US ‘reverse mortgage’ alert

US lenders have been criticised over their reverse mortgage practices…

Many retirees report being pleased with their reverse mortgages, but consumer advocates say Congress should be moving more quickly to protect the elderly from unscrupulous lenders who push mortgages that sometimes cost far more than borrowers realize.

Reverse mortgages allow older homeowners to obtain cash by siphoning off some of the equity in their property. The older the homeowner and the greater the home value, the more cash that can be made available either as a lump sum, monthly payout or line of credit.

When reverse-mortgage borrowers die, their heirs must repay the loan, plus interest and fees, typically by selling the property. They keep whatever equity is left. With the oldest of the nation’s 76 million baby boomers turning 62 in 2008, such loans seem certain to proliferate in coming years.

“When used properly, reverse mortgages can be an effective way for seniors to tap into the equity of their house,” U.S. Sen. Herb Kohl (D-Wis.) said at a December hearing of the Senate’s Special Committee on Aging. “But too often these products are not used effectively, and seniors end up losing their homes.”

Recently, a bill was introduced to prevent abuses of reverse mortgages. “I think we should take a closer look at them,” said U.S. Sen. Chris Dodd (D-Conn.), chairman of the Senate Banking Committee.

FIVE THINGS TO CONSIDER

1. Do you really need a reverse mortgage? If you want some cash to take that dream vacation, a reverse mortgage is an expensive way to pay for it. Taking out a pricey loan to make investments or to purchase insurance products is also not a good idea. Make sure that the needs you want to address are really worth the costs.

2. Do you have less costly options? If you could easily make the monthly repayments on a home equity loan or home equity line-of-credit, these alternatives are less costly than a reverse mortgage. Have you looked into the costs and benefits of selling your home and moving to a less expensive one?

3. Can you afford a reverse mortgage? The younger you are when you take out a reverse mortgage, the longer compound interest will grow, and the more you will owe. On the other hand, due to high upfront costs, these loans can be especially costly if you sell and move just a few years after taking one out.

4. Can you afford to start using up your home equity now? The more you use now, the less you will have later when you may need it more, for example, to pay for emergencies, health care needs or everyday living expenses. Homeowners who wait have “a reasonable expectation of securing a better product at a lower cost in the not-too-distant future,” according to a report by the Fidelity Research Institute.

5. Do you fully understand how these loans work? Before considering one, you need to do your homework carefully and thoroughly. Start with this Web page: www.aarp.org/money/revmort

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