Depending on your age and financial circumstances, taking out a reverse mortgage may be an excellent financial decision. However, a reverse mortgage has long-reaching effects, and you should not decide it on it in haste, or without carefully considering all your alternatives. An attorney who is experienced in estate planning and real estate can advise you of the effects a reverse mortgage will have on your future finances and on your spouse and adult children should you pass away, and may even be able to help you use the reverse mortgage to pay off an onerous subprime mortgage, freeing up more money for you to live on.
What Is A Reverse Mortgage And Who Qualifies?
A reverse mortgage is a loan. As a borrower, you receive a certain amount of money based upon the equity that you have built up in your home, either as a line of credit or as fixed monthly payments for life, or for as long as you live in your home. The proceeds of the loan are tax-free, and you can spend the money on anything. However, there are two important factors that must be met to qualify for a reverse mortgage. First, as a borrower, you must be at least 62 years of age and hold title to your home. Second, your home must be paid off in full, with no outstanding mortgage due, and if it is not you must use part of the reverse mortgage money to pay off the existing mortgage.
Is A Reverse Mortgage “Free Money”?
While a reverse mortgage provides a borrower with disposable income, which can be used for a number of purposes, it is still a loan that has to be paid back – it is a loan with a maturity date! Usually, the loan balance becomes due when the last remaining borrower passes away. And usually the loan is repaid through the sale of the house when the borrower dies or moves into an assisted-living facility. But in some circumstances, the due date arrives because the borrower fails to pay property taxes or fails to keep the home insured, and either situation can result in foreclosure.
The Double Edged Sword: How A Reverse Mortgage Can Avoid Foreclosure And Lead To One
Consider the case of Ruby Clark. In the AARP article, “An Escape Route for Foreclosure,” Ruby Clark’s experience demonstrates the saving grace a reverse mortgage can provide for some homeowners. Ms. Clark was the unfortunate victim of a subprime loan that she took out to help her maintain the home she had lived in for over 30 years. When she could not keep up with her payments, her home was headed for foreclosure. An attorney with the local Legal Aid Society persuaded the mortgage company to agree to a mortgage pay-off of less than what was owed, and Ms. Clark then took out a reverse mortgage. She was able to use those funds to pay off the existing mortgage debt with some money to spare. In Ruby’s case a reverse mortgage saved her home.
However, according the legislative policy director for AARP, there is increasing risk for people who take out reverse mortgages due, to the strict policies being adopted by mortgage giants like Fannie Mae. According to a recent Los Angeles Times article, the Federal Housing Administration, which runs the reverse mortgage program, is clamping down on borrowers who are delinquent in paying their property taxes or who fail maintain property insurance. A reverse mortgage borrower who doesn’t have the ability to pay their property taxes or pay their insurance premiums may face foreclosure. Before you decide that a reverse mortgage is for you, you will want to fully understand the benefits and risks.
Our Real Estate and Estate Planning attorneys at San Diego Law Firm can help you evaluate all the alternatives if you are considering taking out a reverse mortgage. We can take your reverse mortgage into account in updating your living trust and estate plan and planning for Medi-Cal. And if you have an existing subprime mortgage, we may be able to negotiate with your lender to reduce the amount owing so that you can pay it off with a reverse mortgage. For more information or an appointment, please call us at 619-794-0423. We look forward to helping you.
