One situation elderly Americans frequently find themselves in is living “cash rich” but “income poor.” In other words, they have low fixed incomes, such as pensions and Social Security, but they have large assets, particularly their homes. The question is how to tap these assets today before the end. One option is the “reverse mortgage,” which is a loan available only to homeowners who are 62 and up and own their homes outright. In a reverse mortgage, the bank lends the homeowner money based on the house’s equity in a lump sum, regular payments, or on demand.
Although reverse mortgages can benefit homeowners in some circumstances, they come with various risks, such as:
- The fees can be large, and the interest rates can be high. The bank expects to make money on the reverse mortgage, so it’s not a free loan.
- The mortgage balance is due when the borrower sells the property, moves out of the property after 12 consecutive months, or fails to pay property taxes or homeowner’s insurance, or dies. These conditions can lead to numerous implications, such as insolvency when the home is sold, or loss of the home to potential heirs.
- Furthermore, heirs can choose to refinance the home with a regular mortgage, sell the home and take any remaining equity, or return the property to the bank.
- Homeowners must also make sure the home is in excellent condition to maintain its value, which may be a hassle for elderly occupants. An accident like a flood might leave a homeowner with nothing, though they did benefit from the mortgage.
- Predatory lenders, scammers, and unscrupulous banks prey on elderly homeowners by convincing them to take on mortgages that they do not need or are not in their best interests. The reverse mortgage industry isn’t nearly as well-regulated as it should be.
- Homeowners will also be unable to tap any windfall gain in land values after they have taken out a reverse mortgage on the house. Lenders are rarely interested in extending a second reverse mortgage line because the interest payments due on the first might grow to be more than the value of the remaining equity.
- Reverse mortgages have bankruptcy implications. In chapter 7, any remaining equity in the home might not be fully protected by an exemption, though that’s unlikely to be a problem in Nevada. Any payments from the reverse mortgage might be seen as income for chapter 7 means test purposes. Finally, some reverse mortgages might contain clauses that allow the lender to foreclose on the home if the owner files bankruptcy. This might not be a desirable option for the homeowner.
Reverse mortgages can work for some homeowners, such as those who need cash to pay for an uninsured medical procedure that can be repaid out of future Social Security payments, but given the risks, the alternative of selling the home and cashing in on the equity today to live on it might be a more preferable option.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.