apartment was a huge relief to me. I’m where I need to be.”