As baby boomers near retirement age, the concept of a reverse mortgage may seem more enticing. With a reverse mortgage, they must simply agree to turn the home over to the lender when they die in return for deferring payments while still alive.
A Sudden Shift
The advertisements make it sound like the perfect plan. Without a mortgage payment, a homeowner has the freedom to purchase new sports cars, take luxury vacations, and enjoy a worry-free lifestyle. Payment comes due the day the homeowner dies, sells the home, or moves into a nursing home, usually through selling the home.
As more reverse mortgage holders die, information continues to emerge. In recent weeks, consumers have been cautioned about the dangers of reverse mortgages, including the news that several lenders have threatened foreclosure if loans aren’t paid in full.
Rising Debt Loans
In addition to the original loan, heirs also face the uncomfortable truth that reverse mortgages have been nicknamed “rising debt loans” for a reason. During the time a homeowner resides in a house, he makes no payments, but interest continues to accrue. Lenders add this interest to the principal with the understanding that it will all be paid in full at the end.
Under a reverse mortgage agreement, upon the loss of a homeowner, the home must be resold to pay off the loan. If significant interest has accrued but the home hasn’t risen in value, heirs may find that the selling price doesn’t cover the amount owed. Making matters worse, some lenders have been reportedly threatening foreclosure mere weeks after the homeowner dies, without allowing time for the home to be sold.
Many reverse mortgage holders may not realize the protections in place against this very action. Some reverse mortgages call for homeowners to be offered the chance to settle the home for a percentage of the current value. Without legal representation, the average consumer likely would be unable to extract this information from the pages of legalese associated with every home loan process.
Seniors signing new reverse mortgages should pay particular attention to the options that will be offered to heirs in the event of the homeowner’s death. Borrowers should also determine the amount of time that will be allotted to heirs to make such a decision. A fair lender will usuallybuild in language that allows heirs up to a full year to pay off the amount due.
Generally, heirs are given four options when it comes to settling a reverse mortgage:
In some cases, family members of reverse mortgage holders have opted to purchase the home prior to the homeowner’s death. This prevents additional interest from accruing, while also giving heirs time to pay the mortgage off before the family member dies.
By carefully reviewing the fine print of any reverse mortgage, borrowers can protect their heirs from tough decisions later. Preparing a plan in advance can save heirs from unfair behavior by lenders that may result in an unwanted foreclosure.
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