Get the Pros and Cons About Reverse Mortgages
You see them all the time on TV–ads for reverse mortgages. They seem like free money. The bank pays you money usually on a periodic basis out of the equity in your home. It’s like a loan, only the loan funds come from the value of your house, and are added onto what you owe on the house.
You don’t have to pay the money back until the last borrower on the mortgage note vacates the home, sells the property, or passes away. This makes reverse mortgages very appealing retirement strategies.
Be Aware of the Fine Print
But there are things you should know about a reverse mortgage that a mortgage broker won’t tell you. Reverse mortgages sometimes aren’t as appealing as they seem.
The first consideration is who the last borrower named on the loan is. When that person passes away, any money borrowed on the property needs to be paid back to avoid foreclosure. Many people confuse the loan (which may not have included everyone who lives in the home) and the deed (which is more inclusive and may have additional names).
So if mom and dad live in the home, but only dad’s name is on the loan, if they take out a reverse mortgage, and dad passes away, mom could find herself owing a lot of money or being kicked out of the house–even if she is on the title to the property. In fact, even if dad has to move into an assisted care facility, and is no longer residing on the property, mom may find herself subject to foreclosure.
In many cases, any expenses related to the house still need to be paid. This can include property taxes, or insurance. If you can’t come up with these fees, or you forget to pay them, most mortgages give the lender the right to take the property back by foreclosure.
Paying Money Back
Remember that what you are borrowing is being added to what is owed on the home. If you borrow more than the equity in your home, many mortgages do have provisions restricting the lender from collecting any money from you or your heirs directly, but when the last borrower passes away, you may not have the ability to keep the home for your heirs (or you may have cut into the equity into the home pretty significantly).
Parents with young people living in the home, or those who want to leave the property as a “nest egg” to grandchildren, should be careful about using up all the value in property by borrowing. Heirs may find the money in a paid off home they were expecting to receive suddenly “eaten up” by those reverse mortgage payments.
You can defend a reverse mortgage foreclosure the same way you would defend a regular foreclosure, and the risk of a money judgment against you or your heirs is limited. Still, that’s probably not a situation that you want to be in. Think closely before making the decision to encumber a home with equity in it.
At Jacobs Legal, we help people keep their homes and fight foreclosure. Contact us to schedule your free initial consultation.