It's the 15th of the month, and the creditors are calling. Your mortgage payment is due. Your loan payment is due. Your insurance bill, your car payment, your credit card bills, the doctor's office, the department store…something's gotta give. But what? Is a reverse mortgage the answer?
For those over age 62 it might be a way to help with increasing bills and decreasing income.
Set Priorities to Keep a Good Credit Rating
Many people who have always had good credit are now feeling the pinch of a tight economy - even if they've always paid their bills in full, on time. It can seem overwhelming if bills are piling up. If your funds are limited, carefully consider which bills you can let ride for awhile, and which ones you must pay promptly.
Among the most important ways to keep a good credit score are:
- Making your mortgage payments on time
- Keeping collection agencies at bay
If you have a mortgage payment due at a certain time each month, do everything possible to make that payment regularly and on time. Most banks do have a standard "grace period," but the rules may vary and the bank may charge late fees.
You'll likely get many advance warnings that an unpaid, overdue bill will go to collection if you've not paid it within a certain time. Pay close attention to such notices, and call to make payment arrangements if you can't pay the balance in full by the date mentioned. If you do get a notice from a collection agency, don't ignore it, and do everything you can to get it paid before the agency files suit against you.
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Tread Lightly before Pursuing a Reverse Mortgage
A reverse mortgage is a government-insured loan, available to homeowners age 62 and over that allows a portion of the equity in the home to be converted to cash. The cash is usually disbursed in monthly payments. While this may sound like an attractive means to correct a cash flow problem, it comes at a price: Almost all reverse mortgages have initial fees of about $20,000.
There is usually a monthly fee of about $35. The greatest risk is that the homeowner can't move from the home without first paying off the reverse mortgage. Thus, most financial advisors regard a reverse mortgage as a "last resort" and warn that it shouldn't be viewed as a means to create wealth.
Consider Alternative Ways to Address Financial Problems
One condition to obtaining a reverse mortgage is that you must first meet with a reverse mortgage counselor certified by the Department of Housing and Urban Development (HUD). However, the Government Accountability Office released last year exposed widespread lack of counseling, including a common failure to discuss alternatives to a reverse mortgage. That could mean that you could make a hasty, uninformed decision without looking for other, less burdensome ways of improving your cash flow.
The Federal Reserve Bank warns consumers that new lenders are increasingly offering of reverse mortgages. Such lenders often target seniors who are desperate because of losses in their 401(k) plans, pension plans or other accounts.
Among the risks of reverse mortgages is that upon the homeowner's death, there may be so little equity left in the home your heirs have no choice but to let the home foreclose. A surviving spouse whose name isn't on the reverse mortgage will have to immediately vacate the home.
Talk with your attorney, financial planner and family members before taking the drastic step of signing up for a reverse mortgage.
Questions for Your Attorney
- Why isn't this available for people under 62?
- My mother has a reverse mortgage and she passed away. How does it work with estate planning? She left the house to me and my siblings.
- What are some other options my parents have to help with their bills in their later years?