The radio and TV commercials are full with wonderful sounding pitches for reverse mortgages. It almost makes any home owner want to buy one.
In case you are not familiar with the reverse mortgage here is a quick review.
The home owner can get immediate cash for his house based upon the amount of equity that has accumulated. If there is little equity he will no qualify. 50% or more is a good starting place. The age requirement is 62 or older and he must own the house outright. No other financial requirements are necessary. This is the difference from it and a home equity line of credit.
It must be a single family home or 2 to 4 unit non-commercial unit.
The amount the home owner may receive will depend on his age and the value of the property, the current rate of interest as well as the paid-for equity.
Home owners don't need any third party to find a lender to give them a reverse mortgage. That is some rip-off artist. He is not necessary. The local bank will do it, but shop around. The borrower (that is what the home owner is) can go directly to HUD which will make a federally insured reverse mortgage.
The borrower can choose from several options with the most popular being a monthly payment for life for himself and his spouse. As long as one of them remains in the house they can live forever and receive that payment which is computed on an actuarial life expectancy table.
Before signing there is an important clause that should be added to protect the borrower.
This is the pitfall in the contract. If inflation continues that payment will buy less and less groceries or other services. There is only one way to protect the borrower and that is to include a yearly Cost of Living adjustment. So far this option is not included by any lender.
It means the borrower must learn to live on a lower life standard as the years go by. Will he be able to buy a comparable amount of groceries and medications 10 years from now with today's check. He must pay his taxes and insurance. Will they be the same in 10 years? Hardly.
These old folks (that's what they are now) better have some extra cash or they could lose the house. The lenders could see these units fall into the subprime category as they would not have the upkeep necessary (because of the declining purchasing power of the dollar) to maintain the local real estate property values
The smart lenders will bundle these contracts and sell them as the subprime lenders have done.
When taking a long term look at reverse mortgages it is not good for either the borrower or the lender.
Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profitswith his simple 2-step method. Read the first chapter and receive his market letter at http://www.mutualfundmagic.com anddiscover why he's the man that Wall Street does not want you to know. Copyright 2007 All rights reserved
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