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Below are excepts from an article from the New York Times, October 14, 2012 by Jessica Silver Greenberg: “Reverse Mortgages Costing American Their Homes”
“The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates.”
“MetLife was the latest major player to exit the market, in April. That followed the departure last year of the two biggest reverse mortgage lenders, Bank of America and Wells Fargo, which cited falling housing prices and difficulty assessing borrowers’ ability to repay the loans.”
“Reverse mortgages also have troublesome incentive structures that might encourage brokers to steer seniors toward lump-sum loans, which carry a fixed interest rate, rather than a line of credit with a variable interest rate, the bureau found. In a lump sum arrangement, the interest charges are added each month, and over time the total debt owed can far surpass the original loan.Brokers earn higher fees on these loans and even more money when they sell the loans into the secondary market, where they can get rates nearly double those for variable loans, according to rate sheets obtained by the consumer bureau.” If you want to read more the link to this article is:
nytimes/.../reverse-mortgages-costing-some-seniors-their-h... Over 400 comments with lots of personal RM stories. It is a pretty sobering read.
to GregPagan - if you do a FHA backed RM, they will require that you go to a counseling session before FHA will process the RM. You need to take your questions for this session so that you clearly understand what you are doing.
RM is debt that HAS TO BE REPAID.
If homeowners, their kids or heirs want to keep the house, then the RM, it’s fees, interest and other expenses within the RM has to be paid in full once homeowner dies OR does something to have RM come due, otherwise house will be sold on the open market. There is no gray area, the RM has to be repaid. If it’s an FHA backed RM & house sells for less than owed, FHA pays the difference to the mortgage holder. Family doesn’t have to make up the difference. But if you want to keep the house, you have to pay off the whole RM.
RM’s can work for some….like a healthy couple 63 & 65 which own 300K appraised home outright and plan on staying there another 10 - 20 years; home in an area of increasing value; & they have guaranteed income to pay taxes, insurance, maintenance for 10 - 20 years without a strain; & you do line of credit RM. So when you finally move, home is now 400-500K which repays the RM & leaves you $ for a downsized home.
But too often, RM is done by those in financial crisis. If the RM’d home is old & lower value, the $ (which may be 50% of value) is just a band-aid on a bigger $$ problem. They can’t pay for what is required on upkeep on house. If they are really elderly, then end up needing a NH. Either way they end up in a RM default.
As of 2013 significant changes happened to FHA backed RM because of all the problems with RM’s. Now you have to show the ability to pay for all the “required” on the house, like insurance, taxes, etc for several years and if not you have to now have an escrow-like account done to cover these costs. If you are low income and struggling, you can’t do this. The value & condition on the house has to be verifiable & not by the RM originator.
If you do a RM there are main 4 things that can be a problem for compliance and cause the RM to be in default & due:
- FAILURE TO PAY - property taxes, insurance. For many who have had their home, their underinsured for the new debt. Or now they find they now need flood or wind policies. Premiums for new insurance can be lots more.
- MOVING TO A NEW RESIDENCE- if RM property stops being your primary, you are out of compliance with loan. If you move into IL or AL or NH, your loan is due.
- BEING OUT OF THE HOME FOR MORE THAN 1 Yr - the loan will come due. A cruise or long vacation is OK, but you have to continue to live in the home. Most policies have this.
- ALLOWING THE PROPERTY TO DETERIORATE - you are expected to pay for all repairs & maintenance on the home. After Hurricane Katrina, some with RM’s got letters as to the status of the home, how it was being secured, repairs contracts, utility information - this was all about calling in loans that were in areas with uncertainty.
http://www.consumerreports.org/cro/magazine-archive/september-2009/personal-finance/reverse-mortgages/overview/reverse-mortgages-ov.htm
What most people do not know is that Medicaid and SSI considers loan advances as cash assets or “liquid assets” when they are kept beyond the month that a recipient receives them. Borrowers may just find themselves ineligible for these State benefit programs.