Many of those nearing retirement hope that they'll be able to have their mortgage paid off by the time they retire. Yet nearly one in three of those who are age 65 or older have mortgage debt outstanding, according to figures from the Consumer Financial Protection Bureau. Moreover, the average outstanding mortgage debt among older Americans has risen to nearly half of the value of the underlying home, showing the financial pressure that many retirees are under. If you own your home, there are key mortgage facts you need to know in order to protect yourself financially. Below, we'll look at three of the most important ones.
1. Little-known rules can help retirees get or refinance a mortgage.
Many retirees mistakenly assume that because they no longer have work income, they don't have any options to get a new mortgage or refinance an existing one. However, there are ways that retirees can get access to mortgage loans, letting them take advantage of current low interest rates by refinancing or allowing them to cut costs by moving to a smaller home.
In particular, government-sponsored enterprise Freddie Mac has programs that let participating lenders consider assets like retirement accounts. In general, such assets aren't included in available financial resources by lenders, because their ability to accept such assets as collateral is limited by federal and state law. Typically, down payment requirements will be higher under such programs, but the rules allow retirees to tap IRAs, 401(k)s, and other retirement assets in a way that can make it easier to get the mortgage you need.
2. Reverse mortgages can be extremely useful, but you have to know the rules.
Reverse mortgages confuse many retirees, in large part because their name suggests a closer connection to traditional mortgages than they actually have. Reverse mortgages allow lenders to offer monthly payments, a lump sum, or a line of credit to older homeowners. Under the Federal Housing Administration's reverse mortgage program, lenders cannot collect on their loan for as long as the borrower remains living in the home. Once the homeowner moves out or dies, the reverse mortgage comes due, requiring its sale in order to pay off the loan if the homeowner hasn't already done so.
Reverse mortgage borrowers need to be aware of some of the limitations and pitfalls of reverse mortgages. First, the costs can be fairly high, including up-front fees and the requirement to pay annual loan maintenance charges as well. In addition, the amount that you'll be allowed to borrow is typically far less than the value of the home, and if you have outstanding traditional mortgage debt, you'll have to pay that off first.
Finally, new rules on reverse mortgages prevent one of the biggest horror stories involved with the loans. Under old law, if only one spouse were named on a reverse mortgage and that spouse died or moved into a nursing home or other long-term care facility for more than 12 months, then lenders could force the other spouse to sell the home even if the other spouse remained in the original home. To get protection, it was necessary for both spouses to be listed on the reverse mortgage. However, the new rules give spouses greater protection in some survivor situations. Nevertheless, given how quickly these rules can change, it's critical to stay up to date of recent happenings in the industry.
3. Local rules differ in handling debt if you're underwater on your mortgage.
Finally, although the housing market has recovered dramatically since the mid-2000s, some retirees are still underwater on their home loans. If that's the case for you, it's important to understand how your local laws treat underwater mortgages.
In some jurisdictions, mortgage lenders have the right to go after your other assets. So if your house is worth $90,000 but you owe $100,000 on it, the lender could foreclose on your home, sell it for $90,000, and then go after you for the remaining $10,000.
In other areas, state and local laws prevent lenders from doing this. Instead, mortgages are nonrecourse loans. So in the example above, the lender could only collect the $90,000 from the foreclosure sale, and it would have no cause of action against the borrower.
Obviously, the action you take will differ depending on what local law allows. Answers will vary from state to state, but you can generally contact your local elder law services agency to see whether you have the added protection of nonresource mortgage loan status or not.
Mortgages are tough to understand for those of all ages, and retirees face unique financial challenges that make mortgages even trickier. By learning these key facts, you'll be in a better position to handle your mortgage more effectively and live in your home as long as you want.