My brother mentioned setting my mother up with a reverse mortgage over the holiday break, so I thought I would do some research on what is was and if it was a good idea. I had heard of it before and I have a basic understanding of it, but I figured there had to be some sort of catch, as there always is, and there certainly are…
“The HECM FHA insured reverse mortgage can be used by senior homeowners age 62 and older to convert the equity in their home into monthly streams of income and/or a line of credit to be repaid when they no longer occupy the home. The loan, commonly known as HECM, is funded by a lending institution such as a mortgage lender, bank, credit union or savings and loan association. To assist the homeowner in making an informed decision of whether this program meets their needs, they are required to receive consumer education and counseling by a HUD-approved HECM counselor“
1. You need to be under the 62 year old age limit.
2. You need to own your property outright.
3. The house you’re reverse mortgaging needs to be your primary residence.
4. Needs to be a single family home, a 1-4 unit home, a manufactured home, or leased land; ( this just means that when they take your equity in your house out from under you, they need to have a good house to steal, who wants to steal a dump? 🙂
5. Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. A reverse mortgage can cost thousands more than a conventional mortgage.
6. It’s important to calculate the cost of a reverse mortgage against what you would gain, because once you enter a reverse mortgage agreement, the mortgage company essentially OWNS your home.
7. Reverse mortgages are often seen as a last resort if the homeowner needs cash and there are no other options. (Take this one the most seriously! Not only are you getting rid of the possible last piece of ground a person may own, but you’re betting their home on it.
8. What if you outlive your reverse-mortgage? I couldn’t find anything on this, but it is a valid point. What if you USE you last resort, and then you outlive it? I’d assume the bank then owns your house and kicks you out to go live elsewhere; which isn’t fun at 85 I bet.
9. To reduce their risk, lenders generally limit reverse mortgage loans to amounts that are below their estimate of the property’s full value; meaning that you’re going to get a lesser amount than your house is worth in the first place FURTHERING the idea that this should be a last resort.
Andrew Linden from Australia thinks they should be BANNED.
?Associate professor of economics at the University of Western Sydney Steve Keen, author of Debt Watch, calls them ”the most dangerous ‘innovation’ around in finance” and says any decline in house prices will see lenders and investors bearing significant risk of possible losses.
“I want them abolished. [They represent] a systemic danger to the banking system. [With reverse mortgages] the banks are building in an expectation of continued asset price inflation for the next 25 years,” Keen says.”
Can it work? Yea, I suppose it can. It sounds like most of the people don’t even qualify for them in the first place. Some people just don’t find themselves in the right position to act on it in the first place after drudging through the pre-reqs. Bottom line as with any investment, RESEARCH your options. If it IS your last option, REALIZE that it is, and take the proper steps. Bring along a trusted friend or family member to the consultation. Most of us look at the reverse mortgage as a detriment to society and squeezing of our senior citizens, but really the lenders are just targeting another audience. It may not be right for everyone, but to the select few that it is right for, the lenders have a right to advertise to them.
If you’re reading this blog and under the age of 50, well, you’re probably on the right path anyway if you’ve got a plan, at least educating yourself to get a better understanding of what is to come so you won’t make more bad decisions. It is likely we won’t have to worry about that for ourselves, but if we have parents or loved ones that ARE in that situation, at least you’ll be able to answer/help them answer many of the questions that come up in the lending process. Keep your eyes peeled and guard up and decide for yourself if it is a good decision. Prepared financial decisions are usually the best kind to make…