Reverse Mortgages - What You Need To Know
September 8, 2008
A reverse mortgage is a loan available to senior homeowners (age 62 and older) that is used to convert a home’s value into cash, which is often payable either as a lump sum or in installments. On the surface, this is often an attractive proposition. It allows seniors some extra income on top of social security and retirement benefits. However, there are some things that an eligible homeowner should consider before taking out a reverse mortgage.
As the Baby Boom Generation reaches the age of eligibility, the demand for reverse mortgages has steadily increased. Between 2005 and 2006, the market saw a 56% increase in requests for the loans. In response to this increase, the Senate Committee on Aging raised the limit of reverse mortgages it would allow to be granted at any particular time. This increased demand has also given rise to aggressive marketing by mortgage companies to specifically target senior homeowners.
The lure of quick and easy money has turned into a trap for more than one homeowner. According to the Federal Trade Commission, “reverse mortgages tend to be more costly than other home loans” due to high upfront costs and the use of equity, which means there is less left to leave behind to a person’s heirs. Consumers also need to be aware of the interest rates attached to reverse mortgages. Just like a standard mortgage, they can be fixed or adjustable-rate loans. Since the mortgage is not paid on a current basis, interest is added to the principal balance on a monthly basis.
As with anything else, there are other issues to be on the lookout for. According to the AARP, some mortgage companies offer borrowers financial products that may not produce a fair return for the value of the home. The AARP also advises homeowners to be wary if someone tries to sell them a service that will be paid for by the reverse mortgage, citing that as “a good sign that you don’t need it and shouldn’t be buying it.”
A reverse mortgage may often be appealing on the surface, but a consumer must tread carefully. Before taking one out, homeowners need to do some homework to see if they really need it, if they can afford it, and if there are any less costly options available. While the initial influx of money can seem wonderful, several have found their reverse mortgage created more problems than it solved.
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