by Broderick Perkins
(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.
Consumers Union, along with other consumer advocacy groups, earlier this year released "Examining Faulty Foundations in Today's Reverse Mortgages" citing a litany of financial dangers associated with reverse mortgages.
"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.
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