Watch Out for the "Reverse" in Reverse Mortgages!

The flickering television commercial comes on and the pitch begins: Could you use a little more money? Heck, yes, you think to yourself. As if anticipating your knee jerk reaction, the pitchman tells you to look inside your home where the cash lies awaiting you for the taking.

Where is it, you ask?

Why, "the cash is in your home equity," comes the comforting answer.

This pitch is pitched to older Americans on a "fixed income" who may be finding more month at the end of their monthly budgets.

It really does sound attractive.

But look before you leap.

For every yin there is a yang ... and half of the equation is negative. 

Accordingly, by definition, not all yin yang is positive.

I digress.

In fact, The Better Business Bureau (BBB) receives a lot of complaints about reverse mortgages.

Surveying the BBB complaints it is clear that there are problems and issues with reverse mortgages.

However, everything we choose to do in life has consequences, yes?

Doing nothing actually carries its own element of risk.

Nevertheless, what concerns me about the BBB complaints is that more than a few consumers are confused when they sign up for a reverse mortgages. 

This fact was corroborated in a recent article in The (Appleton WI) Post Crescent’s, titled “Be cautious before taking on reverse mortgage.”

The article reveals that some consumers do not understand the essential nature of a reverse "mortgage" - in reality it is a loan that leverages one's home equity as the collateral.

In addition, a reverse mortgage is one of the most expensive forms of credit a person can get.

No, really.

When you unpacked and total the origination fees, interest charges, and insurance premiums you will find that they exceed most other types of loans.

Typically, a reverse mortgage origination fee can be up to $6,000, and the initial premium for federal insurance is set at 2% of the home’s value.

Like any loan, it must be repaid. 

Repayment of a reverse mortgage loan is not required until the borrower dies or moves out of the home.

While death is clearly a triggering event, what if the "borrower" moves out of the home and into a nursing home or assisted living facility?

What if he or she leaves behind a "non-borrowing" spouse, child, or grandchild?

Answer: These left in the lurch loved ones will need to vacate the premises and the loan will need to be repaid. 

In an ironic twist, the article explains that some seniors turn to a reverse mortgage because of financial difficulties, which can include property taxes or insurance payments.

Now the twist: Reverse mortgage agreements generally state that the property taxes, insurance, upkeep, and maintenance are still the borrower's responsibility. 

So, what did the borrower gain?

If the borrower fails to fulfill any of these financial responsibilities commonly attending home ownership, then he or she will be in default.

The lender can foreclose.

Rob Peter to pay Paul?

Yikes. 

So, against this backdrop, who is the best candidate to consider a reverse mortgage? 

• The Number One benefit of a reverse mortgage is that a senior can remain in the home while at the same time receiving a steady cash flow.
• The best reverse mortgage candidate is an individual age 62 or older, who lives alone, and has significant equity in the home (or no mortgage).
• Also, this senior is not planning on leaving the home to their heirs and is healthy enough to stay in the home for a long time without going into an assisted living facility. 

Above all, the article warns those seniors considering a reverse mortgage to forget about those celebrity spokespeople on TV!

Instead, seniors should consult with an experienced elder law attorney before signing any reverse mortgage contract.

Finally, the article notes that there are plenty of scammers who want to take advantage of you. That includes anybody with a too-good-to-be-true interest rate, real estate deal, or investment idea.

The Kansas Attorney General and the Missouri Attorney General both have excellent consumer protection resources and will investigate complaints.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website. 

Reference: The (Appleton WI) Post Crescent (June 20, 2015) “Be cautious before taking on reverse mortgage”