Pros and cons of reverse mortgages
|By Carole Moore
In a TV commercial, debonair actor Robert Wagner invites
viewers to take a closer look at reverse mortgages. The former star
of the series "Hart to Hart," Wagner offers a free DVD
that explains how these mortgages work.
Cash-challenged seniors who want to stay in their
own homes have kept reverse mortgages high on the public radar. But, despite glowing
testimonials from some customers, such as the ones on Wagner's DVD, not everyone
thinks they're such a good idea.
Reverse mortgages hit the scene in the 1960s, according
to a 2005 report by the National
Council on Aging. Although the public has been generally hesitant to embrace
them, their popularity continues to climb. The National Reverse Mortgage Lenders
Association recently reported the number of federally insured Home Equity Conversion
Mortgages administered by Housing and Urban Development (HUD) rose from 43,131 the previous federal fiscal year
to an all-time annual high of 76,351, a whopping 77 percent increase.
surprisingly, five of the top 10 reverse mortgage markets are in California. Also
on the list: New York City, Phoenix, Boston, Denver and Coral Gables, Fla.
general, a reverse mortgage converts home equity into cash in several different
ways, ranging from monthly payments to an equity line to one-time payouts -- or
a combination. The amount you can borrow varies according to your age, the value
of the home, current interest rates and loan fees.”
the reverse mortgage market is minuscule compared to that of regular mortgages.
The Mortgage Bankers Association estimates that 10.7 million mortgages were originated
last year. Reverse mortgages represent a drop in the bucket -- about seven-tenths
of 1 percent of regular mortgages.
In general, a reverse mortgage converts home equity into
cash in several different ways, ranging from monthly payments to an equity line
to one-time payouts -- or a combination. The amount you can borrow varies according
to your age, the value of the home, current interest rates and loan fees.
reverse mortgages a good idea? Most news stories imply they are. Reports suggest
reverse mortgages can be a source of ready cash when it's needed -- similar to
other investments. But, like anything that impacts your bottom line when your
earning potential is limited, taking out a reverse mortgage isn't a no-brainer.
That's why candidates for these mortgages should consider both the benefits and
the drawbacks before jumping in.
Zoran Basich, an elder law attorney and operator of Nursing Home
Solutions, a California-based company, says he believes reverse mortgage lenders
fail to give seniors the full story when it comes to cashing out home equity.
"What they don't tell you is ... that the front load
is very high," Basich says. He says lenders like reverse mortgages because
"these (loans) are very profitable to write in the short term."
refers to upfront costs, paid out of the home's equity at closing. As with conventional
mortgages, reverse mortgage lenders make money the old-fashioned way: through
interest, origination fees and points. The interest rate varies according to the
market. However, closing costs are significantly higher with reverse mortgages.
addition, borrowers continue to be responsible for real estate taxes, conventional
homeowners insurance and home repairs, and have the added burden of paying for
mortgage insurance, too.
Why would borrowers have to pay mortgage
insurance? After all, that insurance is required for regular mortgages if borrowers
don't have a large enough down payment, and its purpose is to protect lenders
in the event of a default. With a reverse mortgage, there's no such risk to lenders.