Reverse mortgages can carry extra costs, risks
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 offering "income" or a line of credit that must be repaid when the holder dies or sells the home.
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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.
Consumer advocates are ringing alarm bells about these financial products as some homeowners now face foreclosure for failure to pay taxes and insurance.
"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 stay 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 your heirs with fewer assets.
Consult highly rated mortgage brokers if you're considering a reverse mortgage to find out if it's the best option.