In a matter of days, the new rules for reverse mortgages are slated to kick in. These rules were designed to clarify the uses of reverse mortgages, protect both spouses and shift the way the loan values are calculated. If you’re considering a reverse mortgage, here’s what you can expect after August 4.
Reverse mortgages are reserved for those who over the age of 62 and who need a way to take advantage of their home equity. Whether they’ve lost part of their retirement due to the recession or simply were caught unprepared, it’s a resource many seniors are taking advantage of. It was risky, though, for reasons many borrowers hadn’t considered.
One of the biggest shocks was discovered when a spouse died. The surviving spouse often realized he was being booted from his home. If there was just one spouse on the reverse mortgage, anyone residing in the home after the death of that borrower had to either pay the loan or vacate the premises. The obvious solution was to ensure both spouses were on the mortgage. Unfortunately that wasn’t always an option. If one spouse was younger than 62, he or she was not eligible, therefore, many loans had only one spouse – the one who met the age requirement. This created untold problems for many senior Americans. The thought of foreclosure after retirement is one of the most overwhelming and frightening realities any of us ever expect, yet that’s what was happening.
Now, the new rules say that if one spouse takes out the home equity loan and then dies, the surviving spouse will not be forced out and can remain as long as he or she chooses, provided the insurance, taxes and maintenance is maintained.
These changes are due to a class action lawsuit filed by the U.S. Department of Housing and Urban Development – or HUD. Many advocate groups, including the National Council on Aging, have publicly stated their support for these new rules. Along with the right for a surviving spouse to remain in the home, there are also other changes.
As mentioned, many of these loans had only one borrower. Now, though, provided one spouse is at least 62, both spouses can go on the application. This provides additional security. With that, though, comes a change in the calculation algorithm. The amount of the loan is now based on the age of the youngest applicant. The younger that applicant is, the smaller the loan will be.
So are these modified mortgage options right for you? We encourage anyone considering an HECM to speak with their estate planning lawyer and a financial advisor to ensure they know the risks and benefits. No loan is without risks, but these new changes go a long way in better protecting borrowers and especially surviving spouses who no longer have to fear losing their homes. Keep in mind, though, these are intricate loan options, to misunderstand any detail can be a big mistake that will affect you, your spouse and ultimately, the estate plan you create in order to leave your assets to those you love most.
Daniel DeBruyckere
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