Reverse Mortgages in New York City? Get Real

As the housing market in areas of Brooklyn and Queens continue to decline and people STILL look for ways to turn equity into spending cash, a somewhat new exotic alternative is propping up more and more…Reverse Mortgages.

The premise of the Reverse Mortgage goes something like this: Homeowners who are 62 and older are able to borrow against their home equity without having to repay the money until the home is sold or the borrower passes away or moves out permanently. When the house is sold, the lenders recover their principal plus interest. And whatever is leftover  goes to the homeowner or to his or her survivors. While that sounds great to many baby boomers who don’t feel secure that their social security checks will pay the bills, the problem with these equity to cash alternatives are the fees, reputability of the lender and the ever-present “fine print.”

Some of the drawbacks include a typical interest rate on a reverse mortgage that is anywhere from 1.5 to 3% higher than that of a traditional mortgage. At those rates, the more sensible solution, should you need the cash, is to refinance or take out a home equity line of credit.

Fees Fees Fees: Typically for a reverse mortgage you will have origination fees of approximately 2% of the overall loan (and never less than $2,000), Mortgage Insurance Premium fees of up to 2% of the loan, and much higher closing costs overall.  There are also “service fees” charged throughout the life of the reverse mortgage.  What that means in plain english is that before you have even had the opportunity to touch your mortgage, you will have thousands of dollars added to your loan, which you need to repay, before you even receive a cent.

Many “new” Reverse Mortgage brokers will charge finders fees. These fees are illegal. Information about reverse mortgages is available and free from AARP, HUD, and a number of other organizations. These so called brokers typically try and sell individuals annuities as well. By the time fees and costs are paid, the typical homeowner is losing money. With an annuity, these sums of money may be locked in as well.

So what is the conclusion? The conclusion, in this humble attorney’s view, is that reverse mortgages should only be used by individuals who are close to retirement, own their own home, have no other assets, and who are in desperate need of additional income. If you are still interested, my suggestion is that you contact AARP and the National Consumer Law Center before you consider going forward.