The CPA Journal published Reverse Mortgages and the Alternatives: Weighing Solutions for Potential Borrowers in its September issue and while you think CPA’s would do their research, it’s clear its not the case.
The article starts by describing the “basics” of reverse mortgages:
Caution should be exercised, because they are not magical solutions for cash strapped seniors, and HUD reports that more than half of HECM borrowers terminate the loan within seven years. The early terminations make these loans extremely expensive, especially when the cost is amortized. The interest expense over seven years suggests that there are other, more cost-effective alternatives.
The article shows an example of a borrower who receives a monthly loan advance of $300 and a compound interest rate of 1% per month. After over one year, the borrower’s total loan balance would be $3,843—that is, $3,600 in 12 monthly loan advances of $300 each, plus $243 in interest charges.
Similarly, at the end of 10 years, the borrower’s total loan balance would be $69,702—that is, $36,000 in monthly loan advances and $33,702 in interest charges
Then they write the following:
It’s no wonder that more than half of the borrowers terminate their FHA HECM mortgages within seven years, once they realize that their home equity is gradually disappearing. Potential borrowers need to understand that, with an increasing debt loan, unless the home’s value is appreciating more than the interest rate, a loan that
was initially less than half the value of the home may, over time, be equal to the value of the home.
Again they go back to the termination after seven years. What’s not clear is where they got their information, I’m not aware of HUD providing any such information (if you know where please let me know). I’m assuming that “termination” includes when borrowers pass away, so it would have nothing to do with borrowers choosing to pay off the loan.
Later in the article they describe how proprietary loan agreements often include shared equity and shared appreciation fees. I’m not aware that any of these type of agreements exist anymore, but our friends at the CPA Journal sure do.
Often included in the terms of proprietary loan agreements are shared equity and shared appreciation fees. These latter two fees can raise the cost of an already expensive loan. The shared appreciation clause gives the lender as much as 50% of the future appreciation in the home, and it has no relation to the amount of money borrowed.
What’s worse is that the article was written by no less than THREE CPA’s who are University professors.