Thursday, April 24, 2008

Dangers of Reverse Mortgages







As the baby-boomers prepare for retirement reverse mortgages are going to be the next mortgage boom according to most analyst. The baby boom began in 1946 and continued through 1964. During those 19 years, 76 million people were born. As this segment of America begins to retire a large portion of them will need to rely on their homes equity to make "ends meet." How they access that equity will be the mortgage industries primary focus in the years to come. 5

A reverse mortgage allows a senior to borrow against the equity in her home in order to access funds. In most cases, the senior must own her home free and clear, or nearly so. A Wisconsin reverse mortgage can be an attractive option for many seniors who need additional income. The right reverse mortgage can enable a senior homeowner to maintain financial independence and an adequate standard of living by converting a home's equity into tax-free cash. A reverse mortgage loan provides a borrower with a lump sum of cash, monthly payments, or a line of credit. The term "reverse" refers to the fact that instead of the borrower making a monthly payment to the lender, the lender makes payments to the borrower.1

A reverse mortgage offers retired persons a way to stay living in their homes and afford to live comfortably. The reverse mortgage pays you with equity you have built up in your home. There are requirements for obtaining a reverse mortgage. You have to continue to live in the home the entire time. You can spend your money now instead of leaving it to relatives after you pass. There are different ways to receive the monies from a reverse mortgage.6

As Kelly points out, the danger is that all the equity in the home will be tapped for non-essential needs if the owner's health declines and they need funds to pay for in-home care or home modifications that would enable them to remain independent at home. Legally, of course, you can use a reverse mortgage for anything you like. The loan limits also increased in 2001 for the HECM product, a reverse mortgage insured by the Federal Housing Administration of the U.S. Department of Housing and Urban Development (HUD). The HECM loan limit varies by geographic area. Borrowers can choose to receive the reverse mortgage funds as a lump sum, monthly income (for up to life), or line of credit, or as a combination of monthly income and line of credit. No mortgage payments are due during the life of the loan.8

A Wisconsin reverse mortgage seems strange at first. The purpose of a reverse mortgage is to convert the equity in your home into cash. The best way to compare reverse mortgages is to answer three questions about each mortgage. How much money would you get? But instead of borrowing all the money at the beginning and then paying it back each month, this time you'll borrow a little at a time and not repay the mortgage until the house is sold. In that way it's the reverse of a traditional mortgage.10

While HELOC's are described as more flexible and less costly, the most obvious drawback isn't put into context. The traditional purpose of a reverse mortgage to provide much needed cash to those folks without savings but plenty of equity in their homes. First, there is no reason why the home must be sold by the heirs. In fact, the structure of the reverse mortgage provides so that any responsible individual can easily hold onto a home after taking over a reverse mortgage. The amount you can borrow in a reverse mortgage hinges on your age, the home value and interest rates. The older you are, the more you can borrow.19

But those costs were hardly the worst features of Stephens' reverse mortgage. Buried away in the block print of the loan agreement was something called "additional interest." In 1988, Stephens and her husband, Harold, signed up for what they thought was a great concept for seniors: A "reverse mortgage" that would pay them $312 a month virtually in perpetuity -- until they died or moved out of their house in Brigantine, N.J., near Atlantic City. At the time, Katherine was 76 and Harold was 78. Major institutions such as Fannie Mae no longer collect interest based on appreciation sharing on reverse mortgages, even when loan contract language entitles them to do so. But that's of no consolation to Ms. Stephens, is it?11

VO 5 Like all reverse mortgage borrowers, Al got mandatory counseling before he took out this loan. And it was all properly disclosed. VO 1 Al Giallorenzi is a 74 year old retired bricklayer, now turned professional harmonica player. And his reverse mortgage? Having enough retirement income doesn't have to be an impossible dream. A reverse mortgage can actually take you there.12

Social Security, Medicare, and Medicaid don't count reverse mortgage loan advances as income. But if you have the money in your bank accounts at the end of the calendar month, your assets may affect your eligibility for these government benefits. Or your heirs could refinance the reverse mortgage, paying it off as a traditional mortgage. The amount you or your heirs owe is limited by the value of your home at the time your balance is due. As for uninsured reverse mortgages, be very careful. They may seem attractive because they don't charge an insurance premium, which lowers the cost.15

Once Betty takes out a reverse mortgage she can pretty much expect to have it until she sells the home or dies. The reason is simple. They may be reasonable risks to take, but you need to know them. Let's take a moment to understand reverse mortgages. But instead of borrowing all the money at the beginning and then paying it back each month, this time you'll borrow a little at a time and not repay the mortgage until the house is sold. In that way, it's the reverse of a traditional mortgage.3

Are they registered with the Better Business Bureau? The reverse mortgage process is highly regulated by the federal government to insure that older borrowers don't put themselves in danger of losing their home ask HUD and FNMA about the reverse mortgage process. As with any financial decision, the first step in the reverse mortgage process is to educate yourself about the product. Congratulations, if you're reading this you've already taken the first step! Make sure to seek advice from trusted friends or others who have gone through the process as well, as having gone through the reverse mortgage process, their perspective can be invaluable.13

The lender gives the borrower a lump sum, monthly payments or a line of credit, which are generally not repaid until the borrower moves or dies. The potential market for reverse mortgages in California is large, with 60 percent, or 2,160,000, of the state's seniors eligible. With senior home ownership and life expectancy rates climbing, more seniors will qualify for reverse mortgages.2

The problem is that the interest shrinks as the money is used and the mortgage payments stay the same. Reverse mortgages have actually been around since 1989, but their popularity is skyrocketing as a result of the wave of baby-boomers that are retiring. On traditional mortgages your escrow payments are added to your payment but they are subtracted from your monthly check on a reverse mortgage. Most of the time you will be shown the monthly amount you will receive each month before the escrows are taken out. However, as with financial product, there are some dangers that you need to be aware of; here are the top three reverse mortgage pitfalls to lookout for.20

Getting a reverse mortgage from the private sector may include more headaches and costs. However, as with financial product, there are some dangers that you need to be aware of; here are the top three reverse mortgage pitfalls to lookout for. Repayment and Forfeiture - Most, if not all reverse mortgages will not require you to make payments or repay the loan for as long as you live. Once you pass on your heirs will have the opportunity to remortgage the debt or sell the house and repay the loan. Reverse mortgages have actually been around since 1989, but their popularity is skyrocketing as a result of the wave of baby-boomers that are retiring. These mortgage products are safe and beneficial when applied to the right homeowner and circumstances.5

Dangers of Reverse Mortgages