Most of us under 62 years of age only know about reverse mortgages from the late night television commercials featuring slightly (or more than slightly) washed up celebrities encouraging senior citizens to mortgage the accumulated equity in their home. As the population of seniors grows with the aging of baby boomers and the percentage of those senior citizens are squeezed by a flat source of income and ever increasing expenses, reverse mortgages and even bankruptcy, or a combination of the two, are becoming increasingly necessary for some senior citizens to survive.
The great recession had a disproportionate impact on senior citizens. According to the Census Bureau, the median income of senior citizens nationally in 2012 was just $33,848 and many senior citizens live on Social Security alone, which averages $1,294 per month. This modest income picture is exacerbated by increasing costs that senior citizens face for health care. The average out-of-pocket expense for health care for those over 65 has increased by 46 percent from 1996 to 2009. Credit card debt for seniors has also exploded. Senior citizens on average carry more credit card debt than their younger counterparts. According to AARP, 34 percent of senior citizens use credit cards to pay for basic living expenses and still, others use credit cards as a high interest plastic safety net to cover contingencies, such as emergency car repairs or medical bills.
What many senior citizens do have is equity in their homes. Reverse mortgages allow senior citizens to tap that equity to pay debts, to make repairs to their homes or to provide a source of income. While this can be a useful tool for seniors who find themselves in a desperate financial condition, seniors and their lawyers should proceed with caution
The Federal Trade Commission (FTC) offers the following definition of a reverse mortgage on its website:
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan.
Sometimes that means selling the home to get money to repay the loan. The Federal Home Administration (FHA) provides insurance to lenders who issue home equity conversion mortgages, the official name for reverse mortgages typically making these products widely available. Most insured reverse mortgages allow a borrower over 62 to borrow up to 60 percent of the equity in their home. However, the FTC cautions that there are important considerations that homeowners contemplating such a transaction should consider, including the following:
There are fees and other costs associated with the transaction.
A borrower of a reverse mortgage will owe more over time.
Interest rates may be adjustable causing instability in circumstances.
Interest on these mortgages is not tax deductible.
Borrowers still have to pay other costs related to their home, such as hazard insurance and property taxes.
Lawyers counseling clients who are contemplating reverse mortgages should be aware that many borrowers who are used to mortgage companies paying taxes and insurance through escrow may not understand the obligation to keep taxes and insurance current. We have represented several consumers who didn’t understand that obligation and were facing foreclosure because of their failure to pay property taxes in a timely manner. Such expenses need to be considered before a borrower agrees to a reverse mortgage.
Finally, senior citizens contemplating a reverse mortgage to pay off debts should also consider whether a bankruptcy, or a combination of a bankruptcy and a reverse mortgage may make the most sense. In some circumstances, a bankruptcy filing could either provide a better alternative to taking a reverse mortgage or make the reverse mortgage option more realistic. Marc Dann