For Baby Boomers, Reverse Mortgages Are Still a Risky Proposition

Don’t rely on this type of mortgage to pay the bills after you retire without doing your research

Apr 20, 2014 at 1:17PM


For older homeowners who own their homes outright or have small loan balances, a reverse mortgage might sound like an excellent way to supplement a lower income once they stop working. At age 62, baby boomers can take out a loan whereby the bank pays them a set amount each month until they die, sell the home, or move out for 12 consecutive months. Reverse mortgages can help older persons stay in their own house, using built-up equity to pay bills without having to sell their home.

But, there are risks. New rules have made these types of mortgages more difficult to obtain, but homeowners can still run into trouble with these specialized loans. Rules can be complicated, so here are a few things to consider before deciding if a reverse mortgage is right for you.

Eligibility rules are tougher. The most common reverse mortgage is called a Home Equity Conversion Mortgage, backed by the Federal Housing Administration. Because some borrowers, in years past, took their loan in a lump sum and then ran out of money, big payouts are now reduced by 10% to 18%. This encourages homeowners to opt for monthly payments, eliminating that particular risk.

They're expensive. Fees are high and plentiful with HECMs. You'll pay all the charges associated with a mortgage, such as appraisal, title search, and recording fees, as well as steep origination fees: For homes worth less than $125,000, for example, you might pay up to $2,500. Monthly servicing fees of $30 to $35 are common, and there is a charge for FHA mortgage insurance, as well.

All these fees and charges are added onto your loan balance, which also includes the interest on the unpaid balance. By taking out a reverse mortgage, be aware that you are actually adding to your loan debt.

You still own the home, and it can be foreclosed upon. If you neglect to pay property taxes or maintain the home, the debt may become due and payable immediately.

Age requirements can cause survivorship problems. Because homeowners must be 62 to take out a HECM – and get a bigger check if they are even older – some couples have been advised to take the younger spouse's name off of the deed. When the borrower dies, the spouse faces foreclosure if he or she cannot repay the loan. A lawsuit is pending regarding this issue, in which surviving spouses claim that the government did not adequately protect them from foreclosure.

Payments are considered part of a home's equity, and can be attached in a lawsuit. Although proceeds from a HECM are tax-free, and the payments don't impact benefits such as Social Security, a court in New Jersey has ruled that the monthly payouts can be used to pay a court judgment – since the payments represent the equity in the home, which could have been sold to satisfy the judgment.

Your heirs could get stuck with a mess. If you have children, be aware that a HECM might not only use up what might be considered their inheritance, but may pose additional problems when the lender demands payment in full, which occurs even though it is against federal regulations. Even if the lender agrees to settle with your heirs for a percentage, remember that the loan has been growing – and resolving the issue may create a real hardship for your children.

For some, reverse mortgages might be just what they need to utilize much-needed home equity during their later years. Like any financial undertaking, however, the decision requires due diligence and careful planning to make certain that the benefits outweigh the liabilities.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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