You May Need Protection from the Dark Side of Reverse Mortgages

Did you know that if you have a reverse mortgage in only one spouse's name that when he or she dies, the other spouse will most likely lose the house? Even worse, they could wind up owing even more money than the value of the house. That information hit me hard when I read about a lawsuit being brought by AARP against the United States Department of Housing and Urban Development ("HUD"). HUD regulates reverse mortgages.

Older adults can tap the equity built up in their homes by taking out a reverse mortgage. They get monthly payments made to them from a bank that holds the mortgage. The older adult(s) can use that money any way they like. When the mortgage holder dies, the house is sold to repay the loan. This was all fine and good while housing prices were rising.

But when housing values fell, homes that suddenly had to be sold were worth less than the value of the mortgage. So the surviving spouse suddenly owed more money than the house was worth. And if their name wasn't on the mortgage, the house would be taken away and sold.

AARP is bringing suit to right these wrongs. On March 9, 201, The New York Times ran an article about the suit, the details, facts behind it, and profiles of surviving spouses who are out the fees and possibly their homes.

If you are in a reverse mortgage or are considering taking one out, read this article first. Do your homework. Consult a good attorney.

Read on:

Business Day

AARP Sues U.S. Over Effects of Reverse Mortgages

By DAVID STREITFELD

Published: March 8, 2011

The lawsuit argues that changes in late 2008 meant that surviving spouses not named on the mortgage must pay the full balance to keep the home, even if it is worth less.

Reverse Mortgages May Be Too Expensive

If you're thinking of taking out a reverse mortgage so that you can afford to age in place, here's something you should consider: the interest is not deductible until you pay the loan off. Add this to the high interest rates charged, and you might be better off taking out a home equity line of credit. That means not only are the interest rates on such mortgages high, but they are even higher than you probably thought.

Check with the IRS, your person attorney or your accountant before you fall for pitches to take out a reverse mortgage.

Here is a quote from the IRS (http://www.irs.gov/publications/p936/ar02.html) :0

"Reverse Mortgages. A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. With a reverse mortgage, you retain title to your home. Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II."