(1/5/2011) Part 2 of 2: Reverse mortgages are complicated financial
products and older home owners should not sign on the dotted line without
first considering alternatives and the risks associated with the loans.
Reverse mortgages are for borrowers 62 or older. The
loans offer cash payments or lines of credit tied to home equity. No payments are due until the
borrower dies, leaves the home for 12 consecutive months or more, or fails
to maintain the property or pay homeowners insurance or property taxes.
Under those circumstances, the full balance is due. Borrowers also pay a
loan origination fee, closing costs, and compounding interest on the loan
principal, which can be significant, according to the study.
The study says there are so many problems reverse mortgages should be
considered a home loan of last resort.
"Reverse mortgages carry such high short and long term costs the product
should only be considered by those who do not have any other options and
never by those with a satisfactory income level and good credit who could
otherwise qualify for a traditional (equity) mortgage," said Nancy Osborne,
chief operating officer of Erate.com, a Santa Clara, CA-based financial information
publisher and interest rate tracker.
Advising older home owners on reverse mortgages , consumer groups nevertheless suggest
alternatives to the complex loans.
"Before considering a reverse mortgage, a senior should first determine
if he or she qualifies for less expensive programs that offer monetary
assistance or cost-cutting benefits," the consumer study says.
• Programs include Supplemental Security Income (SSI), Medicaid,
prescription drug discount programs, energy and telephone discount programs,
city and county grants and low-cost home improvement loans, state property
tax postponement programs, in-home supportive services, and veterans
pensions to pay for in-home care.
• Older home owners should also consider inter-family loans whereby a family
member or family members advance money to the senior instead of going to a
bank. With a willing family member the senior's home equity can be used as
collateral for the "private reverse mortgage" arrangement. When the home is
sold, the investors recoup contributions with interest.
Private reverse mortgages cost a fraction of the lender-originated
variety, allow the home owner to stay in the home, family investors have a
secure loan that produces interest and, when it's time to sell the home, the
home owner has preserved more of the home's equity to share with heirs, than
he or she would with a lender-originated loan.
Senior home owners should contact an estate planning attorney or a
Certified Public Accountant (CPA) to set up the necessary paperwork at a
fraction of the cost of a lender-originated reverse mortgage.
• Attend a sit-down, face-to-face counseling session with a local
HUD counselor rather than the phone counseling permitted by law. Right now
only North Carolina mandates face-to-face counseling.
• Most reverse mortgages are HECMs administered by the U.S. Department of Housing and
Urban Development (HUD), but do not rely solely on HUD counseling to determine if a reverse mortgage is
appropriate for you.
Also meet with either a Certified Financial Planner (CFP) or Certified
Public Accountant (CPA), and/or with an elder law attorney before signing
for any reverse mortgage. A CFP, CPA and attorney can help you examine your
personal financial goals and find reverse mortgage products that are best
for you.
