Do You Really Need an Annuity or Insurance?
The new Housing and Economic Recovery bill prohibits reverse mortgage companies from requiring borrowers to purchase financial products in order to qualify for a reverse mortgage. This arose out of concern for applying for reverse mortgages who were being taken advantage of by unscrupulous lenders and scam artists that tried to sell unnecessary financial products to trusting seniors.
According to a study in late 2007 by the AARP, almost ten percent of reverse mortgage borrowers said that their lender offered them an extra product such as an annuity or insurance.
Annuities
Although not all financial products accompanying reverse mortgages may be unnecessary, seniors need to be cautious of lenders, or anyone trying to sell them financial products. They should be especially cautious of lenders who push annuities on them.
An annuity is a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment. Immoral lenders are pushing annuities on homeowners interested in reverse mortgages as an incentive package.
Some borrowers take out reverse mortgages for the expressed purpose of receiving an annuity. Because the annuity will never catch up to the mortgage debt and interest rates, it rarely, if ever, makes sense for the borrower to take out an annuity along with a reverse equity mortgage.
Insurance
Selling insurance as an incentive or as an eligibility requirement for a reverse home mortgage is also unnecessary, unlawful, and dishonest.
Extra insurance on reverse mortgages is unnecessary because the vast majority of the reverse mortgage loans, about 90%, are federally insured by the FHA, or the Federal Housing Administration. Much as the federal government insures student loans, these loans are guaranteed by the federal government, alleviating the risks for lenders. The federal government regulates HECM loans, capping fees and interest rates.
Requiring borrowers to purchase extra insurance is redundant and unneeded. Companies that practice these policies are most likely pocketing that extra money, and certainly not providing additional protection to their clients.
Starting this spring, HUD will set more precise standards for all the financial planners who counsel borrowers. These new standards are designed to help steer borrowers and potential borrowers in the right direction when considering a reverse mortgage to supplement their retirement.