With the depreciation in home values created by the current market, those seniors that have taken out reverse mortgages should take the time to get their properties evaluated for current value so as to not put themselves into a negative position. I have experienced a situation this past year where the amount loaned led to deficit positions for the families of seniors that have passed with this type of mortgage.
The problem exposed itself, when the value of the property, when presented back to the bank after the senior had passed, was worth less than the amount the bank had loaned to the owner. With assets held by probate, the bank was first in line to recover their money, and the heirs were left with an under valued property to sell. This was done with an additional loss.
A reverse mortgage is a special loan available to homeowners who are at least 62 years old. With the security created by the senior's home, reverse mortgages require no payments from the owner. Most owners receive monthly payments, or loans, from the lender. If they choose, they can receive a line of credit or a lump sum payment, or both. The owner continues to live in the home. Payments would continue until the owner moves from the residence or dies. At that point, the entire loaned amount, plus interest is paid to the lender.
As many seniors had their homes appraised at the height of the market, some may also have chosen to refinance at the same time to consolidate an existing mortgage into the reverse. The most popular reverse mortgage is the Home Equity Conversion Mortgage, insured by FHA. As retirement investments have plunged, and work opportunities grow scarce, reverse mortgages have become a valuable retirement tool for older Americans.
One downside to a reverse mortgage is it's cost. The costs to set up a reverse mortgage can be almost as much as the costs associated with selling a home. The largest single cost is for FHA mortgage insurance, with the next largest cost being the origination fee. As with a conventional mortgage, however, most of these costs can be rolled into the loan, but it will reduce the amount of equity available to the senior, and increases the repayable loan amount along with its added accrued interest. Another concern would be the potential affect the additional income would have on programs such as Medicaid.
If a senior is contemplating a reverse mortgage, they might do well to contact an independent HUD counselor to get help in understanding the process, risks, and fees. Information from HUD can be found here
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