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Reverse mortgage — what is that thing?

By: 8 November 2010 7 Comments

Over the past few months, I’ve seen an increasing number of advertisements for reverse mortgages.

Those have been around for some time, but they appear to be gaining in popularity. What exactly are they?

John Moore of the Reverse Mortgage USA office in Springdale deals with those loans all day long. He was good enough to send over some information defining what reverse mortgages are and who might benefit from them.

In a nutshell, a reverse mortgage is insured by the Federal Housing Administration (FHA) and is available to homeowners who are at least 62-years-old. The mortgage is a loan through which homeowners can cash out the equity in their homes. Generally, the cash is received as a lump sum payment and the borrower still owns the house.

The loan doesn’t have to be paid back so long as the home at issue is the borrowers primary residence. The loan will have to be paid back upon the death of the homeowner or if the home is sold. In most cases, of course, the home is owned by a husband and wife and the loan generally has to be paid back on the death of the last surviving spouse.

A reverse mortgage is a way through which people who do have equity in their homes can take cash for that equity and use it immediately for whatever expenses they might have. If a homeowner already has a mortgage, the proceeds from the reverse mortgage will be used to pay off that loan. The homeowner, of course, will no longer have to worry about a monthly mortgage payment.

There are some things the homeowner must still pay – property taxes, utility bills, home insurance and the typical maintenance costs of the house. The failure to meet those obligations can result in the lender initiating foreclosure proceedings.

An obvious question is what happens on the death of the homeowner, the sale of the house or the homeowner being moved into a residential care facility? The loan must be paid back. Typically, the homeowners’ estate is responsible for paying back the mortgage. That, of course, means that any survivors may inherit less money. Those survivors, by the way, typically have the option of taking out a loan to pay off the reverse mortgage and take possession of the house.

Complicated? The U.S. Department of Housing and Urban Affairs (HUD) believes it is a complicated issue and requires anyone wanting to take out a reverse mortgage to go through counseling. The idea, of course, is that a HUD-certified counselor can make sure the homeowner knows the legal and financial obligations that come with a reverse mortgage.

Also, the costs associated with a reverse mortgage are generally higher than those that come with a conventional home loan. That’s something for potential borrowers to keep in mind.

A reverse mortgage is just another option for homeowners to consider. In some cases, the ability to essentially receive cash that’s equal to the equity in a home while still retaining ownership of the house can be a good decision.

Arkansans considering taking out reverse mortgages are encouraged to get in touch with a lender that handles them to find out if the loan will benefit them.

Column written and distributed to Arkansas publications on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email = Ethan@FirstArkansasNews.net.

7 Comments »

  • Sandy Jolley said:

    No one should ever get a reverse mortgage without the advice of a professional attorney, financial advisor and tax consultant who understands reverse mortgage contracts and can explain the consequences for your personal situation. Elders who do not do this risk losing their property, equity and their very lives to receive a tiny portion of the equity in their homes. Please visit elderfinancialterrorism.com and FB page Caring Advocates Protecting Seniors (from reverse mortgages) for the truth about these financially devastating predatory products.
    Sandy Jolley

  • Ethan C. Nobles (author) said:

    Sandy — thanks for stopping by and leaving a comment. We have an unmoderated (but spam filtered!) comment section specifically so that people can stop in and add to the discussion. In that regard, I appreciate your insight and hope you become a regular visitor over here.

    Good luck!

  • Patricia said:

    Ok this sounds good, but is it? Who does it realy benifit. If the loan to owner goes to pay off morgage chances are there will not be much money left for owner,Then when owner passes away the family has to pay the lone back,and who owns the house?

  • Ethan C. Nobles (author) said:

    Who owns the house? The lender takes it if the family doesn’t settle the debt.

    That is, indeed, the downside…

  • Sandy Jolley said:

    Hi Ethan, This is my second time commenting on your (good) article. I feel it’s important for potential borrowers to have accurate information because they are completely responsible for understanding the consequences and harm. Your point “The idea, of course, is that a HUD-certified counselor can make sure the homeowner knows the legal and financial obligations that come with a reverse mortgage.” is what every borrower believes. “Hud approved counseling” does not provide the borrower with legal, financial, or tax information. It is done before the formal appraisal which changes all the numbers and possible benefit of counseling since it is not related to the borrower’s unique circumstances. We need transparency in the counseling = the counnselor should be required to tell the borrower exactly what the purpose of counseling is and how it relates (or not) to their specific circumstances. The counselor should be required to advise the borrower to get legal, financial and tax advice for their particulat circumstances. I am offering a FREE questionnaire for potential borrowers so they can determine the consequences for their personal situation, financial circumstances, health, short and long term need. It is a tool to help understand benefit or harm and financially plan for the future. Call me for a copy 805 402-3066

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