What Questions to Ask About Reverse Mortgages
A reverse mortgage is a loan on your house, and a valid contract that may affect you and the next generation. The reverse mortgage is an expensive way to get equity out of your house, and AARP suggests that you may find other ways to get cash that are less costly. Understand the risks and ask the right questions before you make a decision.
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Understand the Loan
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Understand how the loan works and rely only on what is written. Real estate transactions rely on written contracts, and oral agreements are not enforceable. You must attend counseling for a reverse mortgage. Listen carefully and ask questions. The Home Equity Conversion Mortgage and the HECM Saver are FHA loans. You pay less upfront fees with the HECM Saver, but get less equity from your home than the standard HECM.
Ask About Default
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If you do not live in the home for 12 months, your reverse mortgage may be in default. This includes a nursing home stay. If you do not maintain the house in the same condition as when you took out the loan, your mortgage may be in default. Failure to pay the real estate taxes will also create a default. You continue to have expenses for the upkeep of the home after you take out the reverse mortgage.
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Calculate the Cost
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The upfront costs of a reverse mortgage are high, but the annual cost depletes remaining equity. The cost of private mortgage insurance, administrative fees and interest on the loan accumulate yearly. Ask for an amortization schedule, a computer-generated report of how much the reverse mortgage loan will cost you each year. Interest on a reverse mortgage is compound interest and this is one of the most expensive ways to get money.
Options
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Investigate all options before you decide on a reverse mortgage. You may not need a reverse mortgage, or you may not need a reverse mortgage now. You must be age 62 to take out a reverse mortgage, but for many individuals, 25 years of life remains. If you can sell your home and move to less expensive housing or get a home equity line of credit, these are cheaper alternatives. State and local governments offer low-cost loans for home expenses and taxes. Jonathan Pond, financial ambassador for AARP, suggests refinancing, relocating, downsizing or sharing your home as options.
Ask Your Children
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Ask your children to help you make the decision, since it will directly affect them. They may suggest better options than a reverse mortgage. They may also help you study the reverse mortgage if they use the Internet. They may be willing to attend the counseling session with you. At the very least, your children will participate in the decision.
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