Reverse Mortgage: Is It Right for You?

With housing activity improving in most markets, the time is right for homeowners age 62 and older to see if a home equity conversion mortgage (HECM) might work for them. The loans have been controversial, and they are complicated, which is one reason that consumer counseling is a required component of the HECM loan process.

The downside of a HECM is that fees and closing costs can be steep.  Also, a fair-sized percentage of a home’s equity must be set aside to cover future interest payments on the loan funds that lenders have committed to pay to the borrowers.  Some private firms selling HECMs have been charged with misleading and overly aggressive sales tactics.  And some borrowers have been encouraged to use the loan proceeds to make risky or unwise investments.

The comptroller of the currency, John C. Dugan, compares reverse mortgages to subprime loans.  Because borrowers need not provide financial information or credit scores to qualify for a HECM, he noted, it’s not clear whether they have the financial ability to maintain the home and stay current on insurance and property taxes.  Failure to do so is grounds for the lender to take over the home, and Dugan urged regulators to develop stronger consumer safeguards to weed out unqualified borrowers.

An official with the Federal Housing Administration (FHA), which oversees the HECM program, says such defaults are less than 1 percent of HECM loans but that regulations will be proposed later this year to require lenders to seek financial information from loan applicants and to include set-asides for home insurance and taxes if they feel the borrower will have trouble keeping up with such payments.

As with any loan of this type, seek the advice of a qualified professional before doing anything!