Many older people who own their own homes but are having trouble making ends meet may be interested in a reverse mortgage. With a reverse mortgage, an older homeowner can get money from a lender for the value of their home without having to pay it back as long as they live there. So, a senior homeowner can keep up their standard of living and still own their home with the right reverse mortgage.
Of course, this is the picture that everyone...
Many older people who own their own homes but are having trouble making ends meet may be interested in a reverse mortgage. With a reverse mortgage, an older homeowner can get money from a lender for the value of their home without having to pay it back as long as they live there. So, a senior homeowner can keep up their standard of living and still own their home with the right reverse mortgage.
This is, of course, the picture that all reverse mortgage companies try to give to people who are interested in getting one. Still, there are many differences between a reverse mortgage and a regular loan that you need to know about. If people who want to get a reverse mortgage don't understand these differences, they can hurt their finances.
Disadvantages of Reverse Mortgages.
The cost of a reverse mortgage is the first thing that makes it less appealing. When compared to a regular mortgage, reverse mortgages tend to be very pricey. This is because reverse mortgages tend to lead to more debt over time. For example, a typical reverse mortgage might give a homeowner a $300 monthly payment at an interest rate of 12% per year, which is added up every month. Over ten years, the homeowner will get $36,000 in payments, but he or she will owe almost $70,000, which is almost twice as much as was paid out.
The second problem with reverse mortgages is that their contracts are hard to understand and can have a big effect on how much the borrower has to pay overall. Due to the complexity of the contracts, lenders and third parties who help set up reverse mortgages don't always tell the full truth about the loan's terms or fees. The cost of a reverse mortgage can also go up quickly because of all the other fees that can be charged up front or at the end. These fees can include origination fees, points, mortgage insurance premiums, closing costs, servicing fees, shared equity fees, and shared appreciation fees.
The shared equity and shared appreciation fees should be avoided because they can quickly raise the cost of the mortgage without giving the borrowers any benefit. For example, a shared appreciation fee can give a lender an automatic 50 percent interest in the difference between the current value of the home when the loan is signed and the increased value of the home when the loan is over. The fees are unfair because they have nothing to do with how much money is borrowed.
The third problem is that the payments from a reverse mortgage can make it harder to get a pension for older people, Medicaid, or extra money from Social Security. Seniors may not even know about this problem until they already have a reverse mortgage. Only then do they find out that it can hurt their finances in the opposite way they wanted it to in the first place when they took out the reverse mortgage.
Reverse mortgages also lower the value of a senior's assets and estate, which is another drawback. This will change how much the borrower's heirs will get as an inheritance.
How to stay away from these risks
Seniors can avoid these risks best by being careful when choosing a lender and getting bids from three different lenders. They should take these contracts to a counsellor for reverse mortgages so that they can be looked over. This will allow them to make a good decision about which of the three contracts is best for them.
