Reverse Mortgages: Know Potential Pitfalls

MP900442456Caution is urged when considering a reverse mortgage as a solution to financial problems during retirement years. Television commercials targeting seniors leave out most of the unpleasant parts of a reverse mortgage.  Rates and fees are extremely high and the homeowner is still responsible to pay property taxes, insurance and upkeep. It’s important to understand the positive and negatives before signing on the dotted line.

The Better Business Bureau receives a lot of complaints about reverse mortgages. As these complaints show, there are problems and issues with reverse mortgages, and they also illustrate that more than a few consumers are confused when they sign up.

A recent article in The (Appleton WI) Post Crescent, titled “Be cautious before taking on reverse mortgage,” says that some consumers don't know that a reverse mortgage is a loan that leverages their home’s equity. It's actually one of the most expensive forms of credit a person can get, with its origination fees, interest charges, and insurance premiums topping those of most other types of loans. Typically, a reverse mortgage origination fee can be up to $6,000 and the initial premium for federal insurance is set at 2% of the home’s value.

Repayment of a reverse mortgage loan isn't required until the borrower dies or moves out of the home, but this is where it can get a bit hairy: if the borrower moves into a nursing home or assisted living facility and leaves behind a non-borrowing spouse, child, or grandchild, they’ll also need to move out.

The article explains that there are seniors who apply for a reverse mortgage because of financial difficulties, which can include property taxes or insurance payments. Reverse mortgage agreements generally state that the property taxes, insurance, upkeep, and maintenance are still the borrower's responsibility. If the borrower fails to do any of these, he or she will be in default. The lender can foreclose.

So, who is best situated for a reverse mortgage?

The Number One benefit of a reverse mortgage is that a senior can remain in the home while at the same time receiving a steady cash flow. The best reverse mortgage candidate is an individual age 62 or older who lives alone and has significant equity in the home (or doesn’t have a mortgage). Also, this person isn't planning on leaving the home to their heirs and is healthy enough to stay in the home for a long time without going into an assisted living facility.

The article says that if you're thinking about a reverse mortgage, forget about those celebrity spokespeople on TV! Talk with an experienced elder law attorney before signing anything.

Lastly, watch out for scammers who want to take advantage of seniors. That includes anybody with a too-good-to-be-true interest rate, real estate deal, or investment idea. Talk with a qualified elder law attorney first.

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Reference: The (Appleton WI) Post Crescent (June 20, 2015) “Be cautious before taking on reverse mortgage”

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