Risks of Reverse Mortgage?

Question

My mom is thinking of doing this and I don't know if she really understands it.

Answer 1

The biggest drawback with reverse mortgages are the high upfront costs. Some seniors may want to consider other options to tap their home equity, particularly if they do not think they will remain in the home for at least five years.

For example, a home equity line of credit (HELOC) requiring interest-only payments for 10 years can be used. These loans typically have very low (or zero) upfront costs. The drawback is that, unlike a reverse mortgage, the borrower must make a monthly (interest-only) payment to the lender. These payments can be made for several years by drawing on the line of credit itself. Of course, the balance needs to be paid off when the house is sold or the owner dies - just as with a reverse mortgage.

Other options that can free up home equity but avoid the high upfront costs of a reverse mortgage include: 1) intra-family loan or sale-leaseback and, 2) selling and moving to a less expensive dwelling or location. However, when selling the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling. Currently, there is a coordinated government program called "Aging in Place" that strives to assist the homeowner in staying in their home and neighborhood, if that is their desire. Various studies, including AARP, show that over 80% of elderly homeowners do not want to move.

Answer 2

She should compare the reverse mortgage to a home equity loan and see which would be cheaper over the long run. With a home equity loan, she'd have a bunch of cash in hand which she could invest and earn interest on while paying back the loan, and keeping ownership of her house. With the reverse mortgage, she would get a set amount each month, losing part of the value of her house. She would need to see how long she could get payments from the R.M., and how much, and make sure that was at least equal to the value of her house; and what if the house's value changes? Will they increase or lower the monthly payments? And can she leave the house to someone in her will if she dies before the value is expended? what will the inheritor's rights and obligations be?

Answer 3

In a reverse mortgage, the loan is paid off when the owner dies or sells the house. If the owner passes away, the home is sold and the proceed from the sale pays off the mortgage and the balance is given to the heirs. If the owner sells the house, the funds from the sale pay off the mortgage and the owner gets the balance.

BUT, the assumption is the home will sell for enough to pay off the mortgage. You mom would be playing with fire as real estate values are dropping - and it's only begun. If there comes a day she wants to sell the house, she may not be able to sell it for enough to pay off the reverse mortgage.

It sounds good on paper, but it's based on a major assumption of always increasing property values. Alas, over 70% of the states in the U.S. are experiencing declining home sales and 45 metropolitan regions are experiencing price declines. I fear, when the time comes to sell the house and pay off the mortgage, it won't sell for enough to cover it.

Answer 4

A reverse mortgage is a mortgage that allows the person to keep their home and possibly give them income from it. It just sits there and there are no payments made to the principal at all. Upon her death the debt will have to be satisfied by the estate and possibly the home sold to make the satisfaction of the mortgage. I personally do not recommend them to my clients ---but some do want them. The home needs to be free and clear or under 50% of the value in most cases to make this an option.
I am a mortgage banker in Tennessee

Answer 5

Their whole sales pitch is that it has no risk (in that you can't be kicked out of your home). What they tend to gloss over is that you have to pay very high fees upfront and that the interest accumulates on the back end - in essence robbing you of the equity you saved for and earned your entire life.

If you are financially able to. You may want to buy your mother out of the house. I think the numbers will work out favorably for you both to do so.

Reverse Mortgages aren't a scam, but they only pay for themselves if your mother were to live in the house way beyond anyones expectations. But keep in mind if that happens - say she lives 20 more years - will the money she is getting today really be able to help her then - and she will have used up most or all of the equity in her house.

Hope that helps some.

Joe...

Answer 6

Steve very almost has it ideal. FHA will lend as much as sixty 5% of the fee the own loan basically constructive properties interest by way of the years and specific upon the loss of life then the own loan could desire to be paid back with the help of the valuables and if the valuables has no money the homestead could desire to be bought or that's foreclosed

Answer 7

I'm a Mortgage Loan Officer, and do not recommend a Reverse Mortgage. She is better off with a plain Refinance if she can. The following article is from Bankrate.com, please advise her to do more research and not to get pressured into this loan!!


http://www.bankrate.com/brm/news/mortgages/20070104_reverse_mortgage_a1.asp

Answer 8

reverse morgages are the biggest fraud....she would be better off taking money out of her retirement funds......

Answer 9

Joe K has said it the best, in my opinion.

Answer 10

The risk is that when she dies, they take her house!