Everyone from former U.S. Senator Fred Thompson to actor Robert Wagner is currently pitching reverse mortgages on television. From the advertisements, these financial transactions appear to be a lifesaver for cash-strapped retirees. However, homeowners should understand that reverse mortgages also carry significant risks.
In basic terms, a reverse mortgage is a special type of loan that allows homeowners to convert a portion of the equity in their home into cash. To apply, homeowners must generally own their home outright or owe little money on an existing mortgage, as well as meet certain age restrictions. Borrowers can elect to receive periodic payments or a lump sum disbursement. They must still pay annual taxes, property insurance, and maintenance or risk default on the mortgage. Most reverse mortgages are non-recourse loans, which means that the lender has cannot pursue any of the borrower’s other assets in the event of default.
Reverse mortgages do not have to be repaid until the home is sold, no longer used as a principal residence, or the borrower defaults on the obligations of the mortgage. At that time, the borrowers must repay all payments, interest, and finance charges. If the borrower dies, the loan must also be repaid, and any remaining equity in the property then passes to the heirs. Any mortgage debt, however, is not transferrable.
While reverse mortgages sound good in theory, they do not always work out as anticipated. In fact, approximately 1 in 10 were in default at the end of 2012.
In addition, many spouses who removed their names from deeds and did not sign mortgage documents in order to meet reverse mortgage age requirements have found themselves facing foreclosure upon the death of their spouses. Lenders claim that the death of the borrower triggers repayment obligations, while the surviving spouses maintain that brokers promised them that they would not be displaced.
The disputes are currently the subject of several lawsuits alleging that lenders failed to comply with the terms of mortgage agreements. The Department of Housing and Urban Development, which insures reverse mortgages, is also facing a suit alleging that agency policies failed to comply with a federal law that specifies that surviving spouses are considered homeowners even if they are not listed on reverse mortgage documents.
The bottom-line is that homeowners should fully consider all of their options before deciding to pursue a reverse mortgage. Like all financial transactions, it carries both risks and rewards.
If you have any questions about reverse mortgages or would like to discuss the legal issues involved, please contact me, Victor Kinon, or the Scarinci Hollenbeck attorney with whom you work.
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