Costs Associated with Reverse Mortgages on the Decline
July 2, 2010
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Although reverse mortgages have become quite popular in the past few years, they are generally considered an expensive proposition for most seniors who want to generate additional income by extracting cash from their homes. However, a recent article in the Wall Street Journal reports that the costs of reverse mortgages are declining as some of the country’s largest reverse mortgage lenders are cutting closing costs, making such mortgages a more attractive option.
Homeowners at least 62 years of age can use reverse mortgages to tap into the equity in their homes without taking out home equity loans or lines of credit, or selling their homes. With a traditional mortgage, the homeowner must make monthly principal and income payments to the lender; with a reverse mortgage, the lender pays the homeowner. And with a reverse mortgage, the homeowner can opt to receive a lump sum payment, a line of credit, or monthly payments. As the debt increases, the home equity decreases. When the home is eventually sold, the lender is repaid the principal and accumulated interest payments. Any remaining equity belongs to the homeowner or the homeowner’s heirs.
One of the biggest criticisms of reverse mortgages is that they can be costly. Fees can total 5% of a home’s value. Lenders typically charge an origination fee, which is allowed to run as high as $6,000 by federal law. A homeowner may also pay a monthly servicing fee which can add thousands of dollars over the life of the mortgage. Mortgage insurance is mandatory, with the premium adding further costs. Closing costs are also added and can exceed $12,000 for a $250,000 loan.
Earlier this year, companies such as Genworth Financial Inc., Bank of America Corp., Wells Fargo & Co., OneWest Bank’s Financial Freedom unit, along with other lenders have dropped or reduced their origination or servicing fees, or both, saving some homeowners $10,000 or more on the closing costs. Why are lenders cutting costs now? Mainly to generate business. From October 1, 2009, to March 31, 2010, home-equity-conversion mortgage volume fell 22% from the same period a year earlier. This is partly due to poor economic conditions and falling home values. The Department of Housing and Urban Development (HUD) cut the amount of equity that reverse-mortgage borrowers could extract by 10% last October. This caused some homeowners to no longer qualify for reverse-mortgages large enough to pay off their regular mortgage – a basic requirement for getting a reverse mortgage approved.
So far, the cuts in fees by lenders apply mainly to one type of reverse mortgage: the fixed-rate home-equity conversion mortgage which is backed by the Federal Housing Administration and is paid out to the borrower as a lump sum. However, there are some lenders giving borrowers relief from origination and monthly service fees for adjustable-rate reverse mortgages, allowing homeowners to tap into their home equity as the need it. Other lenders are cutting interest rates on these loans.
Consumers should consider more than closing costs in deciding whether a reverse mortgage works for them, and if so, which type. Seniors considering using reverse mortgages to cover part of their long-term care expenses should do their homework and research these mortgages thoroughly, and they should consult with an elder law attorney before proceeding. The attorneys at Oast & Hook can provide seniors with long-term care, estate, financial and investment planning advice to assist them with developing the most affordable options.
O&H: Allie, now that summer is here, please tell us about some hazards to pets who may be outside.
Allie: Sure! Several garden plants are toxic to pets, and some are even deadly. They include rhododendrons, azaleas, cycad palms, oleander, foxglove, lily of the valley, and castor bean. The Animal Poison Control Center in Urbana, Illinois, reports that actual poisonings are most caused by Easter lilies in cats (causes kidney failure and death if not aggressively treated) and cycad palms in dogs (causes liver failure, and dogs may die within 24 to 28 hours without treatment). Here are some tips to help keep your pet safe. Don’t assume that pets won’t eat a particular plant; pets investigate things with their mouths, and this is why most poisonings occur. Know the scientific names of plants in your yard in case you have to talk with poison control. Be aware of regional plants that may not appear on poisonous plant lists; such lists don’t always include such regional plants. Use nontoxic gardening products whenever possible. If you do use chemical pesticides, restrict your pet’s access to the yard immediately after applying them. Avoid cocoa mulch that may contain theobromine, the active ingredient in chocolate that is toxic to pets. It’s safest not to use the product. Look beyond the plant to things people make with the product, such as seeds, seed pods, and beans used in jewelry. If your pet ingests a potentially toxic plant, get veterinary treatment immediately instead of trying to induce vomiting. Do not use ipecac to induce vomiting in pets; find out the necessary dosage of hydrogen peroxide from your veterinarian. Finally, don’t assume that after one bad experience your pet will learn its lesson. Dogs, for example, love to eat things once they have tasted them. I’m glad I’m an indoor cat! Time to look out the window and see what animals may be visiting. Have a wonderful 4th of July, and I’ll see you next week!
Oast & Hook attorney Brian Boys will speak on the topic of estate planning from 2:00 p.m. to 3:00 p.m., Monday, July 12th at First Colonial Inn located at 845 First Colonial Road, Virginia Beach, Virginia, 23451. For more information on First Colonial Inn, please visi twww.kiscoseniorliving.com/communities_firstcolonialinn.asp.
Oast & Hook attorney Brian Boys will speak on the topic of estate planning from 7:00 p.m. to 7:30 p.m., Tuesday, July 13th at Hillcrest Baptist Church located at 1637 Holland Road, Suffolk, Virginia 23434. For more information on the church, please visit www.hbcsuffolk.org.
Oast & Hook life care planner Carey Raleigh will speak on the topic of life care planning from 3:30 p.m to 4:30 p.m., Wednesday, July 21st at The Talbot on Granby located at 6311 Granby Street, Norfolk, Virginia, 23505. Seating is limited. If you have any questions or would like to register for this presentation, then please phone Susan Antoni at 757-451-5100. For more information on The Talbot on Granby, please visit www.thetalbotongranby.com
Oast & Hook attorney Letha McDowell will speak on the topic of elder law at the monthly meeting of the Norfolk Retired Employees Association from 10:30 a.m. to 11:00 a.m., Friday, July 30th at the Titustown Recreation Center located at 7545 Diven Street, Norfolk, Virginia 23505. For more information on this organization, please visit www.norfolk.gov/retirees.
Oast & Hook is pleased to announce that it will open its new Harbour View office on Monday, July 26th. This office is located at 5806 Harbour View Boulevard, Suite 203, Suffolk, Virginia 23435. Oast & Hook’s telephone and fax numbers will remain the same.
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