The federal government is proposing to make big changes to its reverse mortgage program early next year that should make the (reverse mortgage) loans safer for seniors who use them to tap home equity.
In a response to the speculative loan market, we have seen increased regulation in the banking and loan industries. Yet the structure of one type of loan has gone relatively unchanged in that time - the reverse mortgage loan.
A reverse mortgage is a special type of home loan that allows homeowners to convert a portion of their home equity into cash. The equity you built up over years of making mortgage payments can be paid to you to supplement your income.
The issue was recently brought up in a Reuters article titled, “Federal clampdown looming on reverse mortgages.”
According to the Department of Housing and Urban Development, reverse mortgages are a safe plan that can help older Americans supplement Social Security, meet unexpected medical expenses, and make home improvements. Unfortunately, riskier loan structures are making reverse mortgages increasingly dangerous. In response, the federal government is planning to take a more conservative approach when evaluating new reverse mortgage loan applications. This means reverse mortgage loans will be harder to acquire in coming months.
For purposes of estate planning, the reverse mortgage is an idea worth exploring. In practice, when your home is no longer used as a primary residence, the cash, interest, and other finance charges from the reverse mortgage loan must be repaid. However, all proceeds beyond such amounts owed on the reverse mortgage belong to your estate and no debt is passed along to the estate or heirs. This makes the reverse mortgage option an appealing idea for older homeowners who may need supplemental income, but hope to avoid passing on debt to family members.
If you or your loved ones are concerned about needing additional income during the coming months, reverse mortgages are worth discussing with your family and estate planning attorney before lending standards become too strict.
Reference: Reuters (December 5, 2012) “Federal clampdown looming on reverse mortgages”