These days, with Baby Boomers approaching retirement and most of their parents still living, too, an unprecedented population of elders has given rise to new financial tools. Brad Stroh, co-founder and co-CEO of Bills.com, offers tips to help people understand reverse mortgages – and avoid falling victim to scams.
"Reverse mortgages can be good tools to help retiring Americans' financial stability," Stroh says. "But, as with any financial service, potential borrowers need to be careful with whom they do business and beware of scammers looking to take advantage of unsuspecting victims. Most commonly, scammers promoting reverse mortgages try to take a fee for providing 'help' that is available for free. Some unsavory lenders offer loans to people who will not benefit from the reverse mortgage, simply to take their cut."
By becoming educated consumers, people can avoid these traps, Stroh says. The first step is to understand the key components of reverse mortgages:
- Reverse mortgages are available to borrowers age 62 or older.
- To qualify, homeowners must have a significant amount of equity built up in their home. Homeowners with little equity will not gain enough from a reverse mortgage to make it worthwhile.
- Unlike a home equity line of credit, there is no monthly payment on a reverse mortgage. A reverse mortgage pays the homeowner, and is available regardless of current income.
- Reverse mortgages typically have closing costs (fees) higher than those associated with a traditional second mortgage or home equity line of credit.
- Homeowners must pay off any existing mortgages with the proceeds from the reverse mortgage.
- The loan comes due when the homeowner sells the house, moves or passes away. Thus, the home will not be left free and clear for heirs. Heirs must repay the loan if they wish to keep the home.
"If you believe a reverse mortgage could be for you, the next step is gaining a realistic view of how this loan could benefit you," Stroh says. For specific details, Stroh advises homeowners take these 5 steps before speaking with a lender:
- Learn about reverse mortgages. Many sources, both online and offline, provide helpful information on reverse mortgages, outlining factors borrowers should consider before taking a reverse mortgage loan. Two good resources include the AARP and the U.S. Department of Housing and Urban Development (HUD).
- Understand equity. Equity in a property is the difference between a property's market value and the amount of claims held against it (such as mortgage loans or liens). If a home is paid off, the homeowner's equity is the current market value of the home. If the home still is mortgaged, the homeowner's equity equals the home's value minus the balance of the mortgage.
- Know borrowing eligibility. The Federal Housing Authority regulates how much homeowners can borrow with a reverse mortgage. The amount varies with the home's value and the borrower's age. Get a ballpark figure with a calculator such as AARP's at www.rmaarp.com/index.asp.
- Determine the costs. Reverse mortgages are relatively expensive, requiring lenders to do more "upkeep" than traditional loans. Lenders must certify that borrowers continue to reside in the home. Also, lenders pay companies to make sure taxes and insurance are paid. Reverse mortgage fees are taken from the equity as part of the deal, but know they exist.
- Get information for free. Do not fall for scams where "helpful" information about finding a lender is offered for a "small fee." Instead, call HUD at 1-888-466-3487. HUD will refer homeowners to an approved counselor that will assist them for free. These counselors also can help homeowners understand if they qualify for other benefits that might improve their financial situation. Bills.com's Reverse Mortgage center at www.bills.com/reversemortgage also offers more information about reverse mortgages at no charge.
"A reverse mortgage might be the right tool for you," Stroh says. "The only way to find out is to learn all you can – and then make the best decision for your future and that of your heirs."