While reverse mortgages may no longer be a loan of last resort, they should still be approached cautiously, writes the Boston Globe in a recent article.
The article details a hypothetical scenario: A homeowner is at least 62 years old, hasn’t saved as much as he wanted to before retiring, but had to stop working because of health issues. He will receive Social Security benefits and a monthly pension, but even those income streams will leave a financial gap because of unexpected expenses and home repair costs.
But a late-night TV commercial advertising reverse mortgages seems like it could be the perfect solution. “It may be,” the article states. “But be careful.”
Most people understand traditional 30-year or 15-year mortgages, but not necessarily reverse mortgages, which is why they should be approached cautiously, the Boston Globe writes.
Although no monthly loan payments are required for a reverse mortgage, borrowers have to maintain the home and pay property taxes and homeowner’s insurance, which got many into trouble a couple years ago.
In 2012, the Consumer Financial Protection Bureau (CFPB) found that a large proportion of borrowers — nearly 10% — of the home equity conversion mortgage (HECM) were at risk of foreclosure because they hadn’t paid their property taxes and insurance, the Globe notes.
However, changes have made the program safer in recent years, as people are now limited in how much they can withdraw during the first year. In addition, early last month changes to the reverse mortgage program made more proceeds available to borrowers and offered more protection to non-borrowing spouses.
Despite program changes, there are lingering concerns that some older homeowners are using reverse mortgages not to supplement other income or to handle unexpected medical expenses or make needed home improvements, but as a pot of money that they are too quickly depleting, the Boston Globe writes.
“To a lot of people, a reverse mortgage is a loan of last resort for [seniors] without any other options,” said Peter Bell, president and chief executive of the National Reverse Mortgage Lenders Association (NRMLA). “But a reverse mortgage can be a useful part of a retirement plan. However, you shouldn’t use it as a bailout.”
To read the full Boston Globe article, click here.
Written by Emily Study
