A reverse mortgage agreement, of which 55,306 were made in fiscal year 2010, is a popular method for retirees to generate income from the equity held in their home. However, as the federal government, the media, and legal counsel has advised the public, there are many concerns from different consumer advocacy groups about reverse mortgages. Most notably, these concerns do not necessarily revolve around the reverse mortgage vehicle itself, but rather lender practices used in the process of making reverse mortgage agreements. For any homeowner considering a reverse mortgage, a quick review of the following list of top concerns related to reverse mortgages will prove beneficial.
Government and Public Criticism and Concerns about Reverse Mortgages
The following list outlines many of the concerns the public and federal government have expressed concerning reverse mortgages, which target a relatively vulnerable age group of potential borrowers, typically retirees aged sixty-two (62) and older.
- Reverse mortgage agreements are complex loan agreements, which often entail large amounts of paperwork, documentation, and other qualifications. Given the target eligible market for reverse mortgages, older homeowners needing income in their later years, the amount of financial literacy may simply not be there to make informed decisions about the lending process. In many cases, the worst examples of these concerns stem from predatory lending practices taken by lenders, while in others, homeowners may simply have made errors in judgment. In any case, given the public outcry and concern, the federal government now mandates any candidate for a reverse mortgage undergo mandatory financial counseling from a federally approved third party advisor before agreeing to a reverse mortgage home loan.
- Reverse mortgages rely on variables, which are not in the best interest of elderly reverse mortgage holders with little or no recourse to control these variables, increase their income elsewhere, or reduce expenses. The borrowing limits on reverse mortgages are capped at eighty percent of the current market value of the home. This value will fluctuate, and as seen recently, can depreciate, which may leave elderly reverse mortgage holders with an unexpected lack of income. In addition, the life of the reverse mortgage loan is dependant the amount of time a homeowner remains in the home securing the mortgage or until they die, which is variable at best as well. This being the case, an accurate estimate of spending abilities versus the borrowing limits of a reverse mortgage is often difficult to predict.
- Reverse mortgages are highly expensive to enter into, relative to other home loan agreements. The typical origination fees, mortgage insurance, title insurance, legal fees, title fees, recording fees, appraisal costs, and survey fees all can lead the costs of a reverse mortgage, from the onset, to be more than $12,000 on a $150,000 reverse mortgage loan. The fees scheduled based on the appraised value of a home, so they will vary, and in most cases, the fees are drawn from a reverse mortgage line of credit or lump sum. In contrast with other loans or home sale options, homeowners will generally incur costs of fifty percent more when doing a reverse mortgage agreement.
- Reverse mortgages accrue compound interest. During the reverse mortgage lifetime, homeowners are not required to make any payments on borrowed funds, which contain a varied interest rate based on the original agreement between a lender and borrower. This interest compounds on a monthly basis, which the longer a homeowner is still in a reverse mortgage agreement, will mean more equity is being drawn from their home for interest only. Fortunately, the federal government through the FHA has mandated that borrowers can never owe more than the actual market value of their home and that no debt accrued in a reverse mortgage may be passed along to one’s estate.
Getting Legal Help
Though common, a reverse mortgage is a relatively complex financial transaction often requiring the intervention and representation of an attorney to assist with negotiations, preparing documents, and filing paperwork. Any retiree considering a reverse mortgage is advised to consult with legal counsel before taking any concrete action to obtain a reverse mortgage loan.
