Reverse mortgages provide a legitimate way for seniors who are 62 or older to use the equity in their home. When used as intended, a reverse mortgage helps seniors afford daily living expenses, health care expenses, and to make necessary home improvements. While reverse mortgages are legitimate, there have been fraudulent practices in the past. New regulations in 2013 have been instituted to avert this.
About Reverse Mortgages
A reverse mortgage allows seniors 62 and older to access the equity in their home either in a lump sum or as a line of credit. The money is due after the home is sold or if the seniors move or are in a nursing home for more than a year. The amount you can borrow depends on how much equity you have in the home and on the home's appraised value. Lenders charge a fee to take out the loan and sometimes charge fees throughout the duration of the loan. Mortgage insurance must be paid in case the loan balance exceeds the home's value, and interest is charged on the amount borrowed.
Reverse Mortgage Issues
After the big players in the reverse mortgage market exited by 2012, some smaller reverse mortgage lenders that entered the market used hard sell tactics and did not fully disclose all the particulars of the reverse mortgage, according to an October 2012 article published by "The New York Times." Many lenders encouraged the practice of putting only one homeowner, typically the older one, on the deed as the sole borrower, according to a 2012 report to Congress by the Consumer Financial Protection Bureau. Those lenders explained that the spouse could always be added later, but that was not always true. Others made loans to borrowers who could not afford to pay the associated loan fees or even their property taxes and homeowners insurance -- all are obligations the borrower must pay. Although borrowers need to meet with a counselor who helps explain the loan, some borrowers were not told everything, according to the CFPB.
Lump-Sum Loans Prevail
The people who take a lump sum loan amount instead of a line of credit spiked from 3 percent in 2009 to about 70 percent in 2012. Lenders make more money on lump sum reverse mortgage loans when they sell them on the secondary market, so they are motivated to push that option, although it is often the riskier alternative for the homeowner, according to the CFPB.
New Rules, Regulations
In 2013, the Department of Housing and Urban Development made some new rules to protect borrowers. Borrowers cannot take all their allowable equity the first year; they can take no more than 60 percent. The maximum amount they can borrower has been reduced 10% to 15% compared to prior reverse mortgage programs. The seniors also need to prove they can pay expenses necessary to live in the home.
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