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Developments with Reverse Mortgages

Reverse mortgages are a product created to allow senior citizens to access the value of their homes in order to fund retirement spending needs. The Home Equity Conversion Mortgage, created by statute in 1988 is an FHA insured mortgage product. The reverse mortgage is a home loan that does not require the borrower to make monthly payments; instead, the interest on the loan is added to the loan balance until such time as the owner dies, sells or moves out of the home and the loan and accrued interest are paid off.

Although we hear a lot about these mortgages, only a small percentage of senior homeowners are using the program. Prospective borrowers are now required to undergo a financial assessment prior to taking out a reverse mortgage and the amount which may be borrowed is subject to a maximum claim limit based on the equity in the property. The loan may be distributed via lump sum, monthly payments or even a line of credit, depending on the product and the borrower’s needs. Actual amounts available will also be affected by the applicable interest rate as that is added to the loan balance and should not exceed the expected value of the property.

A key factor in the program is the requirement that the borrower maintain insurance and pay applicable property taxes throughout the mortgage term. The latest HUD data, from 2016, reflects that nearly 15% of reverse mortgages are in default because of the non-payment of these items for the preceding 12 months. This default can not only lead to borrowers being evicted from their homes but also pressures the FHA which insures these mortgages.

Another concern for prospective borrowers is the general lack of understanding of what is a complex product which may or may not be suitable for those interested in a reverse mortgage. For example, a reverse mortgage will generally preclude family members from inheriting the home upon the death of the borrower and that may not be a desired outcome. It is important to discuss the implications of such a mortgage with your financial adviser and to understand how such a mortgage may affect your ability to meet your financial goals over time.

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