For seniors who have equity in their homes and want to supplement their income, reverse mortgages can be a great asset. They can also be confusing and if not properly researched, extremely risky. (Photo: Shutterstock)
Reverse mortgages can be a tricky subject, but for many seniors, they can also be a financial lifeline.
Reverse mortgages, also called home equity conversion mortgages, are loans for seniors age 62 and older that are insured by the Federal Housing Administration (FHA). Reverse mortgages allow homeowners to convert their home equity into cash with no monthly mortgage payments, while still remaining residents of their home.
The FHA insures most reverse mortgages and sets the rules that borrowers need to follow. These rules include maintaining sufficient homeowners insurance and continuing to pay the appropriate property tax. For this reason, one of the key elements seniors need to be mindful of is that insuring a home with a reverse mortgage is just as important as it is with a traditional mortgage.
Insurance and reverse mortgages
For many adults and seniors, their largest financial asset is their home, and for seniors in particular, dealing with a reverse mortgage can be a huge risk if not approached correctly.
Jason Hargraves, managing editor at insuranceQuotes.com says, "The reality is, reverse mortgages are a good product for the right person. They require your due-diligence and research. It really is a matter of 'what's your personal situation?'"
They are complex, and Hargraves adds that there are so many elements that can be confusing, and that's where you can get into trouble.
"The biggest mistake you can make," Hargraves says, "is not doing your research. It's imperative that the other biggest mistake people make is not talking to a professional advisor, an accountant, or an attorney. You need to talk to any financial professional not related to the reverse mortgage company who can help you make the right decision."
Seniors interested in a reverse mortgage need to realize that there's going to be a lot more personal responsibility when it comes to insurance and property taxes, Hargraves says. In contrast to a standard forward mortgage with an escrow account, a reverse mortgage requires individuals to handle these payments on their own, or face costly penalties.
However, an agreement similar to an escrow account can be arranged in a reverse mortgage through a lifetime expectancy set aside account.
"Taking care of your insurance requirements is an absolute necessity," Hargraves says, "otherwise, the whole idea of a reverse mortgage goes down the drain because they'll just take your house back."
According to a Consumer Financial Protection Bureau report to Congress in 2012, a little under 10% of people are in danger of defaulting on their reverse mortgage because of a failure to pay property tax or homeowners insurance, so the risk is real.
What reverse mortgage companies will do is dictate what insurance they want you to have, and if you don't provide the adequate coverage or fail to maintain it, they'll let you know. From there, you can either change your insurance situation to meet the requirements on your own, or they will do it for you, and that will come with a hefty price tag, Hargraves warns.
Protecting your home and your assets
"The one thing I can't stress enough, and this comes with any sort of big decision," Hargraves says, "is you really need to talk to a lot of people, and, shop around."
While the federal government might be involved in backing many of these companies that do reverse mortgages, the loans themselves are not created equal.
"You really need to find the one that's best for you, that has the best structure, and gives you the most value for your situation. You really have to go talk to a number of reverse mortgage companies and find the one the works best for you."
There are also different regulations for each state, so make sure in your research that you are specific to where you live.
Another important element in structuring a reverse mortgage is flood insurance.
If the home in question is in a flood plain as designated by the Federal Emergency Management Agency, the homeowner must also secure a flood policy at least equal to the value of the homeowner's policy, or for the $250,000 maximum allowed under the law.
Seniors interested or participating in a reverse mortgage should seek legal and financial counsel from an attorney or financial adviser, talk to their children or other family members who may come to inherit their assets, and stay actively on top of their home insurance requirements.
More detailed information and federal guidelines can be found within resources offered by the Federal Housing Administration.
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