Reverse Mortgage - Criticism

Criticism

Reverse mortgages have been criticized for several major shortcomings:

• High up-front costs make reverse mortgages expensive. In the U.S., reverse mortgages can cost $8,000 or more to enter into, as compared with other types of loans which often cost less than $5,000.
• The interest rate on a reverse mortgage may be higher than on a conventional "forward mortgage" even though the collateral – the real property – is the same.
• Interest compounds over the life of a reverse mortgage, which means that "the mortgage can quickly balloon". Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. Because of this compound interest, the longer a senior has a reverse mortgage, the more likely it is that most or all of the home equity is depleted when the loan becomes due. That translates to "less cash for your estate or to pay your bills." That said, with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs. The sole remedy the lender has is the collateral, not assets in the estate, if applicable.
• Reverse mortgages are confusing. Many seniors entering into reverse mortgages don't fully understand the terms and conditions associated with the loans, and it has been suggested that some lenders have sought to take advantage of this. But in a 2006 survey of borrowers by AARP, 93 percent said their reverse mortgage had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative. Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with the counselors that they were required to see.