According to Sam and Jim Commenting on things that irk us off, make us laugh out loud or just seem too weird too believe According to Sam and Jim: Reverse Mortgages Sound Too Good to Be True. Guess What?

Friday, August 30, 2013

Reverse Mortgages Sound Too Good to Be True. Guess What?

If it sounds too good to be true it probably is, right? So, Sam and I are warning you: think twice before applying for a Reverse Mortgage on your home.

A so-called retirement planning tool that has gained a lot of interest in recent years, the reverse mortgage seems, at first glance, like a solid idea to seniors and retirees. A reverse mortgage is a loan for homeowners 62 or older that uses your home’s equity as collateral. You do not have to make payments and it’s government insured- advantages being touted widely by people such as actor, congressman and former presidential candidate Fred Thompson and television stars Henry Winkler (the Fonz), Barbara Eden (Jeannie), Wayne Rogers (M.A.S.H.) and Robert Wagner (It Takes a Thief).

But note carefully those words “do not have to make payments.” This is a loan we’re talking about and it has to be repaid somehow, somewhere, sometime. There ain’t no such thing as free money honey. Lenders do not give that stuff away. As a licensed real estate agent for 30-plus years, I advise you, if at all possible, to avoid a reverse mortgage like the plague.

Say your home is worth $300,000.00. You would be allowed under a reverse mortgage to borrow about $175,000.00. That leaves $125,000, right? So what happens to that $125,000? Though you may not have to make payments on the money you received, interest accumulates, and compounds on your loan, and next thing you know, the $125,000 you thought you had left is gone. AND, you still have to pay property taxes, insurance, homeowner association fees and that sort of thing. If you don’t, the lender can foreclose. The words “government insured,” means your lender is insured against default, not you.

If you die or move into a nursing home or a mother-in-law suite on your kid’s property, the $175,000 you borrowed and any other money you might owe almost immediately has to be repaid. Your estate will have only 6 months to pay the balance owing or sell your home to pay the debt. Any money left over after a sale goes to your heirs. Fortunately, the estate is not personally liable if the home sells for less than the balance owing on the reverse mortgage. But BEWARE!

According to an article by Niels Lesniewski in the our Capitol’s Roll Call newspaper, Susan Collins, R-Maine, the top Republican on the Senate Appropriations panel overseeing mortgages, is concerned about the risk senior citizens face when they take equity out of their homes to pay for living expenses. “We see these ads on television and it sounds like it’s the best thing since sliced bread, and yet I’m hearing that there are a lot of problems,” she said.

President Barack Obama’s fiscal 2014 Housing and Urban Development budget includes a warning about a nearly $1 billion bailout for the Federal Housing Administration from the Treasury. HUD Secretary Shaun Donovan blamed that deficit squarely on issues with government-insured reverse mortgages, which HUD refers to as Home Equity Conversion Mortgages, or HECMs.

“If you just took out the reverse-mortgage loans from the FHA, we would be in a positive $4 billion position,” Donovan said in response to a question from Subcommittee Chairwoman Patty Murray, D-Wash. “Frankly the program needs reforms.”

The bottom line says the Federal Trade Commission: “If you don’t understand the cost or features of a reverse mortgage or any other product offered to you – or if there is pressure or urgency to complete the deal – walk away and take your business elsewhere. “

Supposedly, the rules governing reverse mortgages are set to change October 1. According to a Wall Street Journal article by Anne Tergesen, this could mean less money for borrowers, because fewer homeowners will qualify for these loans, and the maximum amount they will be able to borrow will decline. But it also may help reduce the program's high default rate.

Sam and I are reluctant to come right out and call reverse mortgages a SCAM, but like Sam’s poop, if it looks bad and smells bad it probably is.

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