Pitfalls Of Reverse Mortgages
November 1st, 2010 | 
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The radio and TV commercials are full with wonderful
sounding pitches for reverse mortgages. It almost makes any
home owner want to buy one.
In case you are not familiar with the reverse mortgage
here is a quick review.
The home owner can get immediate cash for his house
based upon the amount of equity that has accumulated. If
there is little equity he will no qualify. 50% or more is a good
starting place. The age requirement is 62 or older and he
must own the house outright. No other financial requirements
are necessary. This is the difference from it and a home equity
line of credit.
It must be a single family home or 2 to 4 unit
non-commercial unit.
The amount the home owner may receive will depend
on his age and the value of the property, the current rate of
interest as well as the paid-for equity.
Home owners don’t need any third party to find a lender
to give them a reverse mortgage. That is some rip-off artist.
He is not necessary. The local bank will do it, but shop around.
The borrower (that is what the home owner is) can go directly to
HUD which will make a federally insured reverse mortgage.
The borrower can choose from several options with
the most popular being a monthly payment for life for himself
and his spouse. As long as one of them remains in the house
they can live forever and receive that payment which is
computed on an actuarial life expectancy table.
Before signing there is an important clause that should
be added to protect the borrower.
This is the pitfall in the contract. If inflation continues
that payment will buy less and less groceries or other services.
There is only one way to protect the borrower and that is to
include a yearly Cost of Living adjustment. So far this option is
not included by any lender.
It means the borrower must learn to live on a lower
life standard as the years go by. Will he be able to buy a
comparable amount of groceries and medications 10 years
from now with today’s check. He must pay his taxes and
insurance. Will they be the same in 10 years? Hardly.
These old folks (that’s what they are now) better have
some extra cash or they could lose the house. The lenders
could see these units fall into the subprime category as
they would not have the upkeep necessary (because of the
declining purchasing power of the dollar) to maintain the local
real estate property values
The smart lenders will bundle these contracts and
sell them as the subprime lenders have done.
When taking a long term look at reverse mortgages it
is not good for either the borrower or the lender.
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