Are reverse mortgages easy money or just a dumb move?
Reverse mortgages let seniors convert their home equity into cash without having to sell their house, but such loans come with significant risk.
Indeed, reverse mortgages enable seniors who are 62 and older to convert a portion of the equity in their home into cash without having to sell.
As the name implies, such loans are structured as the mirror image of a regular mortgage. The lender makes payments to you in either a lump-sum amount or in monthly installments based on a percentage of your home's appraised value. Eligible homeowners can also set up a reverse mortgage as a line of credit, providing access to emergency funds on an as-needed basis.
The money received can be used to pay off your existing mortgage loan and halt your monthly payment, supplement your retirement income, finance a home-improvement project or pay for health-care costs.
And the balance, including interest and financed closing costs, need not be repaid until you sell your home, no longer use it as your primary residence or pass away. Another perk? Proceeds are generally tax-free.
Yet such loans, while potentially solving a host of problems for retirees who are house-rich but cash-poor, also come with some pretty significant risks.
"Reverse mortgages are a useful tool for some people," said Lori Trawinski, senior strategic policy advisor with the AARP Public Policy Institute. "They can enable retirees to age in place, but we always emphasize that these are loans, and as such, borrowers have obligations."
Among those obligations, borrowers must stay current on their property taxes, homeowners insurance and any homeowner's association dues and assessments. They must also keep their home well maintained. Failure to comply can send the loan into default and result in a foreclosure, according to Trawinski.
The amount you owe on a reverse mortgage also grows over time.
Interest is charged on the outstanding balance and added to the amount owed every month. Thus, your total debt increases as the loan funds are advanced to you and interest on the loan accrues.
Post continues below.
That means fewer assets left in your estate to pass along to your heirs, which may not matter if you don't intend to preserve your assets for future generations, said Marla Mason, a certified financial planner and vice president of Presidential Brokerage.
"If you plan to live out your life in your house and you don't care about leaving a legacy behind, the reverse mortgage is a very valid option," she said.
However, Mason explained, these loans come with a lot of fees.
The maximum origination fee allowed for a federally insured reverse mortgage, formerly called a Home Equity Conversion Mortgage, or HECM, is 2 percent of the initial $200,000 of the home's value and 1 percent of the remaining value, with a cap of $6,000, according to the National Reverse Mortgage Lenders Association.
You will also owe a mortgage insurance premium fee based on the amount of funds withdrawn during the initial year. That fee is 0.50 percent of the appraised value of the home if you take no more than 60 percent of the amount available in the first year, and 2.5 percent if you take more than 60 percent of the available amount. On a $200,000 home, 2.5 percent amounts to $5,000, and 0.50 percent is $1,000.
You will also owe a mortgage insurance premium annually, which accrues over time when the balance comes due. The annual premium is equal to 1.25 percent of the outstanding loan balance.
There are also appraisal fees, which vary by region but average around $450. If the appraiser determines that your house requires repairs, you will be required to complete the repairs as a condition of approval, as well.
Finally, there are closing costs, which are comparable to those of any mortgage loan and often amount to about $1,000. Some lenders will also charge a $35 monthly service fee for the life of the loan, but most have dropped that fee, according to Trawinski.
"These loans can be expensive," she said, noting it all depends upon how much you borrow initially. "If you take out a lot of money upfront and exit the home in a very short period of time, it can be a very expensive way to borrow money.
"But if you borrow less and stay longer, the costs amortize over time, so it's comparatively less costly," she added.
Reverse mortgage loans come in three flavors: single-purpose reverse mortgages, which are offered by some states, local government agencies and nonprofit organizations; federally-insured reverse mortgages (HECMs); and proprietary reverse mortgages, which are private loans backed by the companies that develop them.
According to the Federal Trade Commission, single-purpose reverse mortgages are the least expensive option, but they're not available everywhere and can be used for only one purpose, which is specified by the lender. The lender might indicate, for example, that the money can only be used to pay for home repairs, improvements or property taxes.
More from CNBC
why do all the news,weather, & sports commentaters speak so fast. Don't T.V. people know how to speak normal.
Are they all trying to start a new language & speak fast like the latinos. They get worse all the time. Do they need to
hurry to have more commericals. The news is 13 mins. & commericals are 17 mins. T.V continues to get worse by
the day. I timed the two at differient times. They also throw in their APPS. that don't mean anything except words &
that takes up more extra useless time. Tell the news w/ out any extra crap. I don't believe you'll change, but I had to
express my views on the way you do the news because T.V. has gotten worse in these later years
if I was going to get one of these CRAZY reverse mortgage it would be for one of my 100 different inventions make a few millions on my ideas and ask the banks if they want a loan from me all is fair love and war people you never for get my words
I might buy my self a lighthouse to show the way for others or foundation for global inventors understand people the banks needs to make money too because they also have a stander life style of living if your not making them MONEY just like companies most of you work for they fire you or lay you off ANOTHER WORDS THE MONEY NEEDS TO WORK FOR YOU or god who shows the ways
or take your money to a investment plan or make your own investment group to buy homes to make profit to live from their in your own home you will have forever more because the banks money is returning beside the banks money is in GOD WE TRUST why you all think our government use this word? If you all remember did we not all go BK here in usa? Our Government had to print more money just to bail out ythe banks
Here a song for you all to listen to its called (All we are is dust in the wind) people enjoy it well don't worry what you leave behind for your family to enjoy god takes care you at the end
I did get a Reverse Mortgage over 2 years ago. Well, as usual they promised special benefits especially "ALL that tax free cash". After I signed all the papers I asked about the "TAX FREE CASH"
and was told I could only get $8,500 and could not have any more "BECAUSE OF MY AGE, DON"T NEED ANY MORE BRCAUSE I DO NOT HAVE TO PAY A MORTGAGE ANYMORE & THE REST, in the amount of $44,000 would be used to pay other expenses in the Reverse Mortgage Contract.
??? SO, why did my Reverse Mortgage Statement show me an amount of $9,000 paid ?? in interest ?from where? and also, adding a charge of almost $200 I need to pay for Mortgage INSURANCE which I was NEVER told about and I am NOW "Paying approximately $4,800 a year in taxes...HuH??? No, No mortgage payments and was told that 'when I die', the house MUST be sold within "ONE YEAR" and if not they would TAKE the HOUSE>>> Have I SAID ENOUGH. That's REAL TUFF CHIT now isn't it???
SO I'M REALLY STUCK - living in 'almost' poverty - thought I could payoff some bills, lots of medical care, and so much more.
You go with these thieves and you WILL lose your house, property, and in some cases everything in it. We did Estate Sales for years. I can not recall 1 time when a reverse mortgage was doing anything but hurting the family. Case in point: Husband and wife borrowed $30,000. Shortly after the loan was originated, the wife died. Less than 2 years later, the husband got sick and had to be placed in a nursing care facility for what was supposed to be a short time. The day after he had been in the facility for 6 months, the reverse mortgage guys presented foreclosure. The $30k in a little less than 2.5 years had turned into over $80k. It gets worse. The daughter contacted an agent to sell the house – which other than the reverse mortgage thieves was free and clear. The house and 10 acres was valued at over 300k. They listed for $200k hoping to get a quick offer and get the reverse guys off their backs. Sure enough the offer of $200k was made and they thought the nightmare would be over with. Sorry, the reverse mortgage folks had right of refusal. Which right they exercised after obtaining all the information about the potential buyer. 2 months later they foreclosed just hours after we cleared the house of all the personal property – which they tried but failed to attach. After they foreclosed, they contacted the potential buyer – cutting out the family and the agent – and sold him the house. The children got nothing. The dad got nothing but the original 30k – some of which got used to bury his wife.