The Disadvantages Of Reverse Mortgages
A reverse mortgage can be
an attractive option for many home-owning seniors that are having a hard
time making ends meet. With a reverse mortgage, a senior homeowner
will receive money for their home equity from a lender without having to
make repayments for as long as they live in their home. So with the right
reverse mortgage a senior homeowner can maintain their standard of living
while retaining ownership of their home.
This of course, is the picture
that all the reverse mortgage companies try to paint for prospective borrowers.
Nonetheless, there are many differences that have to be understood between
reverse mortgage's and conventional loans. If these differences are not
understood, they can cause financial problems for reverse mortgage borrowers.
Disadvantages of Reverse
Mortgages.
The first disadvantage is the
relative cost of a reverse mortgage. Reverse mortgages tend to be very
expensive when compared with a conventional mortgage. This is due to the
rising-debt nature of reverse mortgages. For example, a typical reverse
mortgage may provide a homeowner with a $300 per month payment with a yearly
interest rate of 12 percent compounded monthly. Over the course of ten
years, the homeowner will receive $36,000 in payments, but will owe almost
$70,000-almost twice as much as received.
The second disadvantage is
the complex and confusing contracts of reverse mortgages, that can have
a tremendous impact on the overall cost of a reverse mortgage to the borrower.
The complexity of the contracts often allow lenders and third parties involved
in arranging reverse mortgages to not fully disclose the loan's terms or
fees. These numerous other front-end and/or back-end fees can also quickly
drive up the cost of a reverse mortgage. These fees can include origination
fees, points, mortgage insurance premiums, closing costs, servicing fees,
shared equity and shared appreciation fees.
Out of all these fees, the
shared equity and shared appreciation fees should be avoided, as they can
quickly raise the cost of the mortgage without providing any benefit to
the borrowers. As an example, a shared appreciation fee can give a lender
an automatic 50% interest in the difference between the current value of
the home when the loan is signed and the appreciated value of the home
when the loan is terminated. What makes the fees unfair is the fees have
no relation to the amount that is borrowed.
The third disadvantage is the
reverse mortgage payments can affect eligibility for old age pensions,
Medicaid, or supplemental Social Security income. Senior's may not even
realize this problem until after they already have their reverse mortgage,
and only then do they find out that this can have the opposite affect on
a seniors finances then what they were trying to accomplish in the first
place by taking out the reverse mortgage.
Another disadvantage is the
fact that reverse mortgages reduce the value of a senior's assets and estate.
This will affect the amount of inheritance received by the borrower's heirs.
How to avoid these hazards
The best way for a senior to
avoid these hazards is to be careful when choosing a lender, by obtaining
bids from three separate lenders. They should take these contracts to a
reverse mortgage counselor for evaluation. This will allow them to accurately
evaluate the three contracts before deciding on best one for their situations.
Author-Bio: Charles Kirkendall
writes articles on reverse mortages and other senior financial issues.
Visit reverse mortgages http://reverse.settle-today.com
for more information and resources.
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