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If you are an older homeowner with substantial equity in your home, a reverse mortgage might be a good option. A reverse mortgage can be good and bad, depending on an individual’s circumstances and needs. Exploring the history and pros and cons of a reverse mortgage and consulting an elder law attorney can provide a balanced perspective to make your decision.
History of Reverse Mortgages
The first reverse mortgage offering occurred in 1961 to a football coach’s widow who wanted to stay in the marital home. An employee in a small bank in Portland, Maine, introduced the creative solution now known as a reverse mortgage.
In the 1980s, these reverse mortgages received federal government backing via mortgage insurance through the Federal Housing Administration. Eventually, the Department of Housing and Urban Development (HUD) created a pilot program to offer government-insured reverse mortgages. The Housing and Community Development Act of 1988 was signed into law, establishing the current (with continuous revisions) reverse mortgage.
In the 2000s, the Great Recession created soaring demand for reverse mortgages. HUD partnered with the American Association of Retired Persons (AARP) to improve counseling policies as many borrowers struggled to pay property taxes and insurance payments. Reverse mortgages became an increasingly viable solution for cash-strapped older homeowners.
By the 2010s, the Reverse Mortgage Stabilization Act came into law, limiting the amount borrowers can access during the first year and addressing issues of non-borrowing spouses to continue residency in the home after the borrower left.
Historically lenders make money on the accrued interest of the loan balance and may also make money by charging an origination fee and selling loans to secondary market investors. The important takeaway from the reverse mortgage history is that rules and eligibility criteria tend to be in a constate state of flux, making decisions about which reverse mortgage to select challenging.
The Current Trend to Age in Place
If you ask older Americans where they want to grow old, the most common answer is in their home. The cost of long-term care in private or Medicaid-funded facilities is prohibitively expensive for most individuals, or in terms of Medicaid, extremely limited in availability.
Because many government programs now center on providing partial or long-term care in private homes, it makes sense for many older Americans to choose to age in place. Unfortunately, for many of these individuals, reduced income levels decrease the practicality of staying home. However, if you are a homeowner with a minimum of fifty percent home equity, you may be eligible for a reverse mortgage to provide needed cash flow.
Advantages of a Reverse Mortgage
- Access to home equity – A reverse mortgage allows homeowners aged 62 or older to access a portion of their home equity through loan proceeds. A reverse mortgage can be useful for retirees with substantial equity tied up in their homes but limited income and savings.
- No monthly mortgage payments – One of the significant benefits of a reverse mortgage is that borrowers are not required to make monthly mortgage payments. The loan is typically repaid when the homeowner moves out, sells the home, or passes away.
- Flexibility in fund use – Borrowers can use the loan proceeds as they want, whether for daily living expenses, home improvements, medical expenses, or other financial needs.
- Homeownership retention – Reverse mortgages can help seniors remain in their homes while supplementing their income, which can be especially valuable for those who want to age in place.
Disadvantages of a Reverse Mortgage
- Accumulated interest and fees – Over time, interest and fees accrue on the reverse mortgage loan, which can significantly reduce the remaining equity in the home. The interest and fees mean fewer assets will be available for heirs or other purposes when the loan is repaid.
- Potential impact on inheritances – Reverse mortgages can impact the inheritance homeowners can leave to their heirs. If the loan balance exceeds the home’s value when sold, the lender typically absorbs the loss, and heirs may not receive any remaining equity.
- Homeownership obligations – Borrowers must continue to meet certain obligations, including maintaining the property, paying property taxes, and keeping up with homeowners insurance and any necessary repairs. Failure to meet these requirements could result in foreclosure.
- Complex terms and risks – Reverse mortgages are complex financial products with varying terms and conditions. Before entering such an agreement, borrowers must understand the risks, such as the potential impact on government assistance programs, as additional income can alter eligibility.
A reverse mortgage typically falls under either a real estate or elder law category. Real estate law deals with legal matters relating to property, including mortgages, leases, and transactions. Elder law focuses on legal issues affecting older adults, like retirement, long-term care, and financial matters.
Since seniors commonly use reverse mortgages as a financial tool, attorneys often have expertise in real estate law and elder law to provide comprehensive guidance to clients. Estate planning and elder law attorneys may also specialize in other related legal areas, such as finance or contract law.
What an Elder Law Attorney Does
An elder law lawyer can assist in several ways when considering and obtaining a reverse mortgage. They can explain a specific reverse mortgage’s legal implications and requirements, ensuring their client understands the financial product’s terms, conditions, and potential consequences related to their situation.
If any issues or disputes do arise during the reverse mortgage process, a lawyer can negotiate on your behalf with the lender or other involved parties. They can advocate for your interests, helping to reach a fair resolution.
Your attorney can help avoid a potential foreclosure with options such as repayment plans, loan modifications, or other alternatives available under the law. They can address the affect a reverse mortgate may have your estate and inheritance plans.
Under the right circumstances, a reverse mortgage can give older homeowners options to pay for at-home elder care that they might otherwise not be able to afford. Money can also be used to make necessary modifications to the home. If you have any questions about something you have read or would like additional information, please contact our Albany office today at (518) 452-6979 and schedule a consultation.