12 NEWS DEFENDERS: Pros and cons of reverse mortgages - WBRC FOX6 News - Birmingham, AL

12 NEWS DEFENDERS: Pros and cons of reverse mortgages


You've probably seen the commercials or ads online promising to turn your home into cash without having to sell the property, move out of it or repay a loan every month.

They're advertising reverse mortgages and more and more senior citizens are taking advantage of them. What those people may not realize is that reverse mortgages come with potentially serious risks.   

Reverse mortgages are only available to people 62 years and older, and there is a rapidly growing, aging population becoming eligible for them. And that aging population is more concerned than ever about out-living the money they have saved up.  

So they're turning to these complex home equity loans. In many cases a reverse mortgage is just the answer people need to make ends meet, but financial advisers warn you need to understand what you're signing up for, and it may not be everyone's answer.

In the commercials, reverse mortgages are touted as a simple way to continue the lifestyle you're used to living. Even as your income dwindles after retirement. But financial advisers say reverse mortgages are anything but simple.  

"It actually works opposite of what a traditional mortgage would be," says Chris Hogan. In a traditional mortgage, you make payments, the principle goes down and you're closer to owning the home. 

A reverse mortgage pays you. You don't owe anything as long as you're in the home, but once it's vacated, the entire loan has to be paid up.

"You still have to make the taxes and insurance payments," Hogan says. "You still have to do all the regular upkeep on the home and on the loan. Fees can be very high. You can pay up to 10 percent in fees, so on a $100,000 loan that's $10,000 that would immediately go to the loan company."

Hogan is the chief financial and business coach for "The Dave Ramsey Show", a radio show about managing money by providing Biblically based, common sense education.

"We want people to be able to get out of debt so they can build wealth and give," Hogan explains.

"The Dave Ramsey Show" never advocates for choosing a reverse mortgage. "The goal is for people to be in a house, pay it down, and the home to be able to appreciate, so it becomes an asset for people in retirement," Hogan explains.

"I thought I was not going to stay in the house," says Hilda Funk. Her story, though, is a reverse mortgage success. "I will be 81 next month," she admits.

When her husband died 7 years ago, Funk was afraid she'd lose her home, explaining that the house payments," were fairly steep." Funk was considering a second mortgage to lower her house note until she learned about reverse mortgages.

To qualify, borrowers have to be at least 62, own their home outright or carry a mortgage small enough to be paid off by the proceeds. There are no income or credit qualifications, but homeowners are responsible for paying the annual taxes, property insurance and maintenance.

No loans have to be repaid until the owners move or die.  

Then the bank takes its share and anything left goes to the heirs. "This is the answer to what we needed so we can stay in our house," Funk says of her decision. "I can stay in it as long as I'm here, which is a very big relief for me."

As for what she leaves behind, Hilda says her heirs will be taken care of. She says she's got everything, "pretty well organized that there will be no debts."

However, if the home owner fails to pay insurance and property taxes, the reverse mortgage goes into default and the owner is in danger of foreclosure, and losing the home altogether.  

For most people, it's the largest investment they'll make in their lives," says AARP Alabama's Bill Hawkins. He says many of its members are struggling to make ends meet, but not every one of them is the right candidate for a reverse mortgage.

"The only way you can determine that is by your specific needs and your specific situation," Hawkins explains. "Get expert advice," he says.

Some financial experts maintain a reverse mortgage is never the right answer.  "Before I would advise anyone to take out a reverse mortgage, I would personally sit with them, talk with them, and say, "Listen, you need to look at all of your options and know what you're getting into,"" Hogan says, adding, "Selling the home is a better option than taking out a reverse mortgage."

But for people like Hilda Funk, she says she would do it again. "This is where we plan on staying. I've never been sorry, it's been a blessing for us."

Like everything, reverse mortgages have their own pros and cons. On the down-side, borrowers are still responsible for real estate taxes, conventional homeowners insurance and home repairs, and have the added burden of paying for mortgage insurance, too.

And the fees to get into a reverse mortgage run high. The borrower must also live in the house for the life of the loan.  If you move into a nursing home, a family member's home, or pass away, the loan is due in full.

On the up-side, it's easier for the aging population to qualify for a reverse mortgage than a traditional 30-year loan. Reverse mortgages also allow you to stay in the home you've more than likely formed a strong emotional attachment to. 

And you get to decide how you receive the money, in a lump sum or monthly installments.      

Before any reverse mortgage goes through, the borrowers are required to go through counseling to make sure they understand exactly what they're getting into.

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