Reverse mortgages are a certain type of loan typically targeted at those aged 62 and older. This type of mortgage is usually secured on a residential property and enables a borrower to access the equity in their home and turn it into a cash loan. Here, we want to properly define reverse mortgages so that you understand what they are. We also want to look at the risks seniors face when they obtain a reverse mortgage. With this information, we hope that you gain a little bit more of an understanding of how these mortgages can affect you or someone in your life, and if you would like more information, speak with a San Diego financial elder abuse attorney.
What is a Reverse Mortgage?
As we mentioned above, a reverse mortgage is a mortgage loan typically secured on a residential property. These types of mortgages allow a person to obtain a loan for the value of the equity in their home. This means that they obtain a loan for how much their home is worth above how much they currently owe for the home. For example, if a person owes $100,000 on a home that is valued at $300,000, they would be able to obtain a reverse mortgage for that $200,000 difference.
When a person borrows money on the equity of their home through a reverse mortgage, they will still be responsible for paying property taxes and homeowners insurance. However, reverse mortgages typically do not come with monthly mortgage payments. Interest is added to the loan balance each month, but the reverse mortgage will not come due until the borrower dies, sells the property, or moves out of the home.
What are the Risks of Reverse Mortgages for Senior Citizens?
As reverse mortgages have increased in popularity, so has knowledge about the risks that seniors face for these types of loans. During the Great Recession, we saw that around 100,000 reverse mortgages failed, leaving elderly borrowers and their family members wondering if they made the right decision.
Some of the main risks that come with a reverse mortgage include the following:
1. Inheritance for heirs
Reverse mortgages will come due when the borrower dies. When this happens, their spouse or the estate is typically responsible for repaying the loan. However, this often means that the house has to be sold in order to generate the money necessary to pay back the loan balance. If a home sells for more than the outstanding loan balance, the heirs or the estate will get to keep the leftover amount. However, if the home sells for a loss, the heirs will receive nothing. They will not have to pay any additional money to cover the loss, but they will not be left with anything else.
2. Living with someone
If the person who took out the reverse mortgage lives with someone else, including relatives, friends, or roommates who are not on the loan paperwork, then these other individuals could lose their home in the event the borrower passes away or moves. These individuals could be forced to vacate the home so that it can be sold and so the loan can be paid back.
3. Having medical issues
Seniors often obtain reverse mortgages in an effort to pay their outstanding medical bills. However, declining health could result in seniors not being able to live in their home. If the health of an individual reaches a point where they have to relocate to a long-term care facility, the loan will have to be paid in full because the home will no longer be the primary residence.
4. Moving to a new location
If a senior is contemplating moving for reasons other than health, then the reverse mortgage is likely not a good idea. The upfront costs for these types of loans can make a reverse mortgage impractical. The various fees that go into obtaining a reverse mortgage include ongoing insurance premiums, closing costs, appraisal fees, property title insurance, inspection fees, and more.
5. Affording the costs
The proceeds from a reverse mortgage may simply not be enough to cover the various expenses of owning a home, including homeowners insurance premiums, home maintenance costs, and property taxes. If a reverse mortgage borrower fails to stay current in these areas, this could cause the lenders to make the reverse mortgage due, and result in the loss of the home.