The Hidden Dangers of Reverse Mortgages

Some people gladly go through the process of mortgages, but few people realize the potential danger of reverse mortgages. But first, what is a reverse mortgage? It is defined as a loan available to seniors of a country (the legal definition of “senior” differs according to where you live), that is mainly used to release home equity in a certain property as multiple payments or one lump sum. Until the owner dies, leaves, or sells the house, the homeowner’s obligation to repay the loan is postponed. In its essence, a reverse mortgage is to convert the equity in your home into a cash amount. You may ask, “Why should such thing be dangerous?” The objective of this article is to enlighten you about the true risks involved in a reverse mortgage.
First and primarily, there are the laws of nature and man that render this risky: upkeep, taxes and insurance. If you do not maintain your taxes and insurance, the loan can be called or you may have an escrow account forced on you. This is because with reverse mortgages, escrow payments are subtracted from your monthly check.
Also, since these types of mortgages are being given to senior citizens, they may not be able to maintain the upkeep of the home. A loan officer has a lender’s policy regarding the maintenance of the home, and enough money should be kept to keep up the repairs, for fear of possible calling of the loan.
Second is the problem of repayment and possible forfeiture. If the home has an equity amount exceeding the amount that is owed to the bank, your heirs will receive the proceeds once you pass on. However, the home may be forfeited if your home is “upside down”, even though they have no obligation to repay your debt. With reverse mortgages, you will not be required to make payments for as long as you live.
There is also a cloying loop in the FHA rules, which state that “When you sell your home or not longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender.” The problem with this is that if you move away, even for medical or social reasons, the bank will call the debt due. This limits the freedom of movement of a homeowner.
Third is the issue of cost and interest rates. Almost all reverse mortgages, at the beginning, were almost exclusively given with adjustable interest rates. It remains a normal practice to have this offered, however unwise it may be. These should not be accepted, due mainly because today’s adjustable rates are going further and further up with the passage of time. These adjustable interest rates are a gamble—and certainly not advisable since fixed rate programs are now available.
High up to front costs remain a problem with reverse mortgages. An unperceptive victim may pay higher closing costs for reverse mortgages than traditional forward mortgages. It is recommended that people buy the insured typed of mortgages from the FHA.
© SOURCE: www.mightymortgages.com