Let’s look at an example to illustrate both rates and fees. Using the same Reverse Mortgage Calculator mentioned above, we’ll say we were born in 1943, own a home in Fort Lauderdale, Florida, with no mortgage and a $400,000 value. We want to borrow $100,000. Results:
- Interest rate: 6.31 percent. This is a combination of the 5.06 percent loan interest rate and the 1.25 percent mortgage insurance. Today’s rate for a conventional 30-year mortgage loan? Four percent.
- Max available to borrow: $236,400. That’s about 60 percent loan-to-value.
- Loan origination fee: $6,000. Ouch.
- Mortgage insurance: $2,000. Ouch.
- Other closing costs: $2,555.70. Ouch.
So that means we’re paying more than $10,000 ($6,000 + $2,000 + $2,555) in fees to borrow $100,000: more than 10 percent. Plus, we’re being charged more than 6 percent on the loan. Not exactly a sweetheart deal.
As with any mortgage, you should shop and compare reverse mortgages and ask about fees. While some may be set by law, others could vary by lender.
Catch No. 2: Although you may be receiving checks in the mail, don’t lose sight of the fact that you’re accruing interest, and that unpaid interest is increasing the size of the loan. The longer the loan remains outstanding, the more interest it will accrue.
Should you choose lifetime payments and stay in your home for decades, it’s likely you’ll have little, if any, equity to leave to your heirs, unless, of course, the home increases in value faster than the accumulated interest.
Catch No. 3: Because you still own the house, you remain responsible for property taxes, insurance and maintenance. As I’ve already mentioned, you’ll have to prove you have the financial resources to pay them.
The bottom line
The benefits of tapping your home’s equity without selling your home or making payments are obvious. Whether a reverse mortgage makes sense for you, however, will depend on your situation as well as other available options you may have. We hit on this topic last year with Looking at a Reverse Mortgage? Explore These 14 Alternatives First.
If it seems I’m critical of reverse mortgages, that’s because I think the fees are high and I’ve personally witnessed people who didn’t realize they were paying them. But a reverse mortgage can be the difference between living and merely surviving. If it’s something that will enhance your life, do it. Just understand what you’re doing and shop carefully.
Before you’re allowed to take out a reverse mortgage, you’ll be required to receive counseling from an FHA-approved reverse mortgage counselor. So if you’re thinking of a reverse mortgage, call one in advance with questions. The vast majority are happy to help free of charge.
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I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.
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