What are the down-falls of a Reverse Mortgage?

Question

My 71 year-old mother, who is a bit financially strapped, received information from her retirement association about Reverse Mortgages. The papers makes it read like for fees of roughly $300-ish, the bank will just give her whatever money she wants and she won't have to pay anything back until the sale of the house.... which for my family, will never happen.

It really sounds like free money... what are the catches??

Answer 1

Linc,

Reverse mortgages are what I specialize in. Something I'm confused about in what you said. The fees for reverse mortgages are mandated by FHA and are very specific. Now if this company is asking for $300 up front for an appraisal deposit or application fee I understand that it is an out of pocket expense (our company doesn't ask for this). There are other fees that are rolled into the loan. 1) 2% FHA mortgage insurance 2) 2% Origination fee) 3) Typical closing cost i.e. appraisal fee, title work, etc.

I'm sorry but there are many misconceptions out there about reverse mortgages. Many of them are listed by some of these replies.

There really is only one downside to taking out a reverse mortgage. The children are not left with 100% of the value of the home for an inheritance. From my experience and my own personal view, most children would want their parents to live their life to the fullest and don't care if part of their inheritance is reduced. It is YOUR home and you worked hard to pay for it. You should enjoy the benefits of it.

She can not get whatever amount of money she wants she can only qualify to receive around 45%-75% of her home value. With reverse mortgages the older you are the more money you receive. The reason for this is that these lenders have to wait for 10-40 years to get paid back their money on average. Someone who is 62 will be around much longer than someone who is 90 so the because of life expectancy the lender will give more money.

The house is still in your mom's name it just shows that there is a mortgage on the home like any other conventional mortgage. She can take the full amount she qualifies for in a lump sum, split it up in monthly payments or leave it in a line of credit which right now has a growth rate of about 7%. This means if she didn't touch the line of credit in one year it would be 7% higher. With the line of credit she is only charged interest on what she pulls out of the line of credit and that interest rate right now is right around 6.5%. The rest of the money sits there untouched until she needs it. These loans are set up so that there should always be equity in the home to pass along to their heirs.

All of this money is tax free and there are no monthly payments to make. You CAN make a payment if you want and are concerned about keeping the balance down. You even get a tax break if you pay back the interest you are being charged.

This is a much better option than a home equity loan which you have to make high monthly payments and if something happens and they get behind could lose their home.

So really the only downside to reverse mortgages is that someone like you wouldn't get 100% of the home value for your inheritance.

I'd be happy to send you some more information if you would like. This is what I specialize in and our company can do reverses almost anywhere in the country. If you would like some more information please email me at [e-mail]

Answer 2

The interest rate.

Let's say you get 500 dollars per month.
The 500 is compounded so at the end of the year it is like they have given you 6500 when you really got 6000.
Just like a mortgage it has principle and interest. The longer it goes the more interest it compounds.
The bank will not lose. Even if they get all the value of the property(fat chance) the estate will have to settle.
I'"m not a lawyer but see one BEFORE you sign anything.

Answer 3

If the home is paid in full, you are able to draw a set amount each month, if you desire. This is based on the market value of your home at any given time. So in the future it could go up or down.

If the house is sold before you may have drawn the full amount of it's value, the surplus left is yours. If you draw the full value over time, then the bank owns the property. You might be able to see that what you draw may be less than the value, so that there is a cushion, (surplus), at the end.

your bank can fully explain this.

Answer 4

The catch is that you don't owe anything as long as the lendee (person borrowing the money) still lives in that home. If the lendee's health deteriorates and they have to face nursing home placement, the bank will want their money back asap. Also, if the lendee passes away, the family will be left to pay the debt. Usually, if it sounds way too good to be true.... It probably is....

Isn't there always a catch?

Answer 5

Sir or Madam,
The WINNER in reverse mortages are BROKERS ,
MORTGAGE companies and any one associated.
The LOSER is YOUR MOTHER and you to some extent.
May is suggest Dave Ramsey.com to explain the ripoff r.m.s are and the hassel you will have after her death. Read this site and you won't have the pain or loss of money we had after the passing.
Good L.U.C.K.