Friday, May 8, 2009

Reverse Mortgage Costs

We are very leery about reverse mortgages. Planning ahead for ones future is already complicated enough - but putting future roadblocks up for shorter terms gains does not seem very logical or well thought out. We have often felt that the only ones who do well with Reverse Mortgages are the lenders and brokers. In a USA Today article titled Reverse mortgages can be costly as seniors cash in on equity describes just how little the homeowners actually receive. Before looking at the article let's take a look at some of an example of what the homeowner actually receives -

Example: A 75-year-old woman owns a home valued at $250,000. She qualifies for an HECM credit line of $135,484, with a 7% interest rate. At closing, she withdraws only $67,742 of the loan. Assuming that the interest rate stays the same and that she remains in the home for 12 years and doesn't take any other loan withdrawals, this is the cost of her reverse mortgage:
Total amount borrowed
Loan costs
Upfront costs
Total mortgage insurance premiums
Total monthly servicing fees
Total monthly interest charges
Total loan costs
Total loan amount owed

While it is no surprise that the lenders are doing well - this illustrates how well - the lender receives 2/3 of the total amount owed. Our worry about what happens when the example woman turns 87 and needs to live in a more assistive environment but may be close to destitute thanks to the Reverse Mortgage.

Now onto the article -

When faced with dwindling savings and mounting debt, elderly homeowners often consider a reverse mortgage for a cash infusion or to wipe out a monthly home mortgage payment. These days, some seniors also are using them to help stave off home foreclosure.


You must pay a one-time fee for the paperwork and processing of your loan. But last year, the government reduced such origination fees.

Before the change, homeowners paid a 2% fee on the loans. Now they pay 2% on the first $200,000 and 1% on any amount over that, with the fee capped at $6,000.


"If I were a consumer, I would focus more on the interest rate," says Meg Burns, director of the Federal Housing Administration Single Family Program Development. "That's an expense that is paid out over the long term of the loan, and it's a place where the product could be costly."


"It is just one part of a retirement strategy," says Brent Neiser, director of Strategic Programs and Alliances for NEFE. "It has its own set of cost and issues. And it should be one of the last options for supplementing your retirement paycheck."

We hear some of the same promises for Reverse Mortgages that we did for HELOCs. Using your property for trips, presents, etc. does not many any more sense than for big screen TVs or granite counter tops. But then again Top Ramen does taste better off a granite counter - or maybe not...

1 comment:

RM_Apply said...

Reverse mortgage is a useful estate planning tool that banks and financial institutions ought to offer making available to seniors. It's a great security for them to ensure the delivery of their pensions in the amounts they thought forthcoming.