Reverse Mortgage Problems: When to Stay, and When to Walk Away

Reverse mortgages are designed for senior homeowners. They’re advertised as a super power available to longtime deed holders. The idea? When you’re low on cash, tap into your many years of equity-building. Draw financial strength from your property’s value.

Sounds good, and yet pitfalls await the unwary. Reverse mortgages allow borrowing to increase, and home equity to dwindle. And a deed holder’s plan to leave something to heirs might be in jeopardy.

In this article, we focus on the risky aspects of a reverse mortgage.

Fixed-Income Seniors Are Looking for Options.

Today’s seniors struggle with rising costs of living. Insurance costs have surged, especially in hurricane-prone areas where many retirees live. Many seniors wind up pushing back necessary home repairs for lack of cash. Inflated costs for materials and services don’t make things any easier.

As noted by the Council on Aging:

What happens when inflation and fixed incomes collide? It can spell trouble for many older adults already struggling to cover basic expenses like food, fuel, utilities, and housing.

For seniors trying to cope, an approval for a reverse mortgage may seem like a godsend. Savvy seniors know they’d be signing up for high fees — but these can be negotiated. They shop around, pressing one company to beat another’s deal.

A Reverse Mortgage Puts a Lien on the Title.

Through a reverse mortgage, the homeowner can receive monthly income and accumulate cash reserves. Watch out for the compound interest, which makes it more like a credit card than a regular mortgage. And here, the lender puts a lien against the deed. This puts homeownership on the line.

Unlike a HELOC, a reverse mortgage doesn’t require you to make monthly repayments.

If the borrower is not paying the loan off every month, debt snowballs and equity dwindles. If there’s a lull in the real estate market, the home’s value could sink below the total debt.

And then what? Can the deed holder walk away from the loan? From the home? Can the lender start seizing assets?

No wonder the Department of Housing and Urban Development offers approved counselors to help applicants. Applicants should also speak with professionals to understand the impacts on credit and tax obligations.

Are Reverse Mortgages Financial Exploitation?
Reverse mortgages with unfair terms were once common. Today, most of these products are Home Equity Conversion Mortgages (HECMs) for seniors aged 62+. These have the backing of the Federal Housing Administration (FHA). The borrower pays mortgage insurance to cover the possibility of default.

That said, some companies operate without basic guardrails. You might see text messages or emails you never asked for, selling reverse mortgage loan products. Clicking or replying can entangle you in a scam.

Variable interest rates can bring painful interest surges. And some companies urge borrowers to extend the loans, to fund unnecessary home improvements. Swindlers target distressed homeowners with products that only compound their distress. Here, sign up for one more lien that can be foreclosed on!

Perhaps the main trouble with these loans is simply that borrowing won’t fix the underlying “cash-poor” problem. Many reverse mortgage borrowers aren’t sure how else to hold onto their homes. In the most worrisome cases, an adviser or relative pushes a senior to borrow, then gains influence over the money. Unfortunately, it happens.

Seniors, make deed-related decisions from a point of strength. Know your rights.

Which Retirees Benefit Most From Reverse Mortgages?

Some seniors don’t have kids. Others have kids who are more than self-sufficient. These seniors aren’t worried about leaving robust inheritances. It can make sense for them to seek improved quality of life by tapping into their hard-earned home equity.

Many older people want to keep their homes, stay in familiar surroundings, age in place. Borrowing against equity can make that possible for some. (There are no monthly payments due, but borrowers must keep up with home maintenance, property taxes, insurance, and any homeowners’ association dues. On the other hand, a reverse mortgage can be used to cover these costs.)

Reverse mortgages can also work out well when home values rise significantly. When home equity growth outpaces the loan charges, retirees can actually leave substantial value to their heirs.

There are also benefits for co-borrowers. When one co-borrower dies or moves into assisted living, the other one can’t be evicted. A spouse or life partner can keep the reverse mortgage loan active by requesting a mortgage optional election assignment. Or they might decide to sell. To resolve the debt, the seller must accept a discount — typically 95% of the home’s appraised value. Will you be leaving the home to your heirs? They, too, will be responsible for repaying the loan balance (or 95% of the property value, if that’s less).

For some, a reverse mortgage is a lifesaver. Just remember, circumstances can change. A deed holder could need to move out for medical reasons, or an area could lose market value.

Reverse Mortgage Underwater: Can You Walk Away?

If home values drop, will the house keep enough value to cover your debt? Deed holders can find themselves trapped in the home by debt, even if they didn’t plan to live there for their entire lives.

In this case, it could be worthwhile to negotiate changes to the terms of your loan, if possible.

Caution: Probably the last thing you want to do is give up your deed to a foreclosure “rescue” company.

If all else fails, can you walk away from the home? Yes. But first, check your loan agreement for its language on default. And speak with an elder law expert. You’ll need to understand the legal aspects of communicating with the company about the next steps. Will you now need to sell the home, or will the lender now sell the home by foreclosing on the lien?

An appraiser can inform you if any equity will survive to be returned to you once the home sells and the debt is resolved.