What Are Some of the Dangers of Reverse Mortgages?

[May 22, 2009.]

 

Reverse mortgages can help homeowners tap into the equity in their homes to boost their income. Many people who are 62 and up have used reverse mortgages to help pay for medical costs, household bills, or even downsize to a smaller home. But these mortgage loans aren’t for everyone. Here are some of the dangers of reverse mortgages.

—Applying to soon. The amount a homeowner will receive for a reverse mortgage is based upon their age, current interest rates, and the amount of equity they have in their home. Generally, the older a borrower is the more they’ll receive. Also, there is a chance that younger borrowers could outlive their reverse mortgage and would need to find another source of income down the line.

—High fees. Reverse mortgage loans have higher fees than conventional mortgages. Although these fees can usually be financed into the loan, this will push up the total interest owed over the life of the loan. Among the fees borrowers can expect to pay are origination fees that can add up to several thousand dollars to cover the mortgage lender’s operating expenses. Other fees include mortgage insurance premiums, surveys, appraisals, title insurance and other closing costs.

—Borrowers could lose their home it they don’t keep up with payments on their taxes and insurance. They also must continue to make any necessary repairs on their home. It’s important for people to continue to put away money in savings if they anticipate having to make large home repairs.

—A reverse mortgage can reduce the size of a borrower’s estate. There is the risk that they won’t have any equity left in their home to leave to heirs. The heirs may have to sell the home to pay off the balance of the mortgage loan.

—The borrower’s ability to qualify for some government benefits like Medicaid could be hindered.

—Some borrowers who aren’t in the best health may not completely understand how a reverse mortgage works. They also could become a victim of mortgage scams or be talked into buying other financial products they don’t really need. Borrowers can search the National Reverse Mortgage Lenders Association website to find reputable mortgage lenders in their area.

Reverse mortgages have helped many senior citizens stay in their homes and find money to help pay other bills. But as with any financial product borrowers should put together a list of questions before talking to a mortgage lender so they can get all the information they need to make an informed decision.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.