Before You Take Out a Reverse Mortgage, Consider………

Before You Take Out a Reverse Mortgage, Consider………

Recently a friend on mine, about to take out a reverse mortgage, came over for a chat - a third party opinion - before she signed “on the bottom line”.  Our discussion was very focused and I found many of the points were worth passing on.  My post will not cover the benefits of reverse mortgages – there are all kinds of mortgage brokers out there that can do that – but more it covers the cautionary tips that many gloss over when see the amount of money they can receive from a reverse mortgage.

With the stock market melt down of the past few years many seniors on fixed incomes are facing financial problems.   Maybe it is roof that needs repair, or they are being pressured for falling behind on their mortgage payments.

Banks are often Unsympathetic

To add insult to injury when they go to their local bank asking for a loan, they find their application rejected.  Even though an individual may have dealt with the financial institution for 40 years and never missed a loan or mortgage payment, they are told their loan has been rejected because they are unable to meet income and credit qualifications.

In such situations many feel their only option is a reverse mortgage.

What is a Reverse Mortgage?

I will not go into the details but simply put, a reverse mortgage allows seniors 62 years and older (60 in Canada) to borrow money against the equity in their house.

It is a loan that doesn’t have to be repaid until your death; or when you move; or the house is sold.

When enticed by all the cash one can receive through a reverse mortgage, it is some times difficult to keep a rational mind, so here are some things to keep in mind.

The Cautions

·      Never lose sight of the fact that a reverse mortgage is a loan that it has to be repaid.

·      And, that the interest on your reverse mortgage loan accumulates, decreasing the equity in your home over time.

·      Be aware that up-front fees can be substantial.  Fees for appraisals, title searches, insurance premiums etc. can be as much as $10, 000 to $15,000

·      Bear in mind you will still be responsible to pay for your house repairs, property taxes and home insurance

·      If leaving a legacy is important to you, consider there may be little money left to pass on to your children.

·      You may find that there is a penalty for pre-payment of the loan before three years: Six to 11 months’ worth of interest is not uncommon.

·      Remember the principle of compound Interest. Since, on a reverse mortgage, you make no monthly payments, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received, but also on the interest previously assessed to the loan.

In my opinion a reverse mortgage should be considered a loan of last resort.

If you have considered all the disadvantages and still think a reverse mortgage is best for you:

1)   Shop Around….interest rates, fees and penalties can vary greatly

2)   Sleep on it …..don’t be pressured into making a decision.  Take your time

As to my friend;

After our discussion my friend decided not to  “sign on the dotted line”.  Instead she decided to negotiate a line of credit guaranteed by the equity in her home.  The interest rate was less, the fees were less and her ability to sleep at night improved.

Remember

You are important!

You do have rights!