A reverse mortgage is a type of loan that enables people who are age 62 and older to use the equity they have built up in their home over the years. The homeowner borrows against their home equity; instead of you paying a lender for a mortgage, the lender makes payments to you. Payments can be received monthly, in a lump sum or through a credit line.
Unlike a home equity loan where you make monthly payments, you don’t have to pay the loan back while you remain in the home. All interest is paid at the end of the loan rather than at the beginning, but that can be an advantage or a disadvantage. Like just about everything in life, reverse mortgages have their upside and their downside. They are not for everyone.
California Reverse Mortgage Statistics
There are a total of 11,068 reverse mortgages in California, according to recent research.
- Standard reverse mortgages: 8,288
- Reverse mortgage refinances: 2,257
- Reverse mortgage purchases: 423
A reverse mortgage must be taken out on the borrower’s primary residence. The California’s Reverse Mortgage Elder Protection Act of 2009 states that a reverse mortgage may have a fixed or adjustable rate of interest. There are basically two kinds. There are federally insured reverse mortgages, which are called Home Equity Conversion Mortgages (HECM). These are insured by the U.S. Department of Housing and Urban Development (HUD). The second type of reverse mortgages are proprietary reverse mortgages, which are offered by companies and often have higher loan amounts than are available through HECMs.
Benefits of a Reverse Mortgage in California
There are a number of benefits to reverse mortgages, as all the many advertisements that inundate you proclaim. Here are some of the biggest ones:
- A reverse mortgage can enable you to live a better life. You can use it to pay for anything you like, such as health care, early retirement, or even travel.
- Qualification is usually not based on credit or income. It’s generally based on the age of the youngest borrower or non-borrowing spouse, the value of the home and the current interest rate.
- You can live in your home as long as you like without monthly mortgage payments.
- Your home can’t be taken from you for non-payment unlike a home equity loan, as long as you pay for taxes, insurance and maintenance.
- You will never owe more than the market value of your home.
- The money is tax-free.
- You retain the title to the property.
- The most common reverse mortgage, Home Equity Conversion Mortgages (HECM), is federally insured.
- The loan does not come due until you move out of the house, sell the house, or both spouses (if they were both borrowers) have died. Make sure both spouses are on the reverse mortgage, however.
Disadvantages of a Reverse Mortgage
Reverse mortgages may sound like they make a lot of sense, and often they do. But there are some issues you need to know about before making a decision. There is a reason there is a federal requirement that you meet with a government-approved counselor before even applying for a reverse mortgage.
Under the California’s Reverse Mortgage Elder Protection Act, lenders must give you a list of at least 10 federally approved counseling agencies you can consult with about the risks and costs of a reverse mortgage. You may also want to consult with a Los Angeles lawyer who is experienced with reverse mortgages in California.
Here are some issues you may want to discuss with your attorney:
- Under California law, the lender may not make the reverse mortgage contingent on buying an annuity, insurance, or another service. Beware of lenders who may try to do this.
- A reverse mortgage becomes due under various conditions. These include borrowers not living in the home for 12 months or more or dying. Make sure both spouses are on the reverse mortgage as borrowers, or a spouse could be forced to sell the home to pay off the mortgage when their spouse moves to a nursing home or dies.
- If you do not keep up your taxes or insurance, or you let the property deteriorate, your mortgage loan will come due.
- A reverse mortgage can adversely affect your eligibility for government programs such as Medicaid, because qualification is calculated on your total liquid asset base. If you have unspent reverse mortgage money, you may not qualify.
- Fees for reverse mortgages can be higher than those for other loans. You may want to consider alternatives such as a home equity loan. It’s wise to consult with a financial advisor or qualified attorney about your individual situation.
- A reverse mortgage, of course, will decrease the equity in your home, thereby leaving less in your estate for your heirs.
- Reverse mortgages vary. If yours is not an FHA-approved mortgage, check that it is a non-recourse loan, meaning the liability to repay is strictly limited to the home itself.
Reverse Mortgages are Complicated
Reverse mortgages are complicated, and we have barely scratched the surface in this article. If you are considering applying for a reverse mortgage to pay your bills, we invite you to call us for a free debt consultation in one of our offices in the Los Angeles area. We can help you to understand the ramifications so you can better reach an informed decision about whether or not a reverse mortgage is the best option in your situation.
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