Mr. Lancaster, the borrower, received a federally-insured reverse mortgage, which enabled him to pay off an existing mortgage of $54,000 and to establish a $60,000 line of credit, which he has used to fund retirement needs.
The property does not,
as the article misstates,
"essentially belong to the lender."
The lender has a lien as in any other loan.
This is no different in a reverse mortgage than in a traditional mortgage.
The balance due on Mr. Lancaster’s loan, $170,000 according to the article, would include the funds advanced to pay-off his prior mortgage, funds drawn down from the line of credit, an upfront mortgage insurance premium paid to HUD, customary and usual closing costs, and an origination fee on the reverse mortgage, plus accrued interest and ongoing mortgage insurance premiums.
Under the FHA-insured federal reverse mortgage program,
while the balance due may be $170,000,
if Mr. Lancaster sells the home,
he will only be responsible for paying back an amount equal to the current market sales price that he is able to obtain, even if that is only $130,000.
The lender would recoup its loss from the Federal Housing Administration (FHA).
That's a benefit of the $2,600 in mortgage insurance premium that he paid to FHA.
The Realtor quoted in the story states that Mr. Lancaster paid interest of $50,000 to $60,000 in just two years, which he labels “insane,” yet the lender who made the loan points out that the interest rate was 5.5%, which amounts to $7,000 a year.
This source is highly misinformed about reverse mortgages. It would be helpful if the reporter would follow-up with knowledgeable individuals who could help analyze the case study presented so the correct facts could be reported.
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