This was originally published on Monday, March 31, 2014, in the Pacific Daily News. Click here to subscribe to the PDN.
Last week, I answered a question I received on reverse mortgages. This week I want to discuss the types of reverse mortgages and what family members need to know.
There are three types of reverse mortgages:
• Federally insured reverse mortgages — This mortgage is backed by the U.S. Department of Housing and Urban Development (HUD) and is known as Home Equity Conversion Mortgages (HECMs). For more information, go tohttp://portal.hud.gov/hudportal/HUD. It provides a bigger loan advance at a lower cost than a proprietary loan. A HECM lets you choose several payment plans and lets you change the payment plan for a minimal fee.
• Single-purpose reverse mortgage — These are offered by state or local government agencies and nonprofit organizations. These are not available everywhere and are usually used for one purpose as defined by the government or nonprofit lender. That purpose may be for home repairs or improvements. This usually is the least expensive option.
• Proprietary reverse mortgages — These are private loans that are backed by private loaning companies. These usually have higher upfront costs.
All three types of reverse mortgages depend on several factors such as your age, the appraised value of your home, and current interest rates, just to name a few.
Family members and those who are heirs to an estate should be aware of what their parents or benefactors are getting into. The bank does not own the property. The title to the home remains with the borrower. If the borrower dies, you have the option to pay off the reverse mortgage. If your heirs cannot pay off the mortgage, the house becomes property of the lending institution; which will most likely sell it to recoup the cost of the mortgage.
Because there are no monthly payments, the interest and the balance grow each month. Unlike a traditional loan where the balance gets smaller every month, the balance actually gets larger. This is because a payment is added each month along with the interest and principal. A smaller reverse mortgage when you are older is advised if you really need the money. If your heirs want to keep the home in the family, take out only what can be repaid. If you plan on leaving an estate and your heirs cannot make pay off the reverse mortgage, the money may be taken from the estate. This leaves a smaller estate or completely depletes the estate.
If the borrower cannot pay the insurance and property tax, the reverse mortgage can be deemed in default and foreclosed.
If you are no longer able to stay in your home, say for medical reasons or need assistance and you have to move to a nursing home or long-term care facility, you will start repaying the reverse mortgage a year after you leave your home. This can come at a time when money is tightest because you have to pay for your care. This can put a strain on you and your family, especially since you may have little to no equity left on the home.
It is imperative that you discuss this with your family or heirs before taking out a reverse mortgage. Carefully think through the situation; a reverse mortgage may sound promising upfront, but you could be selling your future or putting a strain on your family.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.