With property values decreasing in most towns in Connecticut and in the rest of the country, now might be the right time to set up a reverse mortgage for yourself or for your elderly relatives.
While reverse mortgages have inherent dangers, if you or your loved one is 62 or older and has a sizeable equity in their home, and may need money for living expenses, tapping into the equity might make a lot of sense.
Instead of selling the home, or taking out a regular mortgage, a reverse mortgage allows a person who is at least 62 to borrow against the equity and never having to pay it back as long as they are alive.
The borrower can receive the loan either as a stream of income, or as a lump-sum payment.
The loan becomes due – with interest – after the borrower dies or moves. It will also become due if the borrower fails to pay house insurance or property taxes – a huge potential problem that borrowers need to be aware of. Both property taxes and insurance are likely to rise dramatically in the future.
While no one can predict what the economy will do in the future or even in the next few months, odds are that home values in Connecticut will not be increasing any time soon.
In fact, from all the reading I have done, I am convinced that the employment picture is not going to brighten soon and that means house prices – especially in no growth states like Connecticut – will continue to drop. If 7,000 state employees get the ax, that will of course put even more pressure on the economy and decrease house values.
Banks aren’t totally stupid either, and some have ended reverse mortgage programs because of the risks they too see in lower house values as well as borrowers being too strapped to keep up their homes or to pay their taxes and insurance. The two biggest banks to halt their reverse mortgages are Wells Fargo and Bank of America.
So before all the other banks follow Wells Fargo and Bank of America, take action now if a reverse mortgage makes sense. Make sure you discuss that with a trusted financial planner. Be prepared to pay high closing costs and make sure you are aware of every aspect of the reverse mortgage, they can be tricky.
And make sure you contact a reputable bank – don’t ever fall for someone who contacts you with an offer of a reverse mortgage. Earlier this month federal prosecutors in Florida arrested four people on charges that they conned more than a dozen homeowners across the country into signing up for fake reverse mortgages. The homeowners paid the fees, the company officials stole more than $2 million of mortgage money.
The Wall Street Journal this month suggested that in some cases family members could provide the reverse mortgage without the risks that a bank contract would have.
“To reduce fees, streamline paperwork and increase the equity a parent could tap, an adult child could either buy a parent’s house outright or set up a private reverse mortgage,” the WSJ article written by Kelly Greene said.
“Another option is to have the adult child set up a revolving line of credit for the parents backed by their home equity. For a few thousand dollars in legal fees, you can do it using a promissory note, a deed of trust recorded at a local courthouse and a revolving credit agreement,” Kenneth Kossoff, an estate lawyer in Westlake Village, Calif., told the WSJ.
“The good advice is to do it this summer,” says Barbara Stucki, vice president for home-equity initiatives at the National Council on Aging, a Washington-based advocacy group told the WSJ.
