Harry and Regina are both in their 80s and still in pretty good health. They live in their own home in Dunstable, but they keep coming up short on their bills every month. Their income is a couple of hundred dollars less than their expenses. They wonder if they will be forced to sell their house and move to an apartment. But, their advisor tells them there is another option. They can get a Reverse Mortgage that will bring in extra monthly income to meet their bills and allow them to stay at home.
This is the best scenario for a reverse mortgage. It is the traditional option of getting extra monthly income to pay bills and allow an elder to stay at home. The reverse mortgage means that Harry and Regina are spending some of the equity in their home, leaving less for their children as an inheritance. But, like many people, Harry and Regina’s children are better off than them. Staying independent and not being a burden on their children is more important than leaving them an inheritance.
But, Reverse Mortgages have been overused and abused by those who may not really need them. And, since most Reverse Mortgages are backed by the Federal Government, there are new changes to the rules to limit their use to this traditional option. The change is to the Home Equity Conversion Mortgage (HECM) standard program. These mortgages are backed by the Federal Housing Administration (FHA). The FHA has been losing a lot of money on mortgages where the homeowner took a lump-sum distribution rather than monthly payments. Often the house was lost to foreclosure as the homeowner didn’t pay property taxes or insurance (which is the only life-time reason for a reverse mortgage to be foreclosed upon).
As of April 1, 2013, the FHA backed HECM loans only come with the monthly payment option. Lump sum (up front) distributions are not allowed. You can still get a lump sum with a reverse mortgage, but you will have to use a private (not FHA backed) product that will have a variable interest rate (unlike the HECM which is a fixed-rate product) and probably higher fees and costs.
The change in the rules was requested by HUD Secretary Shaun Donovan who asked Congress for the power to make changes to shore-up the program. Secretary Donovan was able to fend off some members of the banking committee who suggested a moratorium on new loans. He said that would hurt seniors who are in financial crisis now – those for whom reverse mortgages (done right) will really help. Congress allowed HUD to make the changes and they will keep backing loans, but with the tighter rules and lower borrowing amounts.
If you find yourself running short of funds to pay your bills, but you own your home, then a Reverse Mortgage might be right for you. Reverse Mortgages are not right for everyone and are not a quick-fix to a short-term problem. They are not a way to get extra cash to buy discretionary goods – they are a way to solve a financial problem and keep a senior in his or her home for as long as possible. You should consult your legal and financial advisers to see if a Reverse Mortgage is a good option for your particular situation.