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Reverse Mortgage Pitfalls

Know the pros and cons before taking out a reverse mortgage

Posted on December 10, 2012 by Joey.


Initially, reverse mortgages were designed to help those who are “house rich” but “cash poor.” Basically, some homeowners have a lot of equity in their homes but not much in monthly income, especially retired people who no longer have jobs. This may be particularly true in areas of expensive real estate such as owners of Almaden Valley homes. The reverse mortgage concept allows these homeowners to take out loans called reverse mortgages against their homes. In many situations, these loans don’t ever have to be paid back while the homeowner is alive. Instead, when the homeowner passes away, the loan becomes due, and the proceeds of the home sale can be used to pay off the loan.

This idea makes a lot of sense and can be a very useful tool. However, the up-and-down housing market of the last several years has caused many lenders to exit the reverse mortgage industry. That left smaller lenders to lead the market, and many of them utilized abusive loan practices. There are many dangers in reverse mortgages, and you should at least understand these before taking one out.

First, if two people live in a home, they probably both need to be listed on the reverse mortgage deed. A New York Times article, http://www.nytimes.com/2012/10/15/business/reverse-mortgages-costing-some-seniors-their-homes.html?ref=realestate&_r=1&, describes what can happen if only one person is on the deed. Basically, a husband was the only one listed on the reverse mortgage deed and passed away. The wife was forced to repay the loan of about $300,000 in full. If you don’t have that much liquidity on hand, they you will be forced to sell the home and find another place to live.

Second, reverse mortgages often have a lot of fees, interest, and other charges. While the income provided from a reverse mortgage can be a lifesaver, shop around to make sure you are getting the best deal possible.

Third, reverse mortgages can come in two flavors: lump sum loan or line of credit. With a lump sum loan, interest charges begin accruing immediately even if you don’t need the entire amount. On the other hand, interest from a line of credit is usually only assessed when the monies are withdrawn. Definitely make sure you look into that option.

Whatever you do, knowledge is the key. Just make sure you shop around, get the best deal, and understand what all your options and consequences are when you or someone you know takes out a reverse loan. If you have any questions, please contact me.

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