Reverse Mortgages - Buyer Beware

As the economy tanked, a small but increasing number of consumers tapped into their home equity and took out reverse mortgages. Available to homeowners over age 62, these loans are unlike a traditional mortgage in which a borrower makes a monthly payment to the lender. Instead, a reverse mortgage offers "income" or a line of credit that must be repaid when the holder dies or sells the home. A reverse mortgage can be set up as a lump sum or a monthly amount paid to the borrower. Typically, the monthly amount is set to supplement a senior's fixed income such as a pension and social security. The benefit for the borrower is that they do not have to make any monthly mortgage payments and do not have to repay the loan during their lifetime. The reverse mortgage loan is only repaid when the house is sold or refinanced. This normally occurs when the borrower is dead or ready to permanently move out of their house. Other than the age of the borrower, the only other guideline for qualifying is the loan to value ratio which is determined by the appraised value and life expectancy. In other words, an older applicant means that a higher LTV is allowed and vice versa. There is no credit report needed or income requirements associated with a reverse mortgage.

There are actually three types of defined reverse mortgages. However, most seniors only apply with Home Equity Conversion Mortgages (HECM). The HECM is run by the U.S. Department of Housing and Urban Development through the Federal Housing Administration (FHA). HECM reverse mortgages are among the least expensive in their class. If you want to apply for a HECM loan, the federal government's defined guidelines require that you first get counseling from an accredited reverse mortgage counselor. A recent MetLife and National Home Builders Association report showed that while less than 1 percent of seniors surveyed had a reverse mortgage, there was a 54-percent increase in these loans between 2007 and 2009.

Even though there are certainly benefits associated with reverse mortgages and they do make sense in certain circumstances, consumer advocates are ringing alarm bells about these financial products. Many are saying that homeowners now face foreclosure for failure to pay taxes and insurance. Others are saying that many lenders are charging higher fees and rates. "Reverse mortgages are more expensive than traditional home loans, and the upfront costs can be high," the Federal Trade Commission cautions. "That's important to consider, especially if you plan to say in your home for just a short time or borrow a small amount."

The FBI has issued warnings to seniors about misleading advertisements and scams related to reverse mortgages. While tax-free, the fees can be steep, the amount owed increases over time as interest is added to your loan balance, and you can sap part or all of the equity in your home, leaving you and you heirs with fewer assets. Seniors should consult highly rated mortgage brokers if they are considering a reverse mortgage to find out if it is the best option.

Joe Jesuele is the founder and president of NJ Mortgage, a financial services company based in Moorestown, NJ. Joe is also the founder of Northern Liberties Real Estate in Philadelphia, PA.