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Pitfalls of Reverse Mortgages
from: Kyle BesserFor years, reverse mortgages have been advertised as a way for cash strapped seniors to get money for their other needs. Reverse mortgages were largely created for seniors who have a lot of equity in their homes but little or no savings.
With a reverse mortgage, homeowners 62 years of age or older can borrow against the equity in their home in a loan that they won't have to pay back until they either die or move out. If they move out, the borrower either has to come up the cash or sell the home. If the home is sold, any equity that remains after the loan is repaid is distributed to the borrower or the borrower's estate.
Reverse mortgages may benefit some seniors by unlocking their home equity, but reverse mortgages should only be entered into carefully and with a complete understanding of the consequences. Selling a home is so difficult in today's housing market that they could end up facing foreclosure. Falling home prices, lending rules and growing instances of fraud could make reverse mortgage loans an incredibly risky proposition for some senior borrowers.
To qualify for reverse mortgage loans, you have to own your home or have a low enough mortgage balance that it can be paid off at the closing with proceeds from the loan. Borrowers retain title to the home. The reverse mortgage loan can be taken as a line of credit, a lump sum payment, fixed monthly payments or a combination. The size of reverse mortgage loans depends on the borrower's age and other factors.
When used the right way and for the right reasons, reverse mortgage loans can be an effective way to supplement a senior's income, but there are potential traps like expensive fees and growing occurrences of fraud. Here are some of the things seniors should consider before getting a reverse mortgage loan.
1. Can you afford to stay in your home as long as you live?
If you can't afford the home, a reverse mortgage loan usually won't solve the problem. Once you take a reverse mortgage loan, the bank expects you to maintain the home, which may become difficult physically and financially. Many homeowners who received a reverse mortgage loan have fallen behind on repairs or real estate taxes within a couple of years.
The problem is that if you can't afford to maintain the house, then you probably can't afford to move either unless the home can be sold before the bank moves to foreclose. If you have to move to a nursing home, you have up to a year to return to your home.
2. The fees add up.
The Housing and Economic Recovery Act of 2008 capped origination fees at $6,000 per reverse mortgage loan from an uncapped 2% of the home's value previously, but other fees remain as high as ever. You'll pay standard closing costs and a mortgage insurance premium fee, which is another 2% of the home's value.
On top of that, you'll pay a $30 to $35 monthly servicing fee for mortgage insurance and a $125 fee for mandatory credit counseling, regardless of whether you decide to take a reverse mortgage or not. The Department of Housing and Urban Development, or HUD, requires that the charge be waived for consumers in financial hardship.
If the senior remains in the home a long time, the fees make sense. If the senior dies or leaves the home fairly early in the life of the reverse mortgage loan, a reverse mortgage loan can seem like a very expensive proposition.
3. There may be cheaper alternatives.
Many seniors who consider a reverse mortgage loan do so to cover necessities such as health care or to supplement their incomes. Many seniors see no other option than to tap their home's equity to pay for everyday expenses.
If considering a reverse mortgage loan to pay off debt or another one time expense, look for cheaper alternatives first. Credit counseling agencies may know of programs or grants to help seniors with home repairs at low or no cost.
4. Avoiding fraud.
As the demand for reverse mortgages has spiked, so has fraud. In some cases seniors who just took a reverse mortgage have been encouraged to use the proceeds from their reverse mortgage to invest in an annuity that won't begin payments for years or to buy a long-term-care insurance policy that may not be appropriate for them.
The Housing and Economic Recovery Act restricts lenders from selling insurance, annuities or other financial products to the same borrower, but there's nothing to stop annuity companies from buying potential customer lists from companies who sell those same lists to reverse mortgage brokers.
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