We all know that when something sounds to good to be true, it likely is. So, beware of reverse mortgages. They might seem like a great way to generate additional income, but they come with a lot of costs and a lot of risks.
A reverse mortgage is a contract by which people 62 or older can borrow money off of the value of their homes. Unlike a standard mortgage, with a reverse mortgage, you don’t have monthly payments on the principal and interest. Instead, you pay a variety of upfront and ongoing fees.
The costs of a reverse mortgage depend upon the kind of loan you select, how much money you borrow and the agency from which you get the loan. Upfront costs include the fees you pay the lending agency, mortgage insurance and real estate closing costs. You can pay these costs with the loan money you are taking out, but it will cost you more if you do so than if you pay out of pocket. Throughout the course of the loan, you will need to pay interest on your loan and ongoing mortgage insurance.
Also, keep in mind that you will need to pay back the money you borrow when you die or move from your home.
The amount of interest you pay depends on the agency loaning you the money. You will pay less if you have a lower interest rate. But, keep in mind that some loans have fixed interest rates that do not change over time and others have adjustable rates that can get quite high over time.
The Consumer Financial Protection Bureau reports that the ads for reverse mortgages tend to focus on their benefits and not their risks. For example, the ads may not explain that you could lose your home if you do not pay your property taxes or homeowner’s insurance. And, if you don’t plan well or live longer than you expected, you could end up borrowing so much that you outlive your loan money.
If you trigger a loan default because you do not pay your taxes or homeowner’s insurance, and you don’t pay the necessary fees in time, the lending agency has the right to foreclose on your home. And, you will lose your home. More than 100,000 people a year take out a reverse mortgage, and about one in ten reverse mortgage loans are in default.
If you move out of your home for any reason, the reverse mortgage holder also has the right to sell your home and get back the money it lent you. If your equity in the house is worth more than the money you borrowed along with fees, you will get any remaining money. If it is worth less than the money you borrowed, the mortgage holder, usually the federal government, will eat the loss.
In short, unless you are experiencing a financial emergency and have no other options, you should think hard before taking out a reverse mortgage. And, if you are seriously considering a reverse mortgage, make sure you understand the terms and compare all your options. Also, if you are married, make sure you and your spouse are both on the loan so that if one of you dies, the other can remain in the home. The Home Equity Conversion Mortgage (HECM) through the Federal Housing Authority is the only reverse mortgage insured by the federal government and offers the largest range of ways to borrow money.
If you have questions you can call for free counseling from the Department of Housing and Urban Development (HUD) at (800) 569-4287 or visit this web page for a counseling agency near you. For more information, download this free booklet on reverse mortgage loans from AARP.
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