Numerous TV commercials make a reverse mortgage sound simple. As more and more people are qualifying for reverse mortgages it is important to consider the large number of pitfalls in taking out a reverse mortgage, which can end up being harmful both financially and emotionally.
ARE THERE ANY DISADVANTAGES? Yes! It is important to evaluate the reverse mortgage disadvantages before taking out one. Proceed with caution. Many financial consultants believe that not only do reverse mortgages have definite disadvantages but that lenders for these types of mortgages don’t fully disclose all the terms, or tell you how high the front-load is. HUD estimates that several hundred seniors nationwide have been cheated by unscrupulous lenders and third-party “estate planning” firms that take advantage of consumers’ relative lack of knowledge about reverse mortgages; enticing them to agree to unfair or illegal contract terms. A woman in Norwalk, California alleged that she paid $5,571 to an America’s Trust, Inc. in return for a visit from an agent, who came to her home and simply referred her to a reverse mortgage lender. She also alleged that America’s Trust never informed her that she would be charged 10% of her loan amount for that service.
WHO GETS REVERSE MORTGAGES (which are considered a loan-of-last-resort for seniors without any other options of getting the capital they need in any other way). Many people have a strong distaste for reverse mortgages, as they feel that it is the poorest people, who will take out a reverse mortgage while banks take a massive cut of everything these people have worked all their lives to acquire. Reverse mortgages have been described as a way for wealthy to scoop up the poorest families homes, while the poorest families become poorer.
REVERSE MORTGAGES HAVE SEVERAL OPTIONS BUT THEY ARE ALL STILL A MORTGAGE THAT MUST BE REPAID! Reverse mortgages are a mortgage. There are several options to receive money in a reverse mortgage: lump sum, a line of credit or monthly payments for a specific period of time or for the remainder of your life.
Just as with a traditional mortgage, you borrow money and that loan must be repaid to the lender at the end of the reverse mortgage term. The “end of the term” is when you move out of the home for 12 months or if the home is sold (whichever comes first) or at your death. The lender has an agreement to take possession of the house to satisfy the balance owed. Typically this is handled by selling the home and using the proceeds from the sale to pay off the reverse mortgage balance. The bank takes the portion of the sale that it is owed, plus interest. The lender gets a premium over what they lent as payment because the loan amount does not go down; it goes up! The loan you receive on a reverse mortgage is worth less than or equal to the value of your house and interest is accruing each month on the amount you still owe, thus the amount you owe increases each month as payments are distributed to you or when you take out money on the line of credit. ) This is why it has been referred to as selling ones house slowly, because the equity in your house is lost over time.
PROBLEMS WITH REVERSE MORTGAGES
READ THE FINE PRINT It’s imperative to read the fine print, ask lots of questions and make sure everything you are promised is actually in the contract! (Have the loan company highlight in the contract, each point they tell you. Read it over carefully or have some other person, such as an attorney take time to read it, to make sure that is exactly what you were told, before signing anything.)
FEES FOR ESTABLISHING A REVERSE MORTGAGE ARE VERY EXPENSIVE
You may be told: There are no income, credit or medical requirements to qualify and no other qualifications like there are with a regular mortgage (RED FLAG!)
REALITY: While it may be true that your income and credit are not a factor, the fees associated with establishing a reverse mortgage are very expensive, while promising an uncertain amount of benefits. It is important to understand that on a reverse mortgage, interest is accruing each month on the amount owed to the lender. That means the amount you owe increases each month as tenure/term payments are distributed, money is taken out on the line of credit, etc. For example, a typical reverse mortgage borrower receives approximately $300 per month from the lender with a monthly compounded interest rate of 1%. Over the course of ten years, you will receive $36,000, in total but by that time you will owe almost $70,000. This means that you are repaying close to twice the amount you are receiving PLUS the bank receives a limited ownership claim in your house in exchange and will eventually own your house! A reverse mortgage works like a credit card in the respect that if the payments aren’t made it goes into default, damaging your credit and most likely you get sued, but the difference is you also lose your home.
What you may be told by the loan company: Some lenders claim that the homeowner doesn’t have to pay anything upfront.
REALITY: RED FLAG BE VERY CAREFUL WHEN ANYONE TELLS YOU THAT!! Many lenders simply add the upfront costs into the loan so while you do not pay them upfront you certainly do pay them. Lenders, of course, love not making you pay the fees upfront because you will have to pay the loan company more interest. This is because, in reality, you are borrowing the extra money from the lender to pay the fees it costs in order to get the reverse mortgage from the lender! This is extremely profitable for lenders. Ka-Ching! (Guess who is the loser!)
WHAT IS INCLUDED IN UPFRONT/FRONT LOADING FEES THAT THE LOAN COMPANY WILL ADD INTO MY LOAN?
Front-loading encompasses the upfront costs which will be paid out of your home’s equity at closing and will include interest, origination fees, points, mortgage insurance premiums, closing costs, appraiser fees, servicing fees, shared equity or “maturity” fees, and shared appreciation fees.
HOW MUCH HIGHER ARE THESE FEES IN A REVERSE MORTGAGE THAN A TRADITIONAL MORTGAGE?
- The origination fee will be double compared to the amount you pay on a normal mortgage.
- The interest rates and fees are all determined based upon home value and what loan you decide to go with. Reverse mortgages often have very high fees and interest rates.
Bottom line: You will pay an excessively large price for a reverse mortgage. (You will be paying a higher interest rate than on other loans, have less equity in your home, and you may run out of the money sooner than you think.)
ARE THERE ANY OTHER FEES FOR A REVERSE MORTGAGE?
Numerous other front-end and back-end fees can quickly drive up the cost of a reverse mortgage. The case of the San Mateo County Public Guardian v. Commonwealth Life Insurance illustrates how some of these fees generated allegations by a class of 1,505 borrowers that they were charged tens of thousands of dollars in artificially inflated loan fees.
CONFUSING AND COMPLEX TERMS OF A REVERSE MORTGAGE Reverse Mortgages are more complicated and have more confusing terms and conditions than a traditional mortgage. These complex contract terms of a reverse mortgage can greatly impact the overall cost to you, the borrower. There can lead to serious repercussions to borrowers, when lenders or third parties involved in arranging reverse mortgages do not fully disclose a loan’s terms and fees.
A lawsuit filed by the San Mateo County Public Guardian alleged that Transamerica Corporation charged Berta Gray, an 83-year old woman what was in effect a shared appreciation fee. This fee gave Transamerica an automatic 50% interest that automatically paid TransAmerica 50 percent ownership interest in the difference between the base value of the home when the loan was established and the appreciated market value of the home when the loan terminates, even though the fee bore no relation to the amount she actually borrowed.
The cost of her reverse mortgage soared when TransAmerica also required her to purchase an annuity, financed out of her home’s equity to provide monthly payments to TransAmerica immediately and that interest began compounding on that fee even though she was not due to receive any payment on the annuity until six years after the loan began, at age 89. Under this arrangement, if Ms. Gray died before the six-year period ended, her estate would see no benefit from the annuity purchase, although she had paid in full for it.
WHAT ELSE DO WE HAVE TO PAY TO GET A REVERSE MORTGAGE? Don’t forget that you are still responsible to pay not only the loan but also the annual real estate taxes, homeowner’s insurance, all home repairs and other maintenance, HOA fees and mortgage insurance (which covers the lender – not you-should the property value decrease, or if the mortgage is held over a very long period )
HOW MUCH CAN WE BORROW AND WHAT IS THE INTEREST RATE?
The amount that the homeowner can borrow depends on the age of the youngest borrower, the current interest rates being offered, & the value of their home. Payouts to the homeowner are based on actuary tables The bank estimates how long you have to live & how much your house will be worth to them at that time of your death. A person age 90 can borrow more as a percentage of equity than someone aged 70. The older you are, the more your home is worth, and the lower the interest rate – the more money you can get.
CAN ANYONE TELL ME WHAT THE TOTAL COST WILL BE FOR A REVERSE MORTGAGE?
No. It is impossible to calculate the true cost of a Reverse Mortgage, without predicting how long you will live and what future interest rates and home appreciation rates will be.
All reverse mortgages are going to have different costs, based on whether there’s any monthly repayment and the ages/health of the people requesting the loan.
COULD A REVERSE MORTGAGE KEEP ME FROM QUALIFYING FOR MEDICAID, IF I NEED IT DOWN THE ROAD?
Red Flag It is a very real possibility and this should be a serious consideration before you decide to do it. The proceeds from a reverse mortgage could prove to be a serious barrier to allowing you to qualify for Medicaid because your proceeds from the loan are counted as an asset! Each state differs, however, any untapped equity you currently have in your home will not be considered an asset when determining your Medicaid eligibility so long as you continue to live in your home. Make sure you speak with a Medicaid specialist before obtaining a reverse mortgage, as you do not want the cash proceeds prohibiting you from Medicaid eligibility.
MY LENDER WANTS ME TO GET AN ANNUITY. IS THIS A GOOD IDEA?
NO! BIG RED FLAG: NEVER take out a reverse mortgage specifically to buy an annuity. An annuity is a type of insurance, in this case, using the equity in the home to pay out the monthly reverse mortgage payments to the borrower. This means that the borrower is charged the cost of the annuity immediately, with compounding interest even though the annuity is not due to start making payments for a certain period after it is established. For example, if the annuity is set up to start paying out after a six-year period, if the borrower dies before the six-year period is up, the estate of the borrower would not benefit from the annuity even though the borrower had already paid for it in full.
WE WERE TOLD THAT BEFORE WE SIGN ANYTHING THAT WE SHOULD OBTAIN REVERSE MORTGAGE LENDER REFERRAL INFORMATION FOR FREE FROM HUD
A session with a HUD certified counselor, who is supposed to explain the disadvantages of reverse mortgages to you, might not help protect you.
During the process of obtaining a reverse mortgage the senior borrower should attend a counseling session with a HUD certified counselor, who has no financial interest in if the senior borrower gets a reverse mortgage or not. The counselor should explain the disadvantages of reverse mortgages, as many are really bad deals for the borrower. However, there have been situations where reverse mortgage counselors are affiliated with the lender. Thus, in reality, that counselor in not a neutral party. Unfortunately, this practice is encouraged by the fact that Fannie Mae will purchase reverse mortgage loans from loan originators who themselves provide “counseling” to prospective reverse mortgage borrowers. The current system of reverse mortgage counseling is not enough to protect potential borrowers against financial fraud and abuse. There needs to be established consumer protections that explains the current pitfalls and hazards for consumers.
Lastly, remember, that the deal you make may not be directly with the lending bank, but with someone planning to profit on your home’s rise in value.