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Pros and cons of reverse mortgages

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.

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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.

Not 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.

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.

However, 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.

How they work
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.

Are 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.  

The cons
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."

Front-loading 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.

In 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.

 
 
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