|Reverse mortgages not always golden for those golden years|
Recently a senior citizen spoke enthusiastically at a church luncheon in Natchitoches, Louisiana about how she was resolving her financial problems by taking out a reverse mortgage on her $400,000 home. She maintained she had researched the process well, that it was an easy one, and that she wouldn't have to tap into her savings by using her home as income. But that easy process is said not to be so easy by experts in the business.
The reverse mortgage is not an easy one to understand and has many complications, some of which may not be understand well by seniors.
A report on the topic came by way of a press release by Consumers Union, as it underlines some of the key problems involved with reverse mortgages. Normal Garcia, its senior staff attorney, says, "Reverse mortgages are a very risky deal for borrowers who don't understand the complicated terms of the loan and how quickly fees and interest charges can add up." She goes on to say, "Reverse mortgages should only be a last resort for seniors who want to stay in their homes and have no other alternatives to supplement their income."
To qualify for a reverse mortgage a senior must be 62 years old and have paid or nearly paid off the mortgage. The costs for the loan itself can be high in comparison with other loans. Seniors often seek this type of loan to provide additional income for living expenses. This is especially true during the present recession. The amount of the loan is based upon one's age, the home's value, the interest rate and the amount of equity in the home.
The attraction of the reverse mortgage to someone in their golden years is the fact that the interest or principal does not have to be paid off until the home is sold, when the owner or owners have moved or dies. Furthermore the borrower can remain in the home even if the balance owed exceeds the value of the property. So all of that sounds appealing for someone in need of extra income.
The pitfalls, however, are numerous. There are special fees upfront. The individual can lose a home if taxes are unpaid or if any liens against the home go unpaid for any reason.
Attorneys explain some of the deficits of reverse mortgages include the fact that unlike a regular mortgage where the interest amount is reduced as the number of payments increase, the reverse mortgage instead are rising-debt loans where interest is added to the principal loan balance. So the interest compounds with the debt increasing. This means over time reverse mortgages using up most of the home's equity. Furthermore there are closing costs, loan origination fees, servicing fees and other costs passed along to the borrower that can make obtaining the loan initially a costly process
Home values are assessed by the lender and not always in favor of the senior, with the loan amount said to often be 20% to 30% less than the home's total value after costs.
New warnings were issued several years ago by the Consumers Union about reverse mortgages, given the housing slump and the past recession, as the demand for these loans has grown with the baby boomers and the television advertising as well.
The National Consumer Law Center issued a report maintaining there are "growing dangers posed by aggressive reverse mortgage lenders who target the home equity of vulnerable seniors."
So what do experts recommend for those who need that extra cash and want to avoid the pitfalls of the reverse mortgage business. They are advised to seek the other best alternative first, which is to sell the home and move into rented, cheaper quarters, using the money from the sale for that cost of living concern, rather than losing out at the front end, and later on when the home is sold, which could end up being a very expensive