Be Cautious with Reverse Mortgages
Dear Liz: This is not a question, but a comment on a recent column regarding reverse mortgages. Although your information was factual, reverse mortgages are not a prudent choice and should be considered as a last resort only. I investigated this option for my parents, and the fees are unbelievable: a minimum 2% origination fee and an annual 0.5% service fee to send out their checks. This does not factor in the other closing costs (title, escrow, appraisal, etc.). If you understood the usury involved by the lenders, you could not recommend it in good faith.
A: The fees that come with reverse mortgages can be steep compared with a conventional mortgage, which is why it may not be the best option for many borrowers.
That’s one reason borrowers applying for a federally insured reverse mortgage must undergo special counseling to help determine whether these loans are the best choice. You can call the Department of Housing and Urban Development at (800) 569-4287 for a referral to a HUD-approved housing counseling agency.
Origination and servicing fees can vary substantially from lender to lender. That is why it’s important to shop around to get the best deal.
The earlier column mentioned the AARP booklet “Home Made Money,” which you can download from its website (www.aarp.org) or order by calling (800) 209-8085. If you have any questions after reading the booklet, you can call the same number to be directed to the AARP Foundation’s Reverse Mortgage Education Project.
You might also check out the website maintained by National Center for Home Equity Conversion, an independent, not-for-profit organization that provides consumer information at http://www.reverse.org .
Reverse mortgages can be a prudent option for elderly homeowners who want to remain in their homes, but you’re right that they should understand the costs before they proceed.
Be Cautious with Reverse Mortgages
Dear Liz: This is not a question, but a comment on a recent column regarding reverse mortgages. Although your information was factual, reverse mortgages are not a prudent choice and should be considered as a last resort only. I investigated this option for my parents, and the fees are unbelievable: a minimum 2% origination fee and an annual 0.5% service fee to send out their checks. This does not factor in the other closing costs (title, escrow, appraisal, etc.). If you understood the usury involved by the lenders, you could not recommend it in good faith.
Â
Â
A: The fees that come with reverse mortgages can be steep compared with a conventional mortgage, which is why it may not be the best option for many borrowers.
Â
That’s one reason borrowers applying for a federally insured reverse mortgage must undergo special counseling to help determine whether these loans are the best choice. You can call the Department of Housing and Urban Development at (800) 569-4287 for a referral to a HUD-approved housing counseling agency.
Â
Origination and servicing fees can vary substantially from lender to lender. That is why it’s important to shop around to get the best deal.
Â
The earlier column mentioned the AARP booklet “Home Made Money,” which you can download from its website (www.aarp.org) or order by calling (800) 209-8085. If you have any questions after reading the booklet, you can call the same number to be directed to the AARP Foundation’s Reverse Mortgage Education Project.
Â
You might also check out the website maintained by National Center for Home Equity Conversion, an independent, not-for-profit organization that provides consumer information at http://www.reverse.org .
Â
Reverse mortgages can be a prudent option for elderly homeowners who want to remain in their homes, but you’re right that they should understand the costs before they proceed.
About Reverse Mortgages
Q: My mother, who just turned 77, lives on Social Security. Although she’s grateful for her checks, they’re just not enough to ease her financial worries. I am able to help her pay for some of her medications each month, but she still barely makes ends meet. She invested in an IRA while she was working, but this year she will draw the last of her money from that account. Is there a safe and smart way she could borrow money against her house, which is paid off? Would she have difficulty getting a loan because of her age?
Â
Â
A: There’s at least one kind of loan where your mother’s age will actually help her get more money than she might otherwise: a reverse mortgage.
Â
Reverse mortgages allow older people to borrow against the equity in their homes and receive either a lump sum or a monthly check. The older you are, the larger the amount you can typically receive. If your mother’s home is worth $200,000, for example, she could boost her monthly income by $699 to $777 with a reverse mortgage. If she were 10 years younger, the amount she would get could be as low as $319 a month.
Â
These payments would continue until she dies, sells the home or permanently moves out, at which point the loan must be repaid. Typically, the repayment comes from the proceeds of selling the house; any remaining equity in the home would go to her heirs.
Â
AARP has a free booklet about reverse mortgages called “Home Made Money” that you can download from its Web site (www.aarp.org) or order by calling (800) 209-8085. You might also check out Tom Kelly’s book, “The New Reverse Mortgage Formula” (2005, Wiley Publishing) for help in evaluating the various reverse mortgage products.
Can I Just Walk Away from a House and Its Mortgage?
Q: I would like to buy a house. However, I live in an area where home prices are rising rapidly, and I worry that there’s a housing bubble that could pop. If I have to move in a year or two and prices have dropped in the meantime, may I simply give the house to the bank and walk away as if I never bought it? I know I’ll lose my down payment, but are there other consequences?
Â
Â
A: Walking away from a house like that typically will trash your credit, making it difficult for you to buy another home for a while. Most of the ways to deal with this situation — foreclosure, deed in lieu of foreclosure (in which you voluntarily give back the house) and short sales (in which the bank agrees to accept the proceeds of a home sale, even if it’s less than what you owe) — can all wind up as black marks on your credit report and severely affect your credit score, the three-digit number that lenders use to help gauge your creditworthiness.
Â
If your home is worth much less than what you owe, the lender also may go after you in court for the balance.
Â
Even in a normal market, you probably shouldn’t consider a home purchase if you think you’re likely to move within a couple of years. In most areas, it takes three or more years for prices to rise enough to offset the costs of selling a home. In hot markets where prices could fall dramatically, you should be able to stay put five to 10 years if you want to avoid the possibility of being “underwater” on your mortgage.
How Much House Can I Afford to Buy?
Q: I’m 21 and thinking about buying my first home. How much house can I afford to buy, and is it OK to bid less than what the seller is asking?
A: You have actually asked two of the more difficult questions to answer when it comes to real estate.
Many people believe there are strict formulas that determine how much they can borrow for a home. In reality, lenders have loosened their standards considerably in recent years, and some borrowers may find — much to their later sorrow — that they can get a much bigger mortgage than they can comfortably repay.
A good rule of thumb is to keep your total housing costs — including mortgage, taxes and insurance — to about 25% of your gross income. That way, you’ll have enough money for other goals, such as retirement savings and vacations.
You can stretch a bit more if you expect your income to rise considerably within a few years or if you have no other debt. But you might want to be even more conservative if your income is uncertain or your debt load is particularly heavy.
Once you have a target monthly payment, you can play with the online mortgage affordability calculators offered by companies including Bankrate Inc. and E-Loan Inc. to see how much house that will buy.
As far as how much to bid, you might consider consulting an experienced real estate or buyer’s agent who is well-versed in the neighborhoods you’re targeting for your house hunt.
There are no hard-and-fast rules. Some sellers overprice their homes; others set the price too low, hoping to set off bidding wars. A smart agent can help you figure out which is which and coach you on the best bidding strategies for your market.
