Editor’s note: The information in this column is not intended as legal advice, but is intended to provide a general understanding of the law. All readers with a legal problem, including those whose issues are addressed here, should seek advice from an attorney about their particular circumstances.
While I love Tom Selleck and his Sackett films, I don’t think he (or anyone in Hollywood) should give me financial advice. There is currently a marketing blitz targeting seniors in order to entice them into reverse mortgages. But as the old saying goes, “If it sounds too good to be true, it probably is.” Be very careful with reverse mortgages.
Let me explain the term “reverse mortgage”. This is a type of home loan that is now allowed by the Texas Constitution. It enables Texas homeowners who are 62 years of age or older to borrow against the equity in their homes without having to repay the mortgage debt while they are still alive, as long as they continue to live in their homes and keep their property tax and insurance payments up to date. The purpose or intent of reverse mortgages is to enable seniors to stay in their homes for the rest of their lives by converting their home’s equity into cash that can be used to pay for housing, medical, or other living expenses .
This particular type of home loan is known as a “reverse mortgage” because payments for the mortgage are said to flow in reverse – from the lender to the homeowner. Unlike a homeowner loan, where the homeowner is required to begin repaying the principal loan amount immediately in equal monthly installments that will repay the loan in full by the due date, a reverse mortgage payout to the homeowner only accrues interest. including interest on interest, until the due date, if the entire loan balance of principal and interest is repaid to the lender in a final lump sum. A common misconception about reverse mortgages is that the transaction involves the transfer of ownership of the property to the mortgage lender in exchange for monthly payments. However, a reverse mortgage is just a loan secured by a homestead lien – just like a conventional or “forward” mortgage lien.
The closing costs are similar, but comparatively higher than with a conventional mortgage. FHA insured reverse mortgages in the HECM program, which account for 90 percent of all reverse mortgages taken out nationwide, see a 2 percent lending fee payable to the mortgage lender, a 2 percent upfront mortgage insurance premium (MIP) and a rolling annual MIP premium of 0.5 percent, which is included in the monthly interest rate, and a service fee of $ 35 per month, which is paid to the lender during the life of the loan. Other fees and charges are comparable to other mortgage loans.
A reverse mortgage is a no recourse loan; Homeowners have no personal liability for the repayment of the loan. Homeowners are not required to make any repayments during the term of the loan and the entire loan amount owed, including any prepayments and accrued interest (including interest), is usually repaid from the sales proceeds if the homestead is sold by the borrower or the estate of the borrower, after the borrower or the last of the borrowers dies. When a reverse mortgage falls due, the only remedy for the lender or note holder is to seek recovery of the property under their mortgage. It is important to understand that the homestead must be sold or the borrower’s heirs will repay the loan from the other property of the estate if the borrower’s family wishes to keep the homestead.
Economists warn that reverse mortgages could be the next big mortgage bankruptcy. A reverse mortgage could force the homestead to be sold for repayment. Hence, anyone looking to get a reverse mortgage should consult their estate planning attorney. In the meantime, do your research (Mr. Selleck is NOT a good investor himself) or look for a copy of the October 2009 Consumer Reports and read their article on reverse mortgages.
Sam A. Moak is an attorney with the Moak & Moak law firm in Huntsville, PC. He is licensed to practice all areas of the Texas Supreme Court, is a member of State Bar College, and serves on the Real Estate, Probate, and Trust Department of the State Bar of Texas. www.moakandmoak.com