The Disadvantages Of Reverse Mortgages by:Charles Kirkendall
A reverse mortgage can be an attractive option for many home-owning seniors that are having a hard time making ends meet
. With a reverse mortgage, a senior homeowner will receive money for their home equity from a lender without having to make repayments for as long as they live in their home. So with the right reverse mortgage a senior homeowner can maintain their standard of living while retaining ownership of their home.This of course, is the picture that all the reverse mortgage companies try to paint for prospective borrowers. Nonetheless, there are many differences that have to be understood between reverse mortgage's and conventional loans. If these differences are not understood, they can cause financial problems for reverse mortgage borrowers.
Disadvantages of Reverse Mortgages.
The first disadvantage is the relative cost of a reverse mortgage. Reverse mortgages tend to be very expensive when compared with a conventional mortgage. This is due to the rising-debt nature of reverse mortgages. For example, a typical reverse mortgage may provide a homeowner with a $300 per month payment with a yearly interest rate of 12 percent compounded monthly. Over the course of ten years, the homeowner will receive $36,000 in payments, but will owe almost $70,000-almosttwice as much as received.
The second disadvantage is the complex and confusing contracts of reverse mortgages, that can have a tremendous impact on the overall cost of a reverse mortgage to the borrower. The complexity of the contracts often allow lenders and third parties involved in arranging reverse mortgages to not fully disclose the loan's terms or fees. These numerous other front-end and/or back-end fees can also quickly drive up the cost of a reverse mortgage. These fees can include origination fees, points, mortgage insurance premiums, closing costs, servicing fees, shared equity and shared appreciation fees.
Out of all these fees, the shared equity and shared appreciation fees should be avoided, as they can quickly raise the cost of the mortgage without providing any benefit to the borrowers. As an example, a shared appreciation fee can give a lender an automatic 50% interest in the difference between the current value of the home when the loan is signed and the appreciated value of the home when the loan is terminated. What makes the fees unfair is the fees have no relation to the amount that is borrowed.
The third disadvantage is the reverse mortgage payments can affect eligibility for old age pensions, Medicaid, or supplemental Social Security income. Senior's may not even realize this problem until after they already have their reverse mortgage, and only then do they find out that this can have the opposite affect on a seniors finances then what they were trying to accomplish in the first place by taking out the reverse mortgage.
Another disadvantage is the fact that reverse mortgages reduce the value of a senior's assets and estate. This will affect the amount of inheritance received by the borrower's heirs.
How to avoid these hazards
The best way for a senior to avoid these hazards is to be careful when choosing a lender, by obtaining bids from three separate lenders. They should take these contracts to a reverse mortgage counselor for evaluation. This will allow them to accurately evaluate the three contracts before deciding on best one for their situations.
About the author
Charles Kirkendall writes articles on reverse mortages and other senior financial issues. Visit reverse mortgages http://reverse.settle-today.com for more information and resources. Pile, Don't File! by:Karin Vibe Rheymer Stewart Establish Credit and Join a Health Club by:Charles Essmeier The Disadvantages of Reverse Mortgage by:Charles Kirkendall Emini Futures Day Trading : Fundamentals And Simulated Trading System by:Michael Taylor Design For Six Sigma by:Peter Peterka The Hurricane Katrina survivors will be victims again... GUARANTEED! by:Stuart McMaster A Tickler File For Sales And Networking by:Stephen Labuda FREE! Insider Secrets About Homeloans and Credit by:David Frost Mortgaging Your First Home by:Jim Muscali Are You Getting The Right Values For Your Money by:John MacKenzie Assessing the Full Cost of a Credit Card by:Mr. Peter Kenny How to Build Great Relationships through Cold Calling by:Ari Galper Strategies For Successful Business Networking by:Stephen Labuda