Seniors should know all about reverse mortgages

As reverse mortgages become more popular, seniors need to understand how these loans work. Counselors for Consumer Credit Counseling Service (CCCS) of East Tennessee, a member of the CredAbility Network, which is one of the nation's largest nonprofit reverse mortgage counseling agencies, say homeowners often have misconceptions about major features of these loans.

CCCS is one of the leading nonprofit counseling agencies in the United States with housing counselors who are certified in reverse mortgage counseling. The agency helps homeowners by providing objective information about reverse mortgages, including the advantages and disadvantages, so a homeowner can decide if this loan is right for them.

"Reverse mortgages can provide needed additional funds for senior citizens on fixed incomes," said Daru Burdge, president of Consumer Credit Counseling Service of East Tennessee (CCCS). "But they aren't for everyone. Understanding the benefits, the risks and the costs involved is an important first step when considering a reverse mortgage."

Below are some important facts about reverse mortgage loans:

A reverse mortgage is a rising debt, falling equity mortgage.

Homeowners often believe there will still be plenty of equity remaining when they pass away, and that they will be able to leave money to their heirs. While that may be true, it's also possible there will be no equity remaining as the rising debt wipes out the remaining equity. This most often occurs when the homeowner lives to their normal life expectancy or beyond. In addition, homes may not appreciate and interest rates on an adjustable rate loan can rise and be higher than expected. These factors can cause the balance on the loan to equal, or even exceed, the equity in the home.

A reverse mortgage loan may include higher closing costs than a forward mortgage.

While closing costs are financed as part of the loan, these costs reduce the home's equity and leave fewer funds for the homeowner. For all Home Equity Conversion Mortgages (HECM), borrowers are charged a mortgage insurance premium. Approximately one-third to one-half of the amount of the closing costs is to pay for FHA mortgage insurance.

Counselors explain to the homeowner that if they plan on selling their home within a short period, a reverse mortgage may not be a good use of their equity. Our counselors provide a HUD-approved Total Annual Loan Cost analysis (TALC), which expresses the average annual cost of a reverse mortgage at four future dates. The average cost becomes lower the longer the loan is in effect.

A surviving spouse younger than 62 years old automatically keeps the house once their spouse passes away.

A person must be 62 years old or older to qualify for a reverse mortgage. Some couples include one person who is younger than 62 at the time of the reverse mortgage application. In this case, the younger person must be removed from the deed for the older person to receive the reverse mortgage.

The surviving person younger than 62 years old, however, may be allowed to keep the house when their spouse or partner passes away. Once the older person passes away, the reverse mortgage must be paid back. The surviving person has the option to sell the house, refinance the balance with a forward mortgage or, if age 62 or older at the time of the death, refinance the old reverse mortgage with a new reverse mortgage and take advantage of any increase in the home's equity.

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