Reverse That Mortgage

One part of the mortgage appears still very busy. It seems like every time we turn on a radio or television program a reverse mortgage ad comes on. With spokespeople like Robert Wagner and James Garner pitching you the benefits of having a Reverse Mortgage, what problems could there be? Well in article by CNN Money titled Reverse Mortgages: Beware the Come-ons, some of the techniques and benefits raise a few questions.

Last year, borrowers took out more than 132,000 reverse mortgages - 50% more than the year before and almost 10 times as many as five years ago.
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There's also a downside to reverse mortgages' growing popularity, however. Loan-origination fees that can top $7,000 on a $500,000 home are attracting aggressive salespeople intent on getting you to take out a reverse mortgage whether you need one or not. Some may try to persuade you to invest the proceeds in high-priced financial products, such as annuities, boosting their commissions even more.
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A reverse mortgage can generate cash, but it's not the only way or necessarily the best. Up-front costs can exceed 10% of the loan, making a reverse mortgage a very expensive option if you're borrowing a small amount or you plan to move in a few years. In such cases, you might pay far less by taking out a home-equity line of credit. And hanging on to your home might not be a great idea. You may be able to generate more income by selling and moving to a less expensive place.
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A 2006 AARP survey found that one in 10 reverse-mortgage borrowers had been pitched a financial product along with their loan, most often deferred annuities but also long-term-care policies. Buying an annuity with reverse-mortgage proceeds rarely makes sense though. As the example below shows, you're unlikely to earn more with an annuity than you are being charged in interest and fees on the reverse mortgage. Worse, you might have to pay surrender charges that are upwards of 20% to take money out in the first few years.
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The federal government requires you to meet with a counselor before taking out a reverse mortgage. The quality of the counseling is uneven though. This spring, HUD will promulgate new standards for counseling and require a discussion of the implications of using loan proceeds to buy annuities. If you want a rigorous analysis of whether you're better off with a reverse mortgage or a less expensive home, however, you should consult a fee-only financial planner. (Don't let him sell you an annuity either!) After all, you want to be sure that the equity you took years to accumulate enriches your retirement rather than a salesman's wallet.

To sum up, if your Reverse Mortgage company, broker or salesperson is trying to sell you a annuity to purchase with your reverse mortgage funds - they are scamming you. First they take a large origination fee for the mortgage, then converting to a annuity requires even more fees. Add the difference in interest between the mortgage and the annuity and the company selling the reverse mortgage is doing significantly better than you.

Many people are using the reverse mortgage to scam people out of millions of dollars. The article also provided a great graph of the difference between the interest on the annuity and the interest for a reverse mortgage. Basically, in many cases you are paying a large price to borrow your own equity.

Notice in the first year there is a $17,000 difference and by the end of ten years it is $111,000. Not a bad profit for the lender. Wonder how some of the reverse mortgage issues will factor in slumping housing markets? We always hear that your will never be thrown out of your house - but it will take another 20 years or so for those real statistics to show up. Reverse mortgages are starting to sound like something to good to be true, which usually are too good to be true.