From the beginning, reverse mortgage was designed to give cash-strapped seniors a way to get some extra cash. But today’s current financial meltdown with falling home prices, lending rules and also growing instances of fraud could make this kind of loans a very risky option for some borrowers.
The reverse mortgage is a mortgage loan designed for homeowners of 62 years of age or older who will be able to convert the equity in their home into a loan that they won’t have to repay until they die or move out. If they move out, the borrower has to sell their home and repay the money that they owe. This will be an extremely difficult thing to do because of today’s housing market that they could end up facing foreclosure.
In an FHA reverse mortgage, if the borrower dies before they actually receive the full value of their house, the property is sold by the estate and the balance owed on the mortgage is paid by the proceeds of the sale.
If you or your parents are considering to apply for a reverse mortgage, here are a few pointers to ask yourself before making any decisions.
1. Will you be staying in your home for as long as you live?
The reverse mortgage lender expects you to maintain the house for as long as you live. This may not only make it difficult for you physically but also financially. Ask yourself whether you can actually afford staying in your home for the rest of your life. There are many homeowners who received a reverse mortgage a few years ago but are now fallen behind on their real estate taxes.
Generally, people who can not afford to maintain their house can not afford to move either. Unless they can make sure that the house will be sold, the bank may move to foreclose.
2. Do you know all the fees that will be involved in applying for reverse mortgage?
The Housing and Economic Recovery Act of 2008 has capped origination fees at $6,000 per loan. Before, the fees were as much as 2% of the home’s value. But although the origination fees are now fixed to this certain amount, other fees are still as high as ever.
There are standard closing costs and a mortgage insurance premium fee which is still about 2% of the home’s value. Moreover, you will have to pay a $30-35 every month for servicing fee for mortgage insurance and $125 per month of mandatory credit counseling fee.
The proposition of reverse mortgage can make sense and be very tempting if you decide to live in your home for a long time. But if you die or leave the home early in the reverse mortgage’s life, it is a very expensive proposition.
3. Are you aware of your cheaper alternatives?
If you are thinking of a reverse mortgage because you would like to pay off your debt or other one-time expense, look for other and cheaper alternatives first. If you go to credit-counseling agencies, they may help you show available programs or grants to help seniors at low or no cost.
4. Is the reverse mortgage lender legitimate?
Fraud has increased as demand for reverse mortgages has spiked. Usually what happens is that insurance agent convinces a senior who just took a reverse mortgage to invest the money in an annuity that won’t begin payments for years or to buy a long-term-care-insurance policy that may not be suitable for them. Annuity salesmen can easily buy customer lists from companies who sell the same lists to reverse mortgage brokers.
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2 Responses
Most of your information is accurate, but you are missing some very key information. It is obvious you have a little knowledge about reverse mortgages and are completely against them. As in most cases though, you have conveniently put a negative spin on your post. You don’t even mention how a reverse mortgage can and has significantly improved the lives of many seniors homeowners.
You say that costs are as high as ever which is completely false. You talk about alternatives, but give no actual options. You failed to mention that these options often require borrowers to prove they have the wherewithal to repay the additional debt. Not the case with reverse mortgages.
I am very glad to see that you recommend finding a reputable company to investigate your options for a reverse mortgage. There are a lot of “mortgage brokers” out there working part time in the reverse mortgage space and they do not even understand the program themselves. They are just trying to make a quick buck.
Beware smart and get all of the facts – both positive and negative.
Posted on July 1st, 2009 at 9:55 am
@ Bill Mantooth.. I agree with you that there ts no particular solution to this but the author has also mentioned some valuable points.
Posted on July 2nd, 2009 at 5:56 am
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