Ronald Fatoullah & Associates - Elder Law

Reverse Mortgages...the Pros and Cons


By Ronald A. Fatoullah, Esq. and Stacey Meshnick, Esq.

{4:16 minutes to read} Reverse mortgages allow people who are 62 and older to use some of the equity in their home to obtain money to pay bills, supplement income and pay for healthcare, etc. instead of having to sell the home to get the necessary funds.

A reverse mortgage does not have to be paid back monthly as would a traditional type mortgage.

The loan is to be repaid when the individual dies, sells the home, or when the home is no longer his or her primary residence. In the reverse mortgage program, a borrower can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid.

The most common type of reverse mortgage is known as a Home Equity Conversion Mortgage (HECM), which is backed by the U. S. Department of Housing and Urban Development (HUD). Reverse mortgages are more expensive than traditional home loans, and there can be significant upfront costs.

Therefore, it may not be a good idea for individuals who have a sufficient savings account, those who plan to stay in their homes for a short period time or those that need to borrow a small amount of money.

How much one can borrow depends on several factors, including age, the appraised value of the home, and current interest rates. In general, the older an individual is, the more equity he has in his home, and the less he owes on the home, the more money he can get. A borrower can also choose different payment options, including fixed monthly cash advances for a time period, fixed payments as long as he lives in the home, a line of credit or a combination. The borrower can also change his payment option at any time.

Before applying for a HECM, the individual must meet with a counselor from an independent government-approved housing counseling agency. The counselor is required to explain the loan's costs and financial implications and to offer possible alternatives to a HECM, such as government and non-profit programs or "proprietary" reverse mortgages.

The counselor also should be able to help compare the costs of different types of reverse mortgages and tell the prospective borrower how different payment options, fees, and other costs affect the total cost of the loan over time. Most counseling agencies charge approximately $125 for their services. The fee can be paid from the loan proceeds, but one cannot be turned away if he cannot afford the fee.

The counselor explains to the borrower's family that they have six months after the last remaining borrower dies to either sell the home and pay off the reverse mortgage or pay it off with other funds. Additionally, as long as the house is listed in writing at or below current market value with a real estate brokerage firm, the family might be eligible for two three-month extensions to sell the home.

A recent letter issued by HUD changed the above-described rule and indicated that the loan would not come due upon the death of one spouse if an application was entered into after August 4, 2014 and the borrower was married at the time of death with the spouse living in the home. However, any line of credit issued to the surviving spouse would be discontinued at that point.

Unfortunately, despite the rules, lenders are now starting foreclosure proceedings even when an individual's family has done everything they are required to do. Even though the HUD counselors confirm the six-month reprieve and three-month extensions, lenders are filling out foreclosure paperwork within 30 days after the death of the borrower.

Hopefully, senior advocates and legislators will get involved to pressure HUD to ensure that the extensions are honored.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that exclusively concentrates in elder law, special needs planning, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Debby Rosenfeld, Esq. is a senior staff attorney at the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.

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