NEW YORK (MainStreet) — A reverse mortgage can be a lifesaver for an older homeowner running short of money, and anyone considering one of these no-payment loans should probably investigate now, as the deals won’t be as good later on if interest rates continue to rise.
But a number of consumer groups warn that too many seniors are taking on these pricy loans. Many, they say, should first consider alternative sources of funds, including loans from family members.
“As the market for reverse mortgages grows, concerns are mounting that an increasing number of seniors are being misled into signing up for a complicated financial product that may squander their equity prematurely or put them at risk for losing their homes,” the groups, led by the Consumers Union, said in releasing a recent report critical of the reverse mortgage industry.
The groups warn that many homeowners are being pressured by lenders into taking these loans before they understand the full costs, which can be high.
How can a “no-payment” loan be pricy? Although the homeowner does not have to make any monthly payments, there are interest charges that are added to the loan balance every month. Interest tacked onto interest will snowball until the loan is paid off, or after the borrower sells or dies. In addition, there are various up-front and annual fees that add to the loan balance, though the government recently introduced a lower-cost alternative for homeowners who need only modest loans.
The consumer groups warn that homeowners who take these loans too early can deplete all of their home equity long before they die. A homeowner with little or no mortgage or home equity debt can get a reverse mortgage as early as 62, but can borrow more by waiting. Other factors like the loan's interest rate also govern how much of the home’s market value can be withdrawn with a reverse mortgage. The lower the rate, the more one can get.