Boomers Should Know Dangers of Reverse Mortgages

Many of you reading this blog may have senior parents that are living in the same home they’ve lived in for many years and do not want to move, but for whatever reason they need money for bills, medical expenses, etc. One way that some people are getting this money is through reverse mortgages. Ideally you should look at reverse mortgages with a fair amount of caution, and be aware of what the disadvantages of reverse mortgages are and try to help your parents make the right decisions about reverse mortgages.

The following is a guest post from Brandon Laughridge of Mortgage Loan Place, who provides some great information about reverse mortgages.

Reverse Mortgage Considerations

Like any loan, reverse mortgages have their pros and cons.  Unfortunately, the decision to get a reverse mortgage isn’t simply a black and white one.  One must take a look at both the benefits and drawbacks of choosing to fund retirement expenses out of home equity via a reverse mortgage.  I always prefer the bad news first so we’ll start there.

The Bad

Fees can be high. The upfront cost of a reverse mortgage can often seem like a bear when it’s printed as one lump sum.  However, when broken down, these costs are in line with conventional financing.  Borrowers must pay an upfront mortgage insurance fee of 2% of the lending limit which is generally pretty hefty.  Add in all the normal costs of appraisals, escrow services, titling, and so on and you can begin to see how it gets pricey.

There are many snake oil reverse mortgage salesman. Unfortunately, many unscrupulous mortgage brokers are trying to make reverse mortgages the next subprime mess.  Fortunately, this has been combatted with a law that requires prospective borrowers to go through counseling with a person that is HUD/FHA approved.

The Good

Fixes monthly cash flow issues. Obviously this is the only reason borrowers would seek a reverse mortgage, but it’s an easy way for seniors with equity to cash it out slowly over time.  Living on a fixed income can be hard and reverse mortgages allow you to get a “raise” from your own pocket more or less.

It’s better than other debt. With a reverse mortgage, your debt is never going to transfer to a relative and it will never be more than your home is worth. Therefore you cannot ever owe more money than liquidating your home would provide to pay off that debt.

Do You Qualify?

In order to qualify for a reverse mortgage you must:

• Be at least 62 years of age or older.
• Own property outright or have a small mortgage balance.
• Ocucpy the property full time.
• Participate in counseling with HUD.
• Have no debt to the Federal Government.

Should You Get a Reverse Mortgage?

As you can see, reverse mortgages aren’t for everyone.  They are, however, a great opportunity if you find yourself short on cash at the end of every month and have a large amount of home equity.  Be sure to discuss this serious financial decision with family members and a nonbiased financial counselor before engaging in talks with a mortgage broker.