Reverse Mortgage Disadvantages and Pitfalls
Reverse mortgages carry some disadvantages and pitfalls that seniors need to know about. Much of the positive press on the program is valid, but there is some cautionary info and real dangers that a senior should be aware of before jumping in headfirst.
One of the most important pitfall to avoid is dishonest reverse mortgage vendors. The old adage, “you know them by their fruits” applies here. If they seem creepy, they probably are. But how does one recognize them? For one, after contacting them, they may never leave you alone. If they get a hold of your contact information and place you on their marketing list, you may never stop receiving a mailbox full of their junk mail and annoying phone calls.
Poorly run reverse mortgage lenders may offer less-than-knowledgeable salespeople who are quick to make big promises, but in the end, utterly fail to deliver. This is called the “over-promise and under-deliver” principle. This becomes a real problem when, as interest rates rise, they take up a month or two of your time, and incur appraisal and counseling fees only to tell you that you cannot be approved for a reverse mortgage.
A limited choice of reverse mortgage programs is another disadvantage of some lenders to watch for. The big reverse mortgage banks (you know, think of the BIG bank names), are only going to offer you THEIR own reverse mortgage programs, which may not be the best fit for your needs. Only the largest correspondent lenders have access to the whole range of about 19 different reverse mortgage programs. The big banks usually have only three of these programs from which to choose.
Working with a mortgage broker is no better because they usually offer only one or two programs, they have to add extra fees onto the transaction in order to make a buck, and they don’t even know much about the programs they offer. Those are definite disadvantages! On the other hand, correspondent reverse mortgage lenders, have access to the full range of programs including all the big Banks’ programs. Yet, because of their wholesale relationship with them, they are able to charge the same fees as the big banks.
Be very careful in selecting your reverse mortgage lender. Ask for references, check their licensing, ask to see a variety of programs and ask yourself if you are convinced that they know what they are doing.
Some fall into the personal disadvantage of thinking that the reverse mortgage program is offering free money. It is not. It is simply a way to access the home equity that you have built up over the years you have owned your home and paid your mortgage. A reverse mortgage is the only way of doing this without selling your home or taking on monthly debt payments.
The service that lenders offer with a reverse mortgage is not free. It is a business transaction: the lender gets a mortgage lien on the home, entitling them to repayment with interest and you get payment-free money out of your home equity. You have to decide if the money that you receive from transaction is worth the cost. To figure the cost of a reverse mortgage, ask your lender for an amortization schedule based on your circumstances. Important: if they cannot give you one in short order, they do not know what they are doing. In this case, it would be in your best interest to find a new reverse mortgage lender.
With this information on the potential pitfalls and disadvantages of reverse mortgages, you should be better prepared to investigate the reverse mortgage and decide if it is right for you or someone you know.
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ABOUT THE AUTHOR
Larry Denver is a consumer advocate and watchdog for senior scams. He helped produce http://www.reversemortgagedisadvantage.com/ to educate and inform seniors about reverse mortgage disadvantages and reverse mortgage pitfalls.