Reverse Mortgage Loan Blog

They’re called “the golden years,” that time of life when you have enough income and assets to live well and work less. Given retirement accounts, real estate appreciation over time, pensions and Social Security the ability of those over age 62 and above to live well is largely unprecedented in human history.

Unfortunately, where there’s gold there are also people who want to take it. As Woody Guthrie told us, there are some people who will rob you with a gun — and some people who will rob you with a fountain pen. How you’re robbed is a lot less important than the fact that it’s possible to be robbed.

When it comes to reverse mortgages there have been a lot of improvements in recent years. That said, if you’re thinking of getting a reverse mortgage you must be aware that it’s possible to be ripped off and lose some or all of the equity earned over a lifetime. Here are the five biggest threats to your home and wealth.

1. A reverse mortgage is complex. It’s a form of financing which allows you to gain access to the equity in your home without moving. As long as you live on the property the lender cannot demand repayment. When you move or pass away the debt to the lender can only be repaid from the value of the property. This means that you and your heirs cannot be sued for any unpaid balance.

Because reverse mortgages are complex it’s necessary to have proper, independent consultation. This is not a do-it-yourself project. Mistakes can cost tens of thousands of dollars and make it harder to enjoy the work of a lifetime.

Protect your interests. No matter how enticing the program looks — no matter how wonderful the sales pitch or the salesperson — never sign reverse mortgage paperwork until you have first spoken with an attorney who specializes in “elder law.”

Ah, you might say, but attorneys cost money. That’s true, but the expense of making a reverse mortgage mistake can be vastly larger. If money is an issue then check the legal resources in your community. See if services are available through legal clinics or on a pro bono basis. Organizations which provide services for senior citizens and community housing organizations may be able to help locate an attorney willing to work with you.

In addition to advice concerning reverse mortgages, meeting with an attorney or legal clinic is a good time to take care of two related matters: In our society you need certain paperwork. Be sure you have both a will and a living will.

2. Not all reverse mortgages are alike. Most reverse mortgages today are insured by the Federal Housing Administration (FHA). The FHA calls reverse financing “home-equity conversion mortgages” or HECMs. With an FHA reverse mortgage if a lender does not deliver promised funds the federal government will step in and make good on the loan. Because of this protection, it’s very important to make sure that the loan is covered under the FHA program.

3. Reverse mortgage costs, even within the FHA program, can vary. Don’t overpay. Protect your interests by shopping around. Speak with a variety of reverse mortgage lenders. Make sure they each provide information in writing, including:

*An amortization statement.

*A statement showing the total annual loan cost rate.

Always show this paperwork to your attorney before selecting a reverse mortgage program.

4. Beware of expensive reverse mortgage fees. Reverse mortgages have steep up-front costs. Sometimes these costs are hidden by the strange uses of common terms. For example, you might hear that a reverse mortgage has an “origination” fee. Usually an origination fee is equal to 1% of the mortgage amount, but not with reverse mortgages.

In the world of FHA reverse mortgages, an origination fee is “limited” to 2% of the home’s value or 2% of the FHA’s local loan limit, whichever is less.

In other words, if you want a $250,000 reverse mortgage, your property is worth $500,000 and the FHA allows loans for as much as $362,790 in your area, the origination fee would be the lesser of $10,000 ($500,000 x 2%) or $7,258 ($362,790 x 2%).

Compare either of these numbers with $2,500 — that’s 1 percent of $250,000 and the origination borrowers would usually expect for a $250,000 loan.

The bottom line: Always get your exact costs up front, in writing, including all fees, charges and costs.

5. Beware of “shared appreciation” reverse mortgages. In some cases it’s possible to get a reverse mortgage that does not charge interest — instead the lender gets a share of the home’s value when the property is sold.

Other lenders, however, offer shared appreciation reverse mortgages where the lender gets a share of the home’s value PLUS a steep rate of interest. If you do the math with these loans the lender’s returns are remarkable — as are the borrower’s costs.

As always, sign nothing until the paperwork is properly reviewed.

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