Reverse Mortgage Mistakes Too Common: Government
NEW YORK (BankingMyWay) -- For all its expenses and confusing terms, a reverse mortgage can be a godsend for an older homeowner, allowing one to tap home equity without having to make loan payments or move out. But a new study from a government consumer watchdog finds that typical borrowers do exactly what the experts say they shouldn't -- tapping too much equity too soon.
The study, released this week by the Consumer Financial Protection Bureau, found that the most common age for taking out a reverse mortgage is 62, the first year a homeowner is eligible. Two out of three homeowners using reverse mortgages take lump sums rather than steady income or a line of credit.
In other words, these borrowers have ignored, or are unaware of, the best advice: to take a reverse mortgage as late in life as possible, and to borrow a little rather than a lot.
To back up for a second, a reverse mortgage is a federally backed loan against the equity in the home, which is the difference between the home's value and any debt remaining on a mortgage or home equity loan. Unlike a regular mortgage or home equity loan, a reverse mortgage requires no monthly payments. Instead, the debt and interest charges are paid when the home is sold, the owner moves or dies. This total can never exceed the proceeds from selling the home, so the borrower's other assets are not as risk. Because there are no payments, the homeowner does not need an income to qualify for one of these loans.These features obviously pose a risk for lenders, who compensate by limiting these loans to less than the home's value at the time the deal is closed. The older you are, the more you can borrow on a home of a given worth, since there is less risk you'll live long enough for the debt to grow larger than the property's value. If the home eventually sells for more than the debt, the difference goes to the owner or owner's heirs. Owners who take loans when they are younger can borrow less and are less likely to have any equity left 10, 20 or 30 years later, when all their other financial assets are more likely to be gone. Borrowing at 62 increases the chances you will run short of money at 85.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV