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CFPB Updates Reverse Mortgage Guide and Suggests Protections for Non-Borrowing Spouses
Wednesday, October 8, 2014 6:35 AM

More and more homeowners are considering tapping their home equity as they approach retirement. Getting a reverse mortgage is one way that some older homeowners can do that. Reverse mortgages are a special type of home equity loan sold to homeowners aged 62 years and older, which are repaid when the borrowers sell the home, move out, or die.

The Consumer Financial Protection Bureau recommends that before borrowing, seniors and their families should consider:

  • The cost of homeowners' insurance and taxes
  • Plans for staying in the home or leaving it to family members
  • Plans for dependents or others living in the home
  • Alternatives to reverse mortgages

Because some important things about reverse mortgages have changed recently, CFPB has updated its guide to reverse mortgages.

First-Year Payout Limits

One of these changes limits the amount of money you can draw from your loan in the first year. Borrowers often get into trouble by taking a lump-sum payment early on. It may feel great to get a big payment up front, but borrowers can outlive this money—and that spells financial trouble for borrowers who live longer.

This limit encourages borrowers to make their money last longer. Borrowers can still take out lump-sum single payments, but this is a risky choice. Borrowers should strongly consider the monthly payment or line-of-credit options before choosing to get a lump sum. These options provide more long-term security than lump-sum payments.

Protections for Non-Borrowing Spouses

Another important change is for couples. In the past, couples who took out a reverse mortgage loan in the name of only one spouse ran into trouble when the borrowing spouse passed away.  When a borrower died, the non-borrowing spouse had to pay back the reverse mortgage or move out. Many surviving spouses were surprised to learn this, and lost their homes.

With recent changes, a non-borrowing spouse may be able continue to live in the home under certain conditions, even after the spouse who signed the loan passes away. However, the non-borrowing spouse will still stop receiving money from the reverse mortgage after his or her spouse dies.

For couples considering a reverse mortgage, borrowing together makes more sense. If both spouses sign the reverse mortgage, then the surviving spouse can continue to receive monthly payments or use an existing line of credit. It also ensures that a surviving spouse may live in the home after his or her spouse (co-borrower) dies.