(10/7/2011) Erate Exclusive - If you are at or near the qualifying age of
62 you may be considering a reverse mortgage to boost your retirement
income, meet health care cost needs or otherwise pad your wallet.
Be very, very careful. The controversial loans are loans of last resort
that can be a godsend or a nightmare.
"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," said Norma Garcia, senior staff attorney
for the non-profit Consumers Union, publisher of Consumer Reports.
"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," she added.
The National Reverse Mortgage Lenders Association (NRMLA) disputed the
study and published it's own report, "The Retirement Abyss: America's Seniors' Search for
Security." It revealed that 74 percent of reverse mortgage borrowers surveyed described their
experience as positive and chose a rating of 7, 8, 9, or 10 out of 10 point
scale with 10 signifying complete satisfaction.
Along with the controversy, the Office of Comptroller of the Currency
(OCC) created a consumer advisory to help consumers learn more about reverse mortgages.
"Reverse mortgages are complex loans that are secured by your home. It is
important to understand the terms, risks, and costs before you sign a
reverse mortgage contract. Make sure to consider alternatives to reverse
mortgages," according to the OCC.
• A reverse mortgage is a loan secured by your home. It's called a
"reverse" mortgage because you don't make payments right away. You receive
payments from the lender -- either over time or all at once -- based on the
value of your home. The payment amounts are added to your loan balance.
Interest is charged on the outstanding balance, so even if you do not
receive any further payments from your lender, the loan balance continues to
increase.
• You must be a homeowner at least 62 years old, must use the home
as your primary residence, and must own the home outright or have enough
equity to pay off any balance along with the reverse mortgage when it comes
due. Meanwhile, you do have to continue paying property taxes, insurance
premiums and home repairs while you have a reverse mortgage.
• The loan comes due when you sell the home, otherwise no longer
live in the home, or pass away. Your obligation to the lender will be
limited to the lesser of the amount due or the value of the home at the
time, unless your heirs want to keep the home. Otherwise to keep the home,
your heirs would need to pay the full amount you have received, plus all
accumulated interest and fees.
• Most reverse mortgages are made under a Federal Housing
Administration (FHA) program, called Home Equity Conversion Mortgages or
HECMs. They have government insurance that protects not just the lender, but
also the borrower. Private reverse mortgages do not come with the same
guarantee.
• How much you can borrow depends on a host of factors. Amounts are
typically larger the older you is, the more valuable your home is and the
lower the interest rates. Payments are flexible and can be a lump sum, fixed
monthly payments, a line of credit or in some combination of these
options.
• Reverse mortgage can be costly because of the mortgage insurance
protection along with interest and fees charged over the life of the loan.
There are also upfront costs which can be financed and added to your loan
balance. Variable interest rates can be relatively low, but because of other
charges mentioned above, the loans tend to be expensive compared to
conventional home loans.
"A reverse mortgage should only be considered by a borrower without any
other options to meet their basic living expenses," said Nancy Osborne,
Chief Operating Officer of Erate.com, a Santa Clara, CA-based financial information
publisher and interest rate tracker.
OCC says reverse mortgage shoppers should shop with a keen eye and open
mind and lots of help to sift through all the complexity.
• Don't over look other financial options, including standard equity
loans or lines of credit, a cash out refinance, even selling the home or
drawing on retirement investments. Financial advisors or housing counselors
can help you find other financial options or community or government
programs that can help you cover costs you may have.
• A reverse mortgage usually makes more sense the longer you are
planning to stay in the home. This is because the high up-front costs make
the first years of the loan relatively expensive. A borrower who uses a
reverse mortgage for only a couple years can have an annual loan cost
several times greater than a similar borrower using the reverse mortgage for
a decade or more. The average HECM borrower remains in the home for only six
years after obtaining the reverse mortgage.
"For borrowers bringing in a reasonable income, who have decent credit, a
traditional mortgage will better serve their needs," Osborne added.
• Be wary of the hard sell and anyone trying to sell you other
products along with a reverse mortgage. A reverse mortgage gives you access
to a large amount of funds, and that makes you a target for aggressive
salespeople offering expensive and inappropriate products or services.
Especially avoid those trying to sell you a reverse mortgage along with
other products, including annuities, long-term care insurance, investment
programs, or home repair services.
