While reverse mortgages for seniors can be a helpful way to turn the equity in homes into fast cash, many people do not realize the costs and long term consequences.
Reverse Mortgages for Seniors Benefits
There are many benefits for seniors to get reverse home mortgages. Sometimes seniors may be forced into retirement and a reverse mortgage keeps them from selling their home and making significant lifestyle changes. These types of home mortgages are also tax free and will not affect Social Security income or Medicare benefits; however, reverse mortgage advances are counted as liquid assets and may affect SSI, Medicaid or other public benefits.
Proceeds from reverse mortgages can be one lump sum, fixed monthly income or both. These home loans can also be set up as a line of credit. Some loans can be set up with all of the above options. In general, seniors will not have to repay the loan until they die or move from their primary home. These types of home mortgages can also be attractive because most borrowers will not have to pay back more than their home is worth. According to Kiplinger, 95% of reverse home mortgages are guaranteed by the federal government.
Reverse Home Mortgages Drawbacks
According to Kiplinger, there are drawbacks for seniors who take out reverse home mortgages. Many unscrupulous lenders are taking advantage of seniors by luring borrowers into unexpected long term consequences and high costs. With more baby boomers increasingly reaching their sixties, reverse mortgage lender businesses are booming and so are scams that target seniors. According to the AARP, many times unscrupulous companies masquerade as official sounding government agencies making unrealistic promises in order to collect private personal information about seniors to sell to third-party vendors.
Other drawbacks of reverse mortgages for seniors include borrowers having to pay off any existing liens on the property. Usually these loans are paid off from the proceeds of the new mortgage; however, there will most likely be extra fees, and homeowners may pay a more interest on pre-existing mortgages that had to be paid off.
There are typically many financing fees from reverse home lenders. These fees can be high and when borrowers pay the costs from the proceeds of the new mortgage, there are additional interest charges. Homeowners should also understand that they must still pay property taxes, home-owner insurance and repairs for the house. When the home loan ends, the homeowners or their heirs must pay off the loan.
Homeowners should also keep in mind that while there are no monthly payments, the loan balance increases over time along with the interest. The balance must be paid off in full when the homeowner moves away, sells the house or when the last homeowner passes away. Seniors who only need money for repairs and property taxes should keep in mind that private sector and HECM (Home Equity Conversion Mortgage) lenders are typically much more expensive than single-purpose reverse mortgages offered by state and local governments; Single-purpose reverse mortgages are loans only used to pay property taxes and for repairs on a home.
Reverse Mortgage Programs
While there are many benefits for seniors to use reverse mortgage programs, there are also many drawbacks. Seniors should fully educate themselves about the different reverse mortgage programs, the long-term effects and the costs of reverse home mortgages before securing a new loan against their property.
References:
Kiplinger, "Congress Eyes Crackdown on Reverse Mortgages" (accessed May 10, 2010).
AARP, "Scam Alert: Reverse Mortgage Seduction" (accessed May 10, 2010).
AARP, "Basic Loan Features" (accessed May 10, 2010).
AARP, "Fact Sheet on Reverse Mortgages" (accessed May 10, 2010).
Cathy Herold - Cathy Herold lives in southern California. She has a BA in English and minor in African American Studies from UCLA and a master's degree ...
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