Vancouver Portland Real Estate Blog

New Warnings About Reverse Mortgages

Filed Under Blog · Tagged: Home equity, Portland Realtor, Reverse mortgage

It’s important to fully understand the complex terms of reverse mortgages, what you can and cannot do, the costs, accepting the funds, even foreclosure problems. In recent years more and more people have opted for a reverse mortgage as a way to be able to stay in their home in their senior years, and utilize their accumulated equity in their real estate property.

Reverse mortgages allow people who are at least 62 years of age to cash in some of their home equity, for a lump sum or regular payouts while being able to continue to live in the home. Reverse mortgages, which carry huge costs, can eventually lead to foreclosure and should be seen only as a last resort. As long as borrowers maintain the home and pay the property tax and insurance premiums, the loan doesn’t have to be repaid until the last borrower dies, sells the place, or lives elsewhere for 12 months.

Most reverse mortgages are insured through the Federal Housing Administration’s Home Equity Conversion Mortgage program. Recent and ongoing changes in that program and heightened competition among lenders are resulting in new loan options and lower up-front costs. But other costs have increased dramatically, and ballooning finance charges can quickly drain your home’s equity. New federal guidelines just announced in January, for example, state that you will risk foreclosure if you cannot afford to pay and keep current, the property taxes and the home insurance, and if you cannot work out a repayment plan for any that fall behind. Those defaults and other costs are threatening the solvency of the government insurance fund that makes these loans virtually risk-free for the lenders.

•Fixed-rate reverse mortgages: The amount of equity you can tap from a standard reverse mortgage depends on three variables: your age, the property’s value and the interest rate on the loan. With a fixed-rate reverse mortgage, you must take all the money in a lump sum at the outset, and interest starts accruing immediately.
Generally, the older you are, the higher the value and the lower the interest rate, the more money you can borrow. The large up-front interest costs make fixed-rate reverse mortgages worth considering only if you absolutely must tap all available equity immediately.

•Adjustable-rate loans: The interest rate you’ll pay on an adjustable-rate reverse mortgage can change every month. Over the life of the loan, rates can rise by as much as 10 percentage points. The plus side to the adjustable rate loan is you have the option to take cash in lump sums, in regular monthly payments, or through a credit line that you tap only when necessary. Interest is not assessed until you draw on the available money. The flexibility the loans offers is an advantage.

•Reverse home equity line: In late 2010, the Federal Housing Administration introduced a new type of reverse mortgage called a Home Equity Conversion Mortgage Saver, which eliminates most of the 2 percent up-front insurance premium borrowers must pay on regular federally backed loans. The up-front premium is just 0.01 percent.
The ongoing annual premium that borrowers must pay is the same as for a standard reverse mortgage: 1.25 percent of the loan’s outstanding balance. The Saver might make sense for borrowers who want to tap only a small amount of equity for a relatively short period of time, but are unable to qualify for a home equity line of credit.

That’s why it’s important to fully understand the complex terms of reverse mortgages.
Talk to more than one lender and make sure you understand the different programs available covering how you receive the funds, the interest rates on the different programs, your total responsibilities to the lender and the lenders guidelines on paying the taxes and insurance, etc. Get all the information that you can on the subject. You won’t regret it.

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