Understand Reverse Mortgages Before You Leap

 Understand Reverse Mortgages Before You Leap by Lisa HoltonHome equity can add up to between 30 to 40 percent of the net worth of most seniors. For individuals or couples at least sixty-two years of age, a reverse mortgage can be an option to turn equity into tax-free cash without forcing a senior to move or make a monthly payment.

There are plenty of television commercials advertising reverse mortgages as a great solution for older Americans, and they really can be. But they require a lot of careful consideration.
AARP has a reverse mortgage calculator you can use online. Click on www.aarp.org/revmort.
Here are the differences between a reverse mortgage and a bank home-equity loan. With a traditional second mortgage, or a home-equity line of credit, you must have sufficient income to qualify for the loan, and you are required to make monthly mortgage payments. A reverse mortgage doesn’t consider income. You don’t make payments because the loan is not due as long as the house is your principal residence. A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in any of a number of forms. Options include a lump-sum cash payment, a monthly cash payment, a line of credit (which tends to be the most popular option), or some combination of these.

When the owner dies or moves away, the house can be sold, the loan paid off, and any leftover equity value can go to the living owner or the designated heirs. Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months, with the option of two ninety-day extensions that must be applied for.

Americans Get Ripped Off on Mortgage Loans

You might think that Americans would have learned over the past few years that home mortgages can be dangerous products, to be approached warily, only after careful study and consideration. You would be wrong.

Americans spend twice as much time shopping for cars than they do for home loans, Zillow.com reported Thursday.  An online survey of 2,729 adults commissioned by Zillow found that on average they spent five hours choosing a mortgage, compared with 10 hours for a car and four hours for a computer. Nearly a third of the respondents devoted two hours or less to choosing a mortgage.

“Mortgages continue to be something that most people don’t want to spend time thinking about,” said Stan Humphries, chief economist for Zillow, a real estate information firm.

Of course, only an economist could find that even faintly surprising. Most people find it fun to look at shiny new cars and take them for test drives. Vroom, vroom! Reading through the fine print of loan contracts and trying to figure out what would be a fair price for title insurance and an appraisal–well, slightly less diverting.

Even if you do want to shop wisely for a mortgage, that isn’t easy to do. You can’t just pick the lowest rate because the lender offering the lowest rate might have the highest fees. And one lender’s loan doesn’t necessarily have the same terms as the similar-sounding loan from the bank or broker next door. You need to look at a bunch of factors, and at the end of it you won’t necessarily know which combination is best.

Moreover, you might be told on Monday morning that your rate will be 5%. When you come back to lock in the next morning, however, the lender may tell you that the market has moved (as it does constantly) and now your rate is 5.25%. Do you have time to go back to all the other lenders and check what they’re charging today? Or are you so eager to refinance or seal your home purchase that you’ll just sign on the dotted line?

In fact, many lazybones simply go to one lender–the one recommended by a friend, Realtor or home builder–rather than doing their own research.

At the beginning of this year, new federal rules mandated a standard three-page “good faith estimate” of mortgage fees and terms that is supposed to make it easier for consumers to compare offerings of different lenders. Opinions are mixed on whether this new form is helpful or confusing.

Lenders, for their part, always say they are eager to improve “financial literacy” so consumers can make better choices. But do they really want to make it easy for consumers to shop for mortgages? I’m skeptical. If consumers could easily compare one lender’s terms with another’s, profit margins on home mortgages would go down.