Reverse Mortgages: Have They Beaten Their Bad Rep?
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Here's your money briefing for Monday, June 6th.
What is a reverse mortgage and who is it designed for?
I'm J.R. Whalen for The Wall Street Journal. You may have seen the ads on TV for reverse mortgages. They're a way for senior homeowners to borrow money against the equity in their home. But for decades, many seniors faced high risk when they took on a reverse mortgage.
In many cases, homeowners could not handle the expense involved and wound up borrowing more than they were able to pay back. It resulted in some horror stories where some borrowers wound up facing foreclosure.
More recently, reverse mortgages have gotten a makeover to make them safer financially, but there are still risks and expenses to plan for. Coming up, we'll ask WSJ contributor Lori Wianu about the pros and cons of reverse mortgages. That's after the break.
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Reverse mortgages are billed as a way for retired homeowners on fixed incomes to be able to afford to live in their homes until they die. But they long ago developed a bad reputation, which the industry has been trying to shake off. So what exactly is a reverse mortgage? How does it work? And what's been done to address the flaws in the system that turn many people off to them? WSJ contributor Lori Weano has been looking into this, and she joins us with details. Hey, Lori, thank you so much for being with us.
My pleasure.
So first of all, Lori, briefly explain what a reverse mortgage is and why would someone consider it?
Well, in a reverse mortgage, the bank takes ownership of a person's house. It differs from a traditional mortgage in that the homeowner borrows a portion of the equity they have in their home as funds to live on, and the bill comes due either when the homeowner or homeowners die, sell the house, or move out. But it's essentially geared to retired homeowners with limited incomes who want to stay in their homes until their death.
Now, reverse mortgages have been around since the 1960s, but they took on a negative stigma over time. What is it about them that led to them getting such a bad image?
Why did reverse mortgages develop a bad reputation over the decades?
Well, in many cases, homeowners could not handle the expense involved and wound up borrowing more than they were able to pay back. And for a lot of people, they simply did not fully understand the rules. It resulted in some horror stories where some borrowers wound up facing foreclosure and surviving spouses who were evicted.
Okay, and so more recently, what kinds of protections have been added to reverse mortgages to benefit borrowers?
Well, the Federal Housing Administration, overseen by the Department of Housing and Urban Development, they really offer protections now to borrowers that include limits on how much borrowers can obtain. So seniors don't opt for large lump sum distributions they can't afford. It offers protection from default if the value of the home declines to less than the loan amount.
What federal protections and HUD rules now make HECMs safer for borrowers?
The Federal Housing Authority covers any shortfalls between the final loan balance and the net proceeds from the sale.
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Chapters
6 chapters
1
What is the main topic discussed in this episode?
0:00–0:38
2
What is a reverse mortgage and who is it designed for?
0:38–3:05
3
Why did reverse mortgages develop a bad reputation over the decades?
3:05–3:51
4
What federal protections and HUD rules now make HECMs safer for borrowers?
3:51–5:18
5
How does the required HUD counseling educate prospective reverse mortgage borrowers?
5:18–7:59
6
Are reverse mortgage payouts taxed like retirement income?
7:59–8:40
Speakers
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