Rushville Republican

Columns

December 17, 2013

It's not quite that simple

(Continued)

Now, when does the loan have to be repaid? (Surely, no one was thinking that any lender was going to lend homeowners money based on the equity in their home and not expect to be repaid – with interest!) The loan is due when the borrower sells the house or fails to keep the taxes or insurance current or moves out of the house for more than twelve consecutive months or passes away. When the mortgage becomes due, the borrower or his/her heirs of the estate have the choice of refinancing and keeping the home or selling it and keeping any remaining equity or turning the home over to the lender. Most people who use a reverse mortgage usually have no heirs; and, when the last borrower passes away, the lender takes possession of the house and resells it to recover at least the amount lent to the now-deceased borrower.

So, before considering a reverse mortgage it’s important to keep in mind that, if the homeowners plan to leave anything to their children or other family members, their house isn’t going to be part of the bequest – unless the children or other family members understand that, to keep the house, they will have to repay the amount of the loan, plus interest. This approach might not be bad if the house is worth substantially more than the amount owed as a result of the reverse mortgage. For family members who either plan to sell the house or live in it, paying off the loan might be a relatively inexpensive ways to acquire a home.

Just for the sake of fairness, here are some things to think about if you’re considering a reverse mortgage. Keeping in mind that a reverse mortgage is really a loan, there are going to be loan-related fees, like an origination fee, for example. Other fees are typically higher since the loan isn’t based on income or a credit score. The interest rate on a reverse mortgage is often higher than the rate on, say, a traditional home equity loan. Your heirs might not get the house. Since the borrower isn’t expected to make payments on the loan, the loan is paid off when the home is sold. If, for some reason, the borrower decides to downsize to a smaller house or move into a long-term healthcare facility, the borrower has to start repaying the reverse mortgage to the lender. Finally, the borrower is still responsible for normal homeowner costs such as property taxes, homeowner’s insurance, and regular maintenance on the property.

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