Yes. Counseling may be the most important aspect of the HECM. A reverse mortgage, like any other form of borrowing, creates an obligation on the part of the borrower. Since the borrower’s home is used for repayment, it also limits the borrower’s use of this asset. Improper use of the reverse mortgage, like any other form of borrowing, can have a detrimental effect on the borrower’s finances.
Suppose, for example, a person plans to move into a retirement community and rent his or her current home for additional income to defer the cost of the new residence. Would it be a good idea to get a reverse mortgage until the move? Unless our hypothetical borrower is desperate for cash, it is a bad choice.
Example: A borrower gets a reverse mortgage, uses $50,000 over five years, and then moves into the retirement community. The reverse mortgage is no longer on the borrower’s primary residence and must be repaid. Since the borrower most likely does not have $50,000 to pay off the loan, he or she probably would not have taken the reverse mortgage if he or she did, he or she now has to refinance to a standard mortgage.
This immediately creates several problems for our hypothetical person.
• The repayment on the new loan begins one month after closing. Whatever rent the buyer hoped to use is now decreased by the amount of the mortgage payment.
• If the lender for the new loan treats the property as rental property, the amount available to the borrower will be lower, and the interest rate and fees will be higher.
• If the borrower is between tenants at some future date, the repayment of the mortgage will be an additional burden that will not be offset by rental income.
• There will be the cost of getting two loans, the reverse mortgage, and later, the standard mortgage.
A counselor can explain the problems that can develop with a reverse mortgage and help the borrower alter his or her plan accordingly. If the reverse mortgage is still necessary, maybe the plan should be to sell the home when the borrower moves and purchase an annuity to help pay the costs of the retirement community. That would be one of several options. The important thing is that our borrower will be well-informed and able to plan ahead with confidence.
Another reason for counseling is to focus on the person’s reason for wanting the money. Is it to invest in some risky venture? Is it because a child does not want to wait for an inheritance? Is a con artist trying to steal the person’s money? The first rule of borrowing is always to ask yourself if you should. This holds true for a ten-dollar credit card purchase as well as a million-dollar mortgage. Once you have decided that borrowing is to your benefit, the next step is to research the best way to borrow. The counselor can help with both decisions.