What You Need To Watch Out On Reverse Mortgages

What You Need To Watch Out On Reverse Mortgages

Reverse mortgage was conceived as a means to help retirees with limited income to cover basic monthly living expenses and pay for health care and whose net worth is mostly tied up in the value of their home. It is a loan available to homeowners, 62 years or older which allows them to convert part of the equity in their homes into cash. Unlike a traditional mortgage instead of making monthly payments to a lender, it is the lender makes payments to the borrower. As long as the borrower lives in the home he or she is not required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance, and homeowners’ association dues. The entire loan balance becomes due and payable when the borrower dies, moves away permanently or sells the home.

A reverse mortgage is probably a bad idea and could complicate if you want to leave some property to inherit by your heirs. Maybe you still live in the home in which you raised your daughter, and she wants to rear her own family in it after you’re gone. With a reverse mortgage, the only way your daughter will be able to keep the home in the family is to pay off the loan.

What Are The Dangers Behind Reverse Mortgage?

A danger associated with a reverse mortgage is the possibility of foreclosure. In this case, the borrower isn’t responsible for making any mortgage payments and therefore can’t become delinquent on them – a reverse mortgage requires the borrower to meet certain conditions. Failing to meet these conditions allows the lender to foreclose.
The reverse mortgage borrower is required to live in the home and maintain it. If the home falls into disrepair, it won’t be worth fair market value when it’s time to sell, and the lender won’t be able to recoup the full amount it has extended to the borrower. They are also required to stay current on property taxes and homeowners insurance. These requirements are imposed by the lender to protect its interest in the home. The nonpayment of property taxes, the local tax authority can seize the house. If you don’t have homeowners insurance and there’s a house fire, the lender’s collateral is damaged.
Here are some reasons that reverse mortgage should not be availed of:
1. High fees

For a typical 30-year mortgage the closing costs might run $3,000. In reverse mortgage, they could run as much as $15,000. Lenders also charge more because they claim they take on unique risks, in that reverse mortgages aren’t based on your income or credit score Reverse mortgages come with more regulations than a regular mortgage so that accounts for some of the additional fees.
2. Property taxes and homeowners insurance to pay

The property remains in your name and you are responsible for paying all property taxes and continue to carry homeowners insurance.
3. Mortgage insurance to pay

To obtain and maintain your FHA-insured HECM, you must pay a 1.25% premium each year on your loan balance.
4. Loan amounts are capped

With a HECM, the rule is you get about half of your equity, up to $625,500.So, if you lived in a $2 million home that you owned free and clear, the most you would get is $625,500 which is even less than half, because of the cap.
5. Interest continues to accrue

Interest has a way of adding up because your lender charges you interest on your loan balance that you continue to carry forward year after year. So the size of your loan balance will continue to grow if you don’t pay down the balance.
6. Younger spouse penalty

Younger people tend to live for more years than older people, the reverse mortgage lender will scale back the size of its loan payout accordingly. With a more limited payout, reverse mortgage lenders are protected in the event you live much longer than anyone expected.
7. Lack of choices

Currently, there is only one jumbo reverse mortgage lender in the country — someone who will make you a loan for more than $625,500. The absence of competition in the market, Urban Financial will lend only an amount equal to 40 percent of your home equity. There’s no incentive to keep a lid on loan fees.
8. Benefits affected

Social Security and Medicare are not affected by a reverse mortgage, but a needs-based program such as Medicaid could be. To remain eligible for Medicaid, the reverse mortgage homeowner would have to manage how much is withdrawn from the mortgage in one month to keep from exceeding the Medicaid limit.
10. Heirs get less

As every month passes, the homeowner sees a debt increase and equity home equity decrease. That equation doesn’t benefit heirs, so if you planned on leaving your heirs a little something, it will probably be very “little.”
If you need money out, it would be far better and cheaper to do a cash-out refinance, but if that’s a problem because you don’t earn enough income to make the monthly payments, then you should sell your home, and get all the money that a sale would bring. Don’t let reverse mortgage lenders play on your sentiments. Decide to downsize, sell and move on, so you can enjoy the rest of your life with more money, not less.

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