Considering a reverse mortgage?
Heard the phrase "Buyer beware?"
That phrase may apply to reverse mortgages as well. If you are considering a reverse mortgage, use caution and do your homework. Sometimes that easy fix will get you in more financial difficulty than you can imagine.
What is it?
A reverse mortgage is a home loan that provides cash payments based on home equity. Homeowners normally "defer payment of the loan until they die, sell, or move out of the home." Upon the death of homeowners, their heirs either give up ownership to the home or must refinance the home to purchase the title from the reverse mortgage company. Specific rules for reverse mortgage transactions vary depending on the laws of the jurisdiction.
For example, in a conventional mortgage, the homeowner makes a monthly payment to the lender. After each payment, the homeowner's equity increases by the amount of the principal included in the payment. In a reverse mortgage, a homeowner is not required to make monthly payments. If payments are not made, interest is added to the loan's balance.
Regulatory authorities, such as the
Advice from those in the know
According to the
Some ads say heirs can inherit the home, but to keep it, they must pay off the reverse mortgage loan, along with numerous fees and charges which can add up to a lot of money.
There are also warnings about unscrupulous salespeople who might try to pressure homeowners into taking out a reverse mortgage with very high fees. Others will tempt them to use money from the loan to buy annuities or investments that may not be beneficial.
BBB recommends elderly homeowners read the ads carefully and discourage taking out a reverse mortgage unless they fully understand all the costs, terms and conditions. Those who need cash should consider getting a less costly home equity line of credit and check into programs that help defer or lower taxes and utility bills.
Tip list
N.C. Attorney General
Cooper said that while these loans are occasionally advertised as "free money," they're far from it. Reverse mortgages often have high upfront fees and interest which get added to the balance of the loan, causing the amount the homeowner owes to grow over time. Although some reverse mortgages have fixed rates, most have variable rates that can change with market conditions.
If a reverse mortgage still seems like a good fit, consider the following tips before you sign your name on the dotted line:
-- Explore other options. Other loan products, such as standard mortgages and home equity lines of credit, may make more sense. Other financial options, such as drawing on retirement plans or selling the home, should also be considered. You may also be eligible for local home repair assistance programs or other public benefits.
-- Talk to a housing counselor. A reverse mortgage is a complex loan secured by your home. Whether such mortgages make sense for you depends on your financial situation and needs.
-- Be wary of anyone trying to sell you other products along with a reverse mortgage. Because a reverse mortgage can give you access to a large amount of money, it can make you a target for aggressive sales pitches for expensive and inappropriate products or services. Steer clear of anyone trying to sell you other products, such as annuities, long-term care insurance, investment programs, or home repair services, along with a reverse mortgage.
-- Stay away from loans offered through door-to-door sales or telemarketing calls.
-- Beware of loan offers made by construction companies in conjunction with construction services.
-- Beware of lenders or brokers who guarantee you a loan regardless of your credit history or rating.
-- Shop around. Interest rates and fees vary widely among lenders. Don't assume that you won't qualify for a loan from a traditional lender.
-- Be suspicious of anyone who tries to pressure you into a loan before you're ready.
-- Read the entire loan application carefully before signing. Don't sign a loan form with blank spaces.
-- Make sure that you have received, read and understood all required disclosure documents before closing.
-- At closing, make sure the loan terms have not changed from what you were told before and that there are no additional fees you didn't know about.
-- Have an attorney review the documents before you sign.
-- Ask about fees and points. The interest rate is not the only important term of a loan. A loan with a low interest rate but high fees and points may cost you more than a loan with a higher interest rate and lower fees.
-- Contact a nonprofit credit counseling agency for help deciding if you can afford a loan. Check with the
-- Make sure the lender and broker you're dealing with are licensed. Check with the N.C. Commissioner of Banks at (919) 733-3016.
-- By law, you have three calendar days to change your mind and cancel the loan. This is called a three-day right of rescission. The process of canceling the loan should be explained at loan closing. Be sure to ask the lender for instructions on this process. Mortgage lenders differ in the process of canceling a loan. Ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place.
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