Is a Reverse Mortgage a Good Idea?
Is a Reverse Mortgage a good idea?
It seems like every day I see an ad featuring a celebrity telling me how much better my life would be if only I signed up for a reverse mortgage. Think how nice it would be to have that extra money to spend on bills, a nice vacation, or other things I can only dream about.
As always, if it sounds too good to be true, run away!
First, a reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is debt. And very expensive debt at that. It is available only to homeowners over age 62. According to the Consumer Financial Protection Bureau, the reverse mortgage is more expensive than other home equity loans, depending on several variables such as who the lender is and how much and how long the loan is. Make no mistake, it is a new debt you are taking on, and you or your heirs will have to pay it back along with interest, fees and any penalties that accrue.
Before you can get an approved reverse mortgage, the Consumer Finance Protection Agency requires you to go for housing counseling to verify that you understand and can afford the new debt you are considering. The counselor can charge for this service on a sliding scale depending on your ability to pay. Other up front fees can include origination fees, which can be as high as $6,000, closing costs and initial mortgage insurance premiums.
Ongoing costs can include interest on the mortgage, mortgage insurance premiums and other servicing fees. These fees are added to your original loan. Unless you make payments on the loan, it will continue to grow at an astounding rate, compounding month after month.
How much can you get for your reverse mortgage?
That depends on how much equity you have in your home and your age. You may be able to get up to 80% of the value of your home if you do not have an existing mortgage. Generally, it will be considerably less than that. Several factors influence how much you can get on your house including age, interest rate and value of the property at the time of the loan.
How will you get the money?
You can have a line of credit, monthly payout, or a single lump sum payment. The method of payout of the loan will also affect the interest rate.
Let's talk numbers
Several online reverse mortgage calculators can give you a more personalized estimate of your options. Here are some hypothetical examples:
If you assume a home value of $300,000, your age is 70 and your spouse is 68, the estimated proceeds at closing would be about $91,000.
Costs associated with this example would be:
- Closing $1,400
- Origination fees of $2,500
- Upfront mortgage Insurance $6,000
Another example that you may find interesting is how much the balance of the reverse mortgage will grow over time. Assume a reverse mortgage on a $300,000 home at 3% interest. You receive the lump sum of $90,000 at closing and no monthly annuity. After 15 years, you will owe roughly $141,000.
While these are just general examples, they give you some idea of what to expect. At this point, you may have many more questions. That is a good thing. The reverse mortgage can be confusing. Do not hesitate to press for clear answers to your questions. If you feel unsure of anything, try a different lender or seriously reconsider the idea. Check out other alternatives such as a conventional Line of Credit or refinancing a conventional mortgage. Another alternative may be admitting that the time has come to move to a more affordable living arrangement. For example, what would your situation be if you sold your home and bought an annuity with the proceeds. Could you live better in a rental where someone else is dealing with the problems and expenses of house maintenance?
There is a lot to consider before signing on the dotted line. Ask a lot of questions. Compare lending institutions and terms. Look for other options to resolve whatever financial problem you are trying to deal with before choosing the best solution for you.
Above all else, do not allow yourself to be pressured into getting a reverse mortgage for repairs or improvements to your home. In my opinion, there are usually less expensive ways to cover necessary expenses and, remember, when you no longer live in the home, for example when you move to a care facility, the loan comes due and must be paid in full, often forcing the sale of the house.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.