Pitfalls of Reverse Mortgages

If hard times have fallen on you and it is becoming a struggle to pay your mortgage, be careful how you approach the options. Television and magazine ads featuring former actors and other slick celebrities are offering advice and false hope by endorsing reverse mortgages. The idea of cashing in on home equity and having extra money to spend without having to worry about losing your home sounds great.

Those pushing reverse mortgages claim you can use your home to get tax-free cash in exchange for your home equity. Reverse mortgage is basically a loan on your own property that allows you, the owner, to remain in your home.

You are still responsible for paying the annual property tax, the insurance and maintaining the property keeping it in good repair. You are allowed to stay until you either sell the property, live elsewhere for at least twelve months or until the last borrower dies.

Pitfalls of reverse mortgages:

Up-front costs such as loan origination, closing and others service fees.

Ballooning finance charges that can quickly drain your home equity.

Defaults and other costs that threaten the solvency of the government insurance that falls under the new 2011 federal guidelines.

The risk of foreclosure if you can't pay property taxes or insurance.

One unexpected health issue may be all it would take to prevent you from paying taxes or insurance. If one spouse dies your annual income can decrease dramatically.

Protect yourself before you consider any type of reverse mortgage. You could have the option of selling your home and downsizing to a smaller house, condo, duplex or quad housing in a retirement community with lawn care and snow removal is provided.

The amount the property owner could expect to get depends on the owners age, the value of the property and the interest rate on the loan. Reverse mortgages are available in either fixed rates or adjustable rates. If you qualify for a fixed-rate reverse mortgage you must take all the money at one time and the interest begins immediately

The major reverse mortgage lenders are; Wells Fargo, Bank of America, MetLife Bank and One Reverse Mortgage.

If you do decide to apply for a federal insurance reverse mortgage you are required by law to consult a counselor, certified by the Department of Housing and Urban Development.
Source: Consumers Reports - March 2011 www.consumersReports.org