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Reverse mortgages part 2 -- borrower beware
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Buyer beware when it comes to a reverse mortgage
In my last column, I covered the basics of reverse mortgages. In this column, I'll cover some of the details like costs, lenders, scams and other considerations.
The best candidates for a reverse mortgage are homeowners with a very low or no mortgage on their residence. When a borrower applies for a reverse mortgage from a HUD-approved lender, she/he receives counseling from an independent counselor specially trained in reverse mortgages before taking out a loan. The reason for this requirement is that reverse mortgages are expensive and can be confusing.
Costs
Costs for reverse mortgage vary and can be very high depending on how long the borrower uses the loan. That is, if a borrower takes out a reverse mortgage and the house is sold in a relatively short time, the upfront costs are high for a relatively small amount that is borrowed.
There are three parts to the cost of a reverse mortgage.
Upfront costs
-- Origination fee (2% on the first $200,000 borrowed and 1% after that up to a maximum of $6,000)
-- Mortgage insurance premium (2% on the maximum borrowed amount)
-- Appraisal fee ($300 -- $500)
-- Closing costs ($1,000 -- $1,200 plus the cost for title insurance).
On-going monthly costs :
-- Mortgage insurance premium of .5% of the borrowed amount
-- Servicing fee of $30 -- $35
Interest rates:
As of today (10/29/09), reverse mortgage rates are approximately:
-- Fixed 5.56%
-- Variable 2.99%
You can see that the costs of a reverse mortgage can be quite high. For a homeowner who takes $250,000 out of their house equity, the costs will be approximately 10% of the loan value in year one and a little over 6% every year thereafter. A reverse mortgage is not cheap and anyone thinking about a reverse mortgage should consider other alternatives first.
How to get a reverse mortgage
There are three sources for a reverse mortgage:
The federally-insured Home Equity Conversion Mortgage (HECM) backed by the U. S. Department of Housing and Urban Development (HUD). These are offered by mortgage companies or banks and the proceeds are typically available for any use. Costs vary, but are usually less than the costs from a private company but more than programs run by state or local governments.
Programs run by state by or local governments. Many of these programs require the borrower to use the loan for specific purposes, for example, home repairs or to pay taxes. Costs are usually the lowest among the three sources.
Private company reverse mortgage. This type of loan is the most expensive, but proceeds can be used for any purpose.
You can get a list of HUD-approved lenders at the HUD web site.
Scams
The number of senior homeowners without a mortgage represents a huge potential market for commerce both legitimate and scam artists. The National Consumer Law Center recently issued a dense report detailing the opportunity and potential abuses in reverse mortgages. You can download a copy of their report entitled"Subprime revisited: How Reverse Mortgage Lenders Put Older Homeowner's Equity at Risk" at their web site.
For more information: I've compiled a Guide on Reverse Mortgages gleaned from government sources and you can download a free copy at my web site, under the Free Resources tab.
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