Chances are you've seen any number of pitches touting the potential benefits of reverse mortgages in your retirement. The concept certainly sounds appealing.
If you are over 62 and have solid equity in your home, you can borrow against that equity without having to pay any monthly payments. The advanced funds can be taken as a lump sum, as a line of credit or as monthly set payments. The older the borrower is, the higher the payout usually is. Interest accrues, but the borrower doesn't repay the loan until he or she leaves the home through its sale or upon death.
The thing is, the reverse mortgage is essentially an insurance policy. The lender is using actuarial data based on the borrower's age to determine how much interest might need to be paid. The older the borrower, the less interest is likely to accrue, so older borrowers can get more money up front.
A problem that has been discovered, however, is that there are cases in which married couples have been persuaded to put the reverse mortgage in only the older spouse's name. When the older spouse died, some younger spouses have faced foreclosure when he or she couldn't pay off the loan.
Well, as of Aug. 4, by virtue of a class-action suit filed by AARP, there are new rules in place to prevent that from happening. The rules state that the surviving spouse can remain in the home as long as they continue to pay just the taxes and insurance.
The head of the National Reverse Mortgage Lenders Association says he understands why the rule is needed, but he says it will reduce how much borrowers will be able to get from reverse mortgages going forward. He says lenders will base loans values only on the younger spouse's age.
The new rule is not retroactive to reverse mortgages already in place, however. So the suggestion from industry observers is that if you have a reverse mortgage you should check with your lender or an attorney to know where you stand.
Of course, the threat of foreclosure is not limited to individuals in this kind of circumstance. Whatever your situation may be, if foreclosure is an issue and you want to know your options, it's best to consult an attorney.
Source: Insurance News, "AARP lawsuit against HUD helps younger survivors keep their homes," Tim Grant, Pittsburgh Post-Gazette, Aug. 12, 2014