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The Disadvantages Of Reverse Mortgages
By: Charles Kirkendall
A reverse mortgage can be an attractive option for many home-owning seniors that
are having a hard time making ends meet. With a reverse mortgage, a senior
homeowner will receive money for their home equity from a lender without having
to make repayments for as long as they live in their home. So with the right
reverse mortgage a senior homeowner can maintain their standard of living while
retaining ownership of their home.
This of course, is the picture that all the reverse mortgage companies try to
paint for prospective borrowers. Nonetheless, there are many differences that
have to be understood between reverse mortgage's and conventional loans. If
these differences are not understood, they can cause financial problems for
reverse mortgage borrowers.
Disadvantages of Reverse Mortgages.
The first disadvantage is the relative cost of a reverse mortgage. Reverse
mortgages tend to be very expensive when compared with a conventional mortgage.
This is due to the rising-debt nature of reverse mortgages. For example, a
typical reverse mortgage may provide a homeowner with a $300 per month payment
with a yearly interest rate of 12 percent compounded monthly. Over the course of
ten years, the homeowner will receive $36,000 in payments, but will owe almost
$70,000-almost twice as much as received.
The second disadvantage is the complex and confusing contracts of reverse
mortgages, that can have a tremendous impact on the overall cost of a reverse
mortgage to the borrower. The complexity of the contracts often allow lenders
and third parties involved in arranging reverse mortgages to not fully disclose
the loan's terms or fees. These numerous other front-end and/or back-end fees
can also quickly drive up the cost of a reverse mortgage. These fees can include
origination fees, points, mortgage insurance premiums, closing costs, servicing
fees, shared equity and shared appreciation fees.
Out of all these fees, the shared equity and shared appreciation fees should be
avoided, as they can quickly raise the cost of the mortgage without providing
any benefit to the borrowers. As an example, a shared appreciation fee can give
a lender an automatic 50% interest in the difference between the current value
of the home when the loan is signed and the appreciated value of the home when
the loan is terminated. What makes the fees unfair is the fees have no relation
to the amount that is borrowed.
The third disadvantage is the reverse mortgage payments can affect eligibility
for old age pensions, Medicaid, or supplemental Social Security income. Senior's
may not even realize this problem until after they already have their reverse
mortgage, and only then do they find out that this can have the opposite affect
on a seniors finances then what they were trying to accomplish in the first
place by taking out the reverse mortgage.
Another disadvantage is the fact that reverse mortgages reduce the value of a
senior's assets and estate. This will affect the amount of inheritance received
by the borrower's heirs.
How to avoid these hazards
The best way for a senior to avoid these hazards is to be careful when choosing
a lender, by obtaining bids from three separate lenders. They should take these
contracts to a reverse mortgage counselor for evaluation. This will allow them
to accurately evaluate the three contracts before deciding on best one for their
situations.
About the Author:
Charles Kirkendall writes articles on reverse mortages and other senior
financial issues. Visit reverse mortgages for more information and resources. |
