Are Reverse Mortgages a Scam?
We have all seen the ads on television touting reverse mortgages, and if you are like myself, you have probably wondered what exactly they are. Reverse mortgages are touted as a way for seniors over 62 who have equity built up in their home to capitalize on that equity without actually selling their home. In some cases a reverse mortgage would do just that. However, consumers should be wary of reverse mortgages before agreeing to one.
How Reverse Mortgages Work
Say an individual lives in a home valued at three hundred thousand dollars, but it would take only one hundred thousand to pay off the balance of their mortgage. By taking out a reverse mortgage, the consumer would be borrowing the value of their home, and they could use the money to pay off their mortgage and supplement their income. As long as they remain living in the home, they do not have to pay back the loan, which is paid back when the home is sold, along with interest and fees. These loans are growing in popularity with seniors who have less than adequate retirement income, or whose retirement funds have been wiped out by the recession.
The origination fees on these loans are two percent for the first two hundred thousand dollars, and one percent for each additional one hundred thousand dollars of the loan. The origination fees on these loans are currently capped at six thousand dollars. Buyers should also be aware of the interest rate, and make sure it is comparable with the rates of other reverse mortgages. If in doubt you can discuss this with a local mortgage broker firm to be sure you are getting a good deal. Since the consumer does not have to pay interest on the loan, as it is essentially recouped from the sale of the home, this rate would not impact them at the beginning of the loan but it certainly when they sold the home. Aggressive marketing of these loans to seniors has led to some regulation by the federal government, but ultimately it is up to the consumer to do their own due diligence.
In some situations, reverse mortgages can be a useful financial tool, allowing retired individuals to stay in their own home and supplement their retirement income. For younger individuals planning for retirement, a reverse mortgage should not figure into their retirement plans. Savings and solid financial planning would prevent the need for a reverse mortgage at retirement age, although it could prove to be a viable option for individuals during retirement.