The reverse mortgage loan is a type of home loan that is available to seniors who currently own a home and have home equity. It has been a source of much controversy in recent years because of the fact that some seniors have been swindled out of their homes as a result of predatory reverse mortgage lending. However, reverse mortgages can be a great way for the elderly to access income and to afford to remain in their homes after retirement. In order to maximize the benefits of the reverse mortgage loan, seniors need to know what to do to keep themselves safe from bad lenders.
What is a Reverse Mortgage?
The reverse mortgage is a home loan which allows you to access income through your home equity. You work with a lender to determine the value of your home. You can then access a percentage of that value and get it in cash. The cash can be received in a number of ways including a lump sum payment, monthly payments and a line of credit. When the borrower opts to sell the home (or passes away and the home is inherited), the money that has been borrowed through these payments come due.
Why Get a Reverse Mortgage Loan?
The main reason that seniors get a reverse mortgage loan is because they want to be able to remain in their homes after retirement but can't afford to do so on their retirement income alone. The money allows them to pay their property taxes and afford repairs that are needed on the home. They may also use the reverse mortgage money to pay other high interest bills, such as credit cards. In some cases, the senior will use the money to realize lifelong dreams such as world travel. The money is the borrower's to do with whatever he or she would like to do.
Problems with the Reverse Mortgage Loan
Unfortunately, many seniors have taken out a reverse mortgage loan that turned out to be bad for them. This was usually caused by the fact that they didn't clearly understand the terms of the loan. In some cases, they and their relatives didn't have the money to pay back the home mortgage when the house was sold and so the house was lost to the bank. In other cases, the loan turned out not to be a reverse mortgage and ended up requiring payback at an unexpected time. Much of this has occurred as the result of what is termed “predatory lending” in which reverse mortgage lenders are pressuring seniors into taking out loans that aren't right for them.
Steps to Take to Protect Yourself from Predatory Lending
Seniors interested in making use of the reverse mortgage loan should protect themselves to maximize the benefits of the loan. Here are the steps that the savvy senior should take:
- Research the different types of reverse mortgage loans available. There are three basic types of reverse mortgage loans. The HECM Reverse Mortgage is a loan program available through the federal government and it is considered the safest of the loans. The Home Keeper Reverse Mortgage is a Fannie Mae loan which is considered relatively safe. Then there are private lender reverse mortgages which may be good but are typically higher risk for borrowers.
- Find a lender that you're comfortable with. If you feel any sales pressure at all, find someone else to work with.
- Attend a reverse mortgage seminar. Many senior centers and banks host free seminars on a regular basis where you can go to get information.
- Ask questions. Make sure you understand every detail of the loan before you sign that dotted line.
- Get a third party to help you understand the terms of the loan. A financial advisor, a business-savvy adult child or a good friend who knows what real estate loans are all about can be invaluable in assisting you to know what you're getting into.
- Get reverse mortgage counseling through the federal government. You will be required to get reverse mortgage counseling before you get the loan so take the time to get the good kind.
- Create a plan for the money. If you have a budget and spending plan in mind, you'll have better control over your new finances.
- Read the news. The government is working hard to make sure that reverse mortgage loans are increasingly safer for seniors. Pay attention to the changes that are being made so you always know the best way to protect yourself.
Reverse Mortgage Alternatives
The reverse mortgage loan can be a safe loan if you make sure that you know what you're getting yourself into when you borrow money this way. However, it's not always the best home loan out there. Consider reverse mortgage alternatives (such as traditional home loan refinancing and the new REX agreement loan) before making a final decision as to whether or not the reverse mortgage is right for you.
