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A reverse mortgage is a loan that converts home equity into tax-free cash for home owners 62 years of age and older. Much has been touted in the media and by lenders about the benefits of reverse mortgages, now here are some of the red flags. Discuss these points with family members and any lender you consider working with. Recognize the red flags and avoid common reverse mortgage problems.
Red Flag #1. Complicated paperwork may have unforeseen consequences. If you don't understand the document, you won't understand the consequences. Take the time to get proper guidance, second opinions, and a review of appropriate alternatives.
Red Flag #2. High cost of a reverse mortgage may outweigh the benefits of alternatives. As in any loan, there are going to be associated fees and costs. These should be clearly spelled out up front. Utilize your accountant, lawyer, trusted financial advisor to review any loan application before signing it.
Red Flag #3. Uncertain benefits. The strange thing about reverse mortgages is that you cannot calculate the true cost of this loan because it depends on how long you are going to live. But, if you want to pass anything to your heirs, it's worth considering the alternatives. There is no way to predict the home appreciation and future interest rates so consider the reverse mortgage carefully. Yes, payments come to you tax free but the debt on that asset is going up. This may be fine as long as you live and as long as you live there. Again, just know your options.
Red Flag #4. Tight-lipped lenders. Lenders who don't fully disclose fees and terms are a big problem. As we've just seen in the sub-prime lending mess, many consumers didn't understand what they were getting into. Some sleaze-ball lenders have gone so far as to work themselves into the deal to gain a large percentage of the property's appreciation. Ask your lender if they are attempting to gain any percentage of the appreciation as part of their profit.
Red Flag #5. Forcing borrowers to buy additional financial products such as variable annuities. In this case, consumers can lose their principle and the earning potential of that money. If there is a reason to combine products, double check and then double check the terms.
Red Flag #6. Numerous front end and back-end fees can be exorbitant. Artificially inflated fees raise the cost to the borrower and deflate consumer benefits fast. Of course the definition of exorbitant is up for debate but that is a reason to educate yourself, get multiple loan proposals, and obtain professional and objective advice before signing any loan document.
Red Flag #7. Reverse mortgage counselors imply that they are there to protect the interest of the seniors applying for the loan. This may be legitimate but if they present themselves as a counselor yet, have an affiliation with the lender; there is an inherent conflict of interest. Unfortunately the government still allows this practice. Your tax advisor doesn't work for the IRS does he? Well then your reverse mortgage counselor should not work for the lender he is trying to protect you from.
Red Flag #8. Borrowers should not pay a referral fee for an agent just for the privilege of introducing you to a lender. That fee has been as much as 10% of the loan amount in some cases. Don't pay referral fees or finder's fees for reverse mortgages just find a new agent or broker.
Red Flag #9. You don't know your lender. Laws and recourse vary from state to state. It's a good idea to know your lender. Get referrals from family and friends and ask for references from the agent you are talking with.
Red Flag #10. HUD might be a DUD. You cannot assume that because Uncle Sam is guaranteeing some aspect of a reverse mortgage that it is safe or good for your situation. HUD does provide some helpful and free info on its website but it is very limited. When the agent tells you this loan is backed by the U.S. Government, don't be overly impressed.
Red Flag #11. Information is withheld. When Total Annual Loan Costs (TALC) rates are not disclosed, be careful. When information is withheld and real costs and fees are not fully explained up front, there's trouble on the horizon.
Red Flag #12. When a borrower's decision-making capacity is in question- everyone involved should slow down, double check, and get additional assistance. Ethical lenders or agents will offer resources to seniors who clearly don't understand the consequences of reverse mortgages. Families should work together to keep tabs on senior family member's financial needs and lend a helping hand and a second set of eyeballs to major financial decisions such as reverse mortgages.
Red Flag #13. Alternatives to reverse mortgages are not known. There are several safe and secure alternatives that should be considered.
The bottom line to reverse mortgages is this. There are reverse mortgage alternatives beyond lines of credit or selling your home. Get the facts, recognize the red flags and take the time to do your homework.
Elder abuse is a major concern for financial products with seniors and the best way to fight it is to punish unethical lenders and teach consumers the facts and the alternatives. Families need to keep closer tabs on senior members and do the homework when it comes to reverse mortgages.
A safe alternative to reverse mortgages is the Prentiss Group's U. R. the Bank program at http://www.GuaranteeMyMoney.com . It can provide fixed rates of return of 7, 8, 9 % interest or more by utilizing home equity to provide monthly income. Call 888-777-3805 for more info. Steve Dahl is a freelance writer in Carlsbad, California. He can be reached through the website.
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