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A closer look at reverse mortgages


True Wealth: Judith McGee

We’ve all seen the TV commercials: the friendly and familiar face of an aging actor, using his most earnest and sincere tone of voice (they are paid actors, after all), touting the too-good-to-be-true benefits of a government insured reverse mortgage.

No credit scores or income requirements to qualify! Get tax-free money from the equity in your home! Use that money to pay off your mortgage and keep the rest to enjoy your retirement! No monthly mortgage payments, and you still own your home! Don't wait; call now for a free-no-obligation DVD! Yadda, yadda, yadda.

In a reverse mortgage, you borrow against your home and don't have to pay it back as long as you still live there. But it’s still debt and is one of the most expensive forms of credit you can have.

For many seniors with minimal income and rising living expenses, the idea sounds appealing. But before you sign up, remove the rose-colored glasses, understand what’s at stake, and pay attention to that man behind the curtain.

Three categories of reverse mortgages

n Proprietary Reverse Mortgages: Private companies that maintain ownership of these loans select specific lenders to administer the mortgages. They have fewer qualifying restrictions than other varieties, but there are substantial upfront fees, such as appraisals, credit reports, origination fees, closing costs and a monthly service fee.

n Single-Purpose Reverse Mortgages: These can be offered by nonprofit groups or local and state governments. Funds are generally limited to specific needs such as renovation or property taxes. There are certain income qualifications, but usually lower initial costs.

n Home Equity Conversion Mortgages: Since being introduced in 1987, these FHA insured reverse mortgages are the most popular and the only ones guaranteed by the government to deliver on the loan promises.

Questions you’ll need to ask

* What triggers a default? If an elder fails to pay property taxes or homeowner’s insurance, or fails to maintain the home, they are in default. The lender can then foreclose, purchase the property, and flip it for profit.

* What if the elder is moved to a permanent care facility? In such cases, not only will the mortgage come due, there is now the high cost of the care facility. It can leave an elder homeless.

* What happens when the elder dies? In most cases, the loan doesn't have to be paid back until the last surviving borrower dies, sells the home or permanently moves out. Then the entire principal, plus accrued interest and service fees, must be paid in full before the heirs take possession of the home. If the debt exceeds the home’s actual market value, and if the heirs can’t afford to pay it off, the lender can foreclose and sell.

Here are a few thoughts to keep in mind:

* The amount loaned against the property is discounted relative to the appraised value and the age(s) of the borrower. You may be putting your home equity in jeopardy for pennies on the dollar.

* Your heirs may not get the house. Take the case of Aunt Betty, who didn’t live long enough to use her reverse mortgage equity loan. The bank would not finance any of her four children, the home was sold, and the family lost it all.

* Scams: Loving grandparents would do almost anything for their grandkids. But Bobby steered his grandparents into a reverse mortgage and then, with a little finesse, was able to con enough money from their account to buy his own condo and a sports car. The grandparents lost the home but were reluctant to prosecute Bobby for his theft.

* However, in Jean’s situation, a reverse mortgage made sense. She wanted to stay in her home, didn’t have heirs and needed additional income just to live. She felt the reverse mortgage was ideal for her.

Seek objective sources for answers

A reverse mortgage should be a last resort. What’s good for some may not be OK for others. Before you sign any documents, consult your financial or tax adviser.

Judith A. McGee is the chair and chief executive officer of McGee Wealth Management Inc., an independent registered investment adviser, at 12455 S.W. 68th Ave., Portland. She is a co-branch manager of, and offers securities through, Raymond James Financial Services Inc. (member FINRA/SIPC). Contact her at 503-597-2222 or [email protected]com.

The information has been obtained from source considered to be reliable, but we do not guarantee that the foregoing materials is accurate or complete. Any opinions are those of Judith A. McGee and not necessarily those of Raymond James.