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.
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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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