In the past many older Americans sought to release cash from their homes using reverse mortgages in a bid to solve money worries. Unfortunately, as the article in CNNMoney things don't always turn out as planned, and a considerable number went on to incur more debt, or to even lose their home.Nowadays new rules have made this type of mortgage safer, but there are still quite a few pitfalls that could put your home at risk. Reverse mortgages are backed by the Federal Housing Administration, and are available to those aged 62 or older. The loan does not have to be paid back until the borrower chooses to move, or dies.
This all sounds perfectly reasonable but problems have arisen when borrowers have taken the cash as a lump sum and haven't necessarily been prudent with their spending. As a result some have been left without sufficient money to pay homeowner association bills, property tax and insurance, and as a result have defaulted. According to the FHA nearly 10% of borrowers with reverse mortgages defaulted on their loans by last September and had either already lost their property or were in danger of doing so.
Last October new rules were launched to discourage homeowners from taking lump sums through reducing the amount that could be received immediately. Experts point out that monthly payments are usually a better option, especially as people are living for longer. The payments are guaranteed to keep on coming even if the borrower exceeds the value of the home. In spite of this reverse mortgages are still a very expensive option, as there are a whole host of extra charges that have to be paid and which can increase costs by up to $15,000 or more for a loan of $200,000.
In addition to these upfront fees, lenders will add interest charges every month plus a servicing charge and FHA insurance premiums. This means a lump sum mortgage balance of $100,000 could double within just 11 years so there will be less money left for the estate when the borrower passes away or chooses to move. In addition to the mortgage fees, borrowers still have to take into account the costs of other annual fees such as property taxes, insurance and homeowner’s association costs. Under the new rules lenders are required to ensure borrowers have sufficient income to afford these charges plus living expenses. They must have sufficient money through pensions or other savings or from Social Security to cover these routine expenses.
One issue not covered by the new regulations is the fact that many couples choose to take out a reverse mortgage in the name of the older spouse as this helps to maximize cash benefits. Unfortunately if the older spouse dies first then the lenders will take possession of the property, often evicting the surviving spouse.