Michelle Singletary, The Washington Post, July 6th, 2012
When my grandmother retired, she was mortgage-free. It was the achievement of a lifelong goal to reach a certain level of financial independence. However, what happens if you’ve paid off your mortgage but find that you’re house rich and cash poor?
Many seniors are finding they are cash poor because of poor money management or by no fault of their own. Job losses and/or medical expenses have wiped out their savings.
Recognizing that many older Americans were free of a mortgage but also cash-strapped, decades ago a savings and loan came up wioth a new loan prioduce — a reverse mortgage — that allows people who are 62 or older to borrow against their home’s equity.
Unlike a tradfitional home loan, no payment is due on a reverse mortgage until you move, sell, or die. If your home is sold, any equity that remains after the loan is repaid is distributed to you or your estate. typically, a reverse mortgage works best ifyou plan to stay in your home for a long time. the longer you stay, the less expensive the loan is because the upfront fees are so high.
Borrowers can take the loan as a line of credit, a lump sum, monthly payments, or a combination. For many seniors, a reverse mortgage can be a saving grace. But this product isn’t without issues, according to a newly released report from the Consumer Financial Protection Bureau.
The bureau found some troubling issues. For instance, even though borrowers have to get mandatory pre-loan counseling, many still don’t understand the intricacies of a reverse mortgage.
Further, some counseling agencies receive payment only when the reverse mortgage is closed, which could undermine counselors’ impartiality, the bureau points out.
Yet another concern: People are taking out loans at younger ages. Last year, nearly half of borrowers were under 70. “By tapping their home equity early, these borrowers may find themselves without the financial resources to finance a future move — whether due to health or other reasons,” the report says.
The bureau found that a large proportion of borrowers (9.4% as of February) are at risk of foreclosure because they haven’t paid their property taxes and insurance.
The agency can impose regulations on reverse mortgages. It is asking for public comment before deciding whether other measure are necessary. If you want to weight in on this issue, go to www.consumerfinance.gov. The bureau has a short guide on reverse mortgages.
A reverse mortgage isn’t a bad product. But consumer groups have long complained about deceptive or misleading marketing. The bureau’s report raised enough red flags to warrant the agency’s taking whatever steps are necessary to protect people considering this option.
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