Three Big Reverse Mortgage Mistakes
By Matt M. Borkowski
The reverse mortgage has become a viable financial product. It always has been but it’s now becoming recognized as such rather than some form of a scam. A potential borrower will have at least 30% equity in the home, be over the age of 62, and be open to unlocking the equity in the home for a mortgage in which the borrower is not required to make payments to the mortgage company.
If these three items are in the cards the reverse mortgage can be a tool. With that we need to sidestep a handful of costly mistakes.
1. The biggest being not shopping around. The reverse mortgage business is very competitive and it is commonplace for a lender to compete against another for the business. When looking for a lender make sure you get quotes from at least two different lenders. Make sure each knows you will be getting quotes. By doing so the lender has literally no choice but to drop his interest rate, service fee, closing costs or all three.
This is important as it can reduce upfront fees and have a dramatic effect on saving your equity in the long run.
2. Using the fixed rate. The fixed rate should only be used in one situation; that is if the borrower needs a lump sum pay out of over 90% of the allowable loan. Otherwise the borrower should be getting an ARM with a line of credit.
The fixed rate, unlike the ARM does not allow for a line of credit. Therefore the borrower must take out the maximum allowable loan at closing. If the borrower does this and is not using the money then the money will end up in a bank. Now the borrower gets 2% on a good day and is being charged around 7%.
The ARM’s line of credit allows the borrower to leave unneeded cash in the line of credit. While it is in the line of credit it is not accruing interest against the equity of the home.
3. Using the mortgage as a short term fix. The reverse mortgage has high closing costs. With that in mind this is an expensive short term loan. It can easily cost the borrower 13% annually for the first 3 or 4 years. It is only when the loan matures beyond the fourth year when the annual cost to getting the loan comes down. As it gets older and older it becomes much more reasonable.
Just a few tips to optimize the reverse mortgage.
If you could get a practical California reverse mortgage guide you should go to this site. Additionally, a plethora of Texas reverse mortgage info can be had by heading over here
Photo by Katharine Moriarty
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