Responsibilities With a Reverse Mortgage
Reverse mortgages, also known as a Home Equity Conversion Mortgages, are growing in popularity as more homeowners age 62 and up use the product to tap into their home equity. These mortgages are called “reverse” because homeowners can receive money from their mortgage company instead of sending monthly mortgage payments. The payments (and interest charged on the loan) increase the loan’s balance and decrease the homeowner’s equity.
Most reverse mortgages are insured by the Federal Housing Administration (FHA), as part of its Home Equity Conversion Mortgage (HECM) program. As long as the borrowers live in the home as their primary residence, maintain the home, and pay homeowner’s insurance, HOA dues, and property taxes, they don’t have to repay the loan.
If the borrowers move or pass away, the loan becomes due and must be paid off. Usually, the home is sold to repay the loan and, if FHA-insured, FHA pays for amounts not fully covered by the sale proceeds.
What’s the Catch?
Not understanding your obligations under a reverse mortgage can lead to serious consequences including foreclosure. That’s why homeowners are required to take HUD-approved counseling (which details the loan’s commitments and conditions) before being approved for the loan.
Even so, in a 2012 report to Congress, the U.S. Department of Housing and Urban Development estimated 9.4% of reverse mortgages (of 582,000 total) are at risk of foreclosure due to nonpayment of taxes and insurance, and stated “counseling may be insufficient to counter the effects of misleading advertising, aggressive sales tactics, or questionable business practices.”
In addition to living in the home as your primary residence and paying property taxes and insurance, AARP thinks every homeowner with (or considering) a reverse mortgage should know:
- Reverse mortgages do not automatically transfer to a surviving spouse. If you die or leave the home (such as to live in an assisted living facility) and your spouse’s name is not on the loan, the loan becomes immediately due. He or she will have to pay back the loan (to stay in the home) or face eviction.
- You can opt to have taxes and insurance money set aside when the loan is originated, but such arrangements only last for a specified number of years. After that, you must pay property taxes and homeowners insurance on your own. Make sure your budget can support paying these expenses on time.
- You must still pay for items like flood, fire, hurricane and earthquake insurance and condominium fees. If you don’t pay these bills, the mortgage company can foreclose.
While a reverse mortgage can provide extra cash, seniors need to understand the unique terms of this loan product.
If you have questions, contact a HUD-certified housing counselor, or call 888-995-HOPE (4673). For free information, visit HUD.gov or AARP.org. If you have a complaint about a reverse mortgage, contact the Consumer Financial Protection Bureau at 1-855-411-CFPB or visit www.consumerfinance.gov.