Elder Law: Reverse Mortgages - Be Aware of the Hidden Costs
REVERSE MORTGAGES - BE AWARE OF THE HIDDEN COSTS
Reverse Mortgage - What to Look Out For
Reverse mortgages are HIGHLY complex financial products that have serious consequences to the equity in your home. Here are some things to consider:
Reverse Mortgages are Loans- With a reverse mortgage, you are borrowing the equity accumulated in your home. That loan will need to be paid back by your heirs if you pass away or the house may be sold.
Reverse Mortgage Problems - A reverse mortgage may cause problems if you or your heirs want to keep the home or do not have the funds to pay back the loan.
Some questions you should ask before entering a reverse mortgage:
How Much am I Borrowing? The higher amount you borrow, the higher amount of interest you accrue every month.
What is the Interest Rate on this Loan? Most reverse mortgages allow the lender to adjust the interest rate to a very high interest rate or the rate changes from a low rate to a high rate after several months. It is imperative to discuss the terms with someone that you trust and that doesn't have a vested interest in closing the deal.
What am I Paying for? Reverse mortgages have higher closing costs than regular mortgages. Such costs are typically paid for using the proceeds of the loan itself. This either decreases the amount of cash available for you, or forces you to borrow more. Some expenses and costs that come with reverse mortgages include:
- Pre-existing mortgages/liens
- Origination fees or broker commissions - which can be as high as 2% of the amount borrowed!
- Mortgage insurance premiums - which can be as high as 2% of the amount borrowed initially!
- Service release premiums and loan correspondent fees
- Recording fees, appraisal fees and other closing costs
- Repair rider fees and set-asides
What am I Still Paying for? You should know that you are still responsible for typical homeowner costs, such as:
- Property taxes
- Homeowner's insurance
- HOA fees
- Repairs to property
Watch Out for an Annuity! Some agents/brokers have attempted to commit sales fraud by convincing the borrower to use a reverse mortgage to buy an annuity or other insurance product. This is a red flag. See also for more information about deferred annuities, http://www.elderbankfraud.com
Reverse Mortgages - What YOU Can Do to Protect Yourself
There are a number of things you can do to protect yourself from fraud.
- Research the Product
- Ask what product you are buying, how it works, and how it will help you. Get everything to you in writing.
- Ask for a consumer brochure.
- Ask how much you are borrowing and what your interest rate will be. Get everything told to you in writing.
- Go over the closing costs you will be paying for.
- Consult websites and resources related to senior financial planning to learn about reverse mortgages.
- Counselor - All HECM reverse mortgages, prior to closing, require borrowers to have a counseling session with an allegedly independent HUD counselor.
- Check Broker's Credentials - Some resources you can use to research the broker:
Watch out for agents who use phony certifications that misrepresent their actual qualifications or expertise. Always check to see if that credential is valid and matches that agent's expertise.
Some designations you should look out for:
- Certified Senior Advisor (CSA) - earned through three and a half-day course, where no college degree or prior financial experience is required.
- Certified Retirement Financial Advisor (CRFA) - earned through a four-day in-person or self-study course. College degree or prior financial experience is required.
- Certified Senior Consultant (CRC) - earned through a thirty-hour self-study course. An undergraduate degree and one year of experience in financial service is required.
Certified Financial Planner (CFP) - A master of 89 topics in integrated financial planning. At a minimum, in order to earn this designation, an undergraduate degree is required, plus course training in the above topics, as well as passage of a ten-hour multiple choice exam.
If you have already entered into a reverse mortgage, here are some things you can do to make sure you understand your loan:
- Read Your Loan Documents - Below are certain loan documents you should look at under how the loan works and what you are paying for. If needed, consult a close friend/family member and reputable financial planner to help you.
- Good Faith Estimate Form - This estimates the amount borrowed and closing costs.
- Total Annual Loan Cost (TALC) Form - This estimates the total cost of the loan.
- Settlement Statement - This provides borrower's actual closing costs, amount borrowed, and cash amount disbursed to the borrower.
- Adjustable Rate Note - This explains how the loan works.
- Opt for the Free-Look Period - Most reverse mortgage products allow you a very short time period to rescind you loan.
If you believe you have been a victim, here are some steps you can take in California:
- Contact Seniors Against investment Fraud (SAIF)
Report suspected unethical agents to the following public entities:
Consult an attorney, see http://www.evanslaw.com for more information about The Evans Law Firm in California only for cases in California.