Denton County Living Well Magazine March/April 2019 | Page 45
REVERSE MORTGAGES:
UNDERSTANDING THE RISKS
By Leu & Peirce, PLLC
W
ith seniors living longer and trying to
remain independent while coping with
higher health care costs, reverse mortgages
are an increasingly popular retirement
tool. For many seniors, their home is their
primary asset, so leveraging it seems like a good idea.
Unfortunately for some, taking on a reverse mortgage
can have unintended consequences, such as unexpected
foreclosure and involuntary displacement of the surviving
spouse. Before deciding if a reverse mortgage is a good
fit for your situation, it is important to educate yourself on
how a reverse mortgage works and consider all available
options and alternatives.
A reverse mortgage is a special type of home equity loan
available to homeowners aged 62 and older. The loan,
which allows homeowners to access a portion of their home
equity as cash, must be repaid when the borrower sells the
home, moves out, or dies. The first reverse mortgage was
issued in 1961 as a tool to enable older homeowners to
convert home equity into an income stream or line of credit
that could be used in retirement. Under a reverse mortgage,
interest is added to the loan balance each month, so the
payoff amount continues to grow. The borrower is not
required to pay the loan while living in the home, but is
responsible for all other expenses associated with the home,
including paying property taxes, homeowner’s insurance,
homeowner’s association fees, utilities, maintenance, and
repairs. Failure to maintain the home or pay the property
taxes can cause the home to go into foreclosure. Borrowers
who take out a reverse mortgage at a younger age will
have fewer resources to pay for everyday expenses later
in life. The same is true for those who elect to take out
the full amount of proceeds as a lump sum, rather than as
an income stream. This can prove especially problematic
in the case of unforeseen health issues down the road, or
where a homeowner needs to finance a move but does not
have the resources to do so.
Most reverse mortgages available today are Home Equity
Conversion Mortgages (“HECM”). An HECM is a reverse
mortgage insured by the Federal Housing Administration that
allows a borrower over age 62 to withdraw part of the home
equity in monthly payments or a lump sum, without requiring
regular mortgage payments. The loan must be repaid after
the borrower dies or moves out. In certain situations, both
spouses do not qualify for the HECM. If only one spouse
is 62 or older, the older spouse must be the sole HECM
borrower. If both spouses are over 62, but title is only in one
spouse’s name, the titleholder must be the sole borrower.
Importantly, borrowers should consider the effect the
reverse mortgage could have on the surviving spouse who
wishes to remain in the home. This is especially true where
only one spouse is the borrower. In the past, when the sole
borrower died, the non-borrowing spouse had few options.
Traditionally, the non-borrowing spouse was forced to
refinance the HECM transaction, sell the home, or face
foreclosure. The U.S. Department of Housing and Urban
Development recently enacted regulatory changes aimed at
protecting non-borrowing spouses. If an HECM originates on
or after August 4, 2014, and certain qualifying conditions
are met, a non-borrowing surviving spouse can now
postpone the HECM repayment and potential displacement
until he or she no longer resides in the home. However, if
any of the particular requirements are not initially met or
lapse over time, the non-borrowing spouse is ineligible and
the HECM becomes due and payable immediately upon
the borrower’s death.
In addition to expanding regulations, federally-required
disclosures and mandatory counseling are examples of
tools available to help consumers understand their options
and make informed decisions about whether to take out
a reverse mortgage. Reverse mortgages are inherently
complicated. Before taking out a reverse mortgage, it is
important to educate yourself on the potential pitfalls as
well as the potential benefits. Seek qualified professional
advice and take the time to build relationships with people
you trust to help you plan for your future.
For a better understanding of available planning options
for funding your retirement and long-term care, and to find
an Elder Law attorney in your area, go to www.naela.org.
Lori Leu, Erin Peirce, Lauren Olson, and Laura Chavero are Elder Law attorneys with Leu
& Peirce, PLLC, located in the North Dallas area. They can be reached at 972-996-2540.
DENTON COUNTY Living Well Magazine | MARCH/APRIL 2019
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