March 28, 2013
Reverse Mortgage

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     My client is thinking about a reverse mortgage. "What should I know before I sign the papers?" he asked.

     To begin with, asking me is fine. But you should also ask that question of a financial advisor who is neutral regarding reverse mortgages.

     You should know that a "reverse mortgage" is a very expensive loan, and call it what it is: a "Home Equity Conversion Mortgage" or HECM. Calling it by its name will remind you every time it comes to mind that you are converting, or spending, the equity in your home.

     You should know that the paperwork is considered by some to be too complex for ordinary seniors to understand, and that is one reason that the law requires that you meet with a HUD ("housing and urban development") approved counselor before the closing on the loan.

     You should meet with the HUD approved counselor early enough in the negotiations that you can ask the Counselor about options you may have to meet the goal that you may have by using your home equity mortgage.

     You should know that some Lenders, just like Buyers and Sellers in the marketplace, are predators. Some things to watch for: 1) Beware if the Lender is pressuring you to take a loan to invest in, or buy something that the Lender is selling; 2) There are no credit or income requirements to get the loan, but you still must keep up with property taxes and insurance bills related to your equity mortgage, or you could lose your home.

     You should know that the amount you can borrow is based on the value of your home, the ages of the borrowers, and the interest rates. (The lender won't lend you more than the value of the house, less the anticipated costs you will have to pay to finance the loan, and a projection as to the life expectancy of the Borrowers [the mortgage will be paid off when the house is sold, or the Borrowers both die] and the amount of interest that the law allows them to charge for the mortgage).

     You should know that the Lender can raise the interest rate according to the terms in the contract, which is sometimes as often as weekly.

     You should know that you still own your home, but everything you borrowed and the Lender's assessments, will have to be paid back, when you sell the house or die.

     You should know that there will be monthly service charges to cover the Lender's expenses.

     You should know that if you put all of your loan money into a bank account at one time you may make yourself ineligible for necessary programs which you now qualify for based upon your assets (most government programs include money in their asset evaluation, but do not include the equity in the home that you live in).

     You should know that there are circumstances where an equity loan is exactly the right solution.

     You should know that if you borrow the money now, you may not have it when you need it later on.

     You should know that once the equity is gone, it's gone.


Posted by Peggy S. Hedrick at 2:39pm

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So what are the circumstances where the equity loan is “exactly the right solution”?
Charles W. Hedrick
Posted by Charles Hedrick on 3/29/2013 at 9:35am
"Exactly" is probably "mis-spoken." But two circumstances that the parties were determined were appropriate involved providing bail for a family member in jail, and another medical matching funds for a transplant. Both had an immediate need with no alternative resource, the equity in the home matched the need, and the parties' circumstances made them able to pay the expenses related to the loan.
Posted by Peggy S. Hedrick on 3/30/2013 at 7:25am