Reverse Mortgages — Things to Consider

Part 4 of 5 - Reverse Mortgages — Things to Consider ...

• Scams and frauds

Although most Reverse Mortgage brokers and lenders are ethical, some scams have been reported. If you receive an offer from an “estate planning” service, by phone or mail, to put you in touch with a Reverse Mortgage lender, the solicitor may want you to pay a substantial fee for that service. HUD, Fannie Mae and most lenders will not allow such a fee, since the information is available for little or no cost from a counselor or an Internet site. Do not sign a service agreement that includes a fee for this service. Also, be careful of solicitations that come by phone or mail.

• Alternatives to Reverse Mortgages

There may be alternative ways of obtaining financial relief without taking out a Reverse Mortgage. For example: if there is a problem making property tax payments, the California State Franchise Tax Board offers a tax postponement service that works much like a Reverse Mortgage. It is available to homeowners who are 62 years or older, own their home (there can be a mortgage), and have an annual income of $24,000 or less. The interest rate is much lower than for a Reverse Mortgage. The phone number to obtain an application and further information is 1-800-952-5661.

If the home is in need of repairs that you cannot afford to make, your local Housing and Redevelopment Agency may have a Senior Loan Program that can help. These loans also do not require repayment until the home is sold or you move out. Interest rates are either low or there is no interest charge. Programs for emergency repairs such as building ramps, widening doorways, etc. may also be available. Check the white pages of your phone book under your county or city name followed by “Housing.”

Assistance programs may be available for those with special needs — blind, disabled, veterans — through these same agencies. A Reverse Mortgage counselor will have the most current information about all these programs in your area.

If you decide to take out a Reverse Mortgage after you have signed up for any of these assistance programs, ask if they can be subordinated to the new loan. Subordination means that you do not have to pay off this loan in order to obtain the new one. Instead, the assistance loan becomes secondary to the Reverse Mortgage. Many agencies will do this if they think it appropriate.

• Compare loan costs. Federal Truth-in-Lending regulations require the lender to disclose the Total Annual Loan Cost (TALC) on all Reverse Mortgages at various points in time. But lenders are not required to make this disclosure until after you apply for a loan. NCHEC “Preferred Counselors” and some lenders have Personal Reverse Mortgage Analysis software that overcomes such difficulties. This is another good reason to consult a counselor before you apply for a loan.
• Among the most important variables in the total cost of Reverse Mortgages are the fees that are charged at the beginning and during the loan. These could include origination fees, points, mortgage insurance premiums, closing costs, monthly servicing fees, shared equity or appreciation fees. Be sure you know what you are committing to pay.
• Most fees are assessed at the start of the loan and make up a large portion of the total loan costs in the first few years. Terminating a Reverse Mortgage after a year or two can be very costly.
• Many lenders and brokers listed by HUD and Fannie Mae also sell Reverse Mortgage products from other sources. Be sure you understand which program they are suggesting.
• Beware of “shared appreciation” or “shared equity” fees. These give the lender a share of any increase in the value of the home between the time the loan is closed and when it ends (usually in return for a larger loan amount). They can significantly increase the cost of the loan.
• Reverse Mortgage loan documents can be long and confusing. At the closing, you will be expected to sign or initial many pages. If you find any of the terms confusing or you are uncertain about what they commit you to do, get independent advice before you sign. This is particularly important if the loan you are considering includes an annuity, since an annuity can have undisclosed income tax and “needs based” assistance implications depending on the contract language.

• Refinancing a Reverse Mortgage can be very costly. HUD and Fannie Mae programs have some flexibility in the way payments are made, which may make refinancing unnecessary. Consider the costs carefully before deciding to refinance.
• Be sure to keep your property tax and homeowner insurance premiums current. Failing to do so may lead to additional charges from the lender or termination of the loan. If you are having difficulty making payments, contact your lender. It may be possible to arrange to make payments using loan funds.

A Reverse Mortgage may be exactly what you need to improve your lifestyle or maintain your financial independence. Other alternatives may work better or be less expensive. The best way to be sure you made the correct choice is to be as well informed as possible before making a decision. The following resources section provides pointers to more detailed and specific information.

Go to Part 5 of 5 -  Reverse Mortgage Resource Pages