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.

By MSN Real Estate partner Mar 24, 2014 9:56AM

Image: House with coins © Digital Vision/Getty ImagesBy Shelly K. Schwartz, CNBC


CNBCFaced with rising medical expenses and longer life expectancies, many seniors are turning to their single largest asset as a source of supplemental income: their home.


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.

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"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.


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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.


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Apr 2, 2014 7:33AM
When they say keeping it maintained, the bank will come in your home and tell you what needs to be upgraded and those upgrades come out of your pocket. They want you to get your house up to marketing quality and keep it that way. They will make you get new carpeting, repaint your house, what ever they see fit to make your home ready for putting up to sell.
Apr 2, 2014 7:25AM
My wife passed away 5 years ago, and her pension was stopped, today all i have is my SS and a small IRA, I found that If I live modestly, check for sales at super markets. do my own cooking, and shop thrift stores for clothes, I have no bills except the normal monthly utilities, (I made my last mortgage payment last month) I will be in pretty good shape now, no car payment, etc. After my wife passed away, I was thinking about a reverse mortgage, But decided to just buckle down and get my mortgage paid off, and then I could breath, and do a little traveling. I am so glad that I didn't do a reverse mortgage. after all now I will be able to leave my kids with a nice home all free and clear.
Apr 2, 2014 7:18AM
Question - to those who love the reverse mortgage.   What happens when you can't stay in your house any longer and have to go into assisted living?   It happens more and more.   If you've already gotten rid of you house,  how do you pay for that?   BTY it's normally between 5 and 8 grand a month.
Apr 2, 2014 7:00AM
I agree they are a scam.   My Dad had a reverse mortgage and passed.  It reverted to my Mom, but she didn't know how much he took out  (he was very secretive)  Now that she is passed the bank is looking for my sister and I to repay it, but it wasn't our loan and we didn't sign anything.  Our lawyer agrees with us, but the bank is taking their sweet time to foreclose on the house, which means my sister and I are still paying the utilities, etc,  until the bank forecloses.  It has been about 2 years now---(Neither of us are living at the house, so it just sits there, vacant)
Apr 2, 2014 6:53AM
Just be sure to place both your and your spouses name on the reverse mortgage or the day after the funeral the survivor will be evicted. homeless
Apr 2, 2014 6:48AM
The deed is put in the name of the oldest of the two homeowners with the provision that when that individual dies the other has to vacant. They tell them it gives them the best deal but leave out the fact that Grandma gets the boot. These loans are not very transparent.  
Apr 2, 2014 6:16AM
My granmomma gots one of these loans and she be livin it up with all her cash now, sumpin she wouldnahave wifout it. Go big momma, yo show did the right ting.
When they say reverse mortgages aren't right for everyone there right. THEY ARE ACTUALLY RIGHT FOR NO ONE. What a scam.
Apr 2, 2014 6:13AM

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

Apr 2, 2014 5:59AM
After reading most of the posts, I have come to the conclusion that all reverse mortgages are not the same. I have a friend that is as pleased as possible with his reverse mortgage. There are many companies selling reverse mortgages and they probably have different options.
Apr 2, 2014 5:37AM
My wife and I aren't planning on having kids and we've tossed around the idea of using a reverse mortgage to supplement our modest 401k and any Social Security benefits we may have available assuming it will be there for us when it's time to collect (I'm not interested in speculation on the subject, so don't waste your time)

It's my understanding that a reverse mortgage means a bank is essentially buying the house and paying you monthly until they have paid for it outright or you die while you pay the property tax and the upkeep during that period. Is this not the case? My home is currently valued at over $600k and I paid $500k for it about 4 years the time I plan to retire I suspect it will increase in value...given the estimates for growth in the area and the history of growth locally in the housing market over the last 20 years I'm conservatively estimating $800k. 

Would I be better off selling and moving or does a reverse mortgage make sense for someone in my situation?
Apr 2, 2014 5:33AM

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

Apr 2, 2014 5:27AM
Like P.T. Barnum always said " there's a sucker born every minute" Or  "a fool and his money are easily parted".
Apr 2, 2014 5:22AM

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. 

Apr 2, 2014 5:15AM
When will everybody out there that has at least some common sense realize that nothing in this country is free. Not one thing it's free, not Obama care, not the food you eat, not the close you put on your back, not the car you drive, even freedom isn't free. It comes in a high cost, something that the Americans have forgotten if you want something you work hard for them. Don't fall for these schemes that everybody out there place. I don't care what party they are from. If it says free you know it's a lie as simple as that. You can't live in this country for free. You can't live in any country for free, open up your eyes and at least try to see a little bit of truth. What I'm saying you don't have to agree with it, but least is to truth. Take it for what it's worth.
Apr 2, 2014 4:55AM
I learned a long time ago , not to trust a bank or lending firm that was offering me something to make my life better . Offers are made only to make the lenders and banks richer . Most homeowners don't even understand the basic math involved in reverse mortgages, and are surprised when they're hit with fees they didn't know anything about . If it's too good to be true , it usually is .
Apr 2, 2014 3:57AM
If you have huge medical bills, threaten bankruptcy. Once you do, you'll find hospitals and doctors willing to accept drastically reduced amounts and payments extended over time. Even in a  bankruptcy, you will never be forced to sell your home. Lenders know most older people have a substantial monetary asset in their home. They continually advertise the ease of the reverse mortgage scam and the fact you can stay in the house as selling points. What they really want is to get a lien on your equity so they can rob you blind. Reverse mortgages are a quick way to transfer your life savings to a mortgage company. You'll be financially raped with high fees, accrued interest and expenses along with insurance fees that never end until there's nothing left. If it sounds to good to be true that's because it is. Think very hard before letting a bank steal your life savings. If you want to convert your home equity into cash... sell it ( a large portion or all will be tax free) then rent. It's your money why give it away. Once the realization sinks in of what a reverse mortgage really is, many ultimately sell anyway to get out from under the scam before the bank could take everything.
Apr 2, 2014 3:18AM
I am a widow and have no kids to leave an estate to.  I have had a reverse mortgage since $2009 and use it as a line of credit for taxes and home repairs.  Have used $130,000 of the $250,000 available based on the value of my home.  $80,000 of the $130,000 was transferred to the reverse mortgage from a former Home Equity Line of Credit.  The monthly interest on this $130,000 is close to $500.00 so in 1 year the interest is $6,000!   So even if I don't use any more money from the reverse mortgage, if I live for another 10 years I'll be paying over $60,000 in interest.  To me, that's just handing my money over to the bank.  I plan to sell my home in the next couple years, pay off the reverse mortgage and have a nice sum left to help pay rent on a luxury apartment.  Whatever respect I had for "The Fonz", Robert Wagner and Fred Thompson has gone down the proverbial crapper for encouraging this rip-off.
Apr 2, 2014 3:03AM
Yes when I was young I started preparing for my Retirement, as time went on the got advices from all these so call experts of Finances living to Doctors, as time march on it came to realized no matter what I did the Politicians always change the Rules of the game of life as they got richer I got poorer, now my kids are grown and I'm TAX to DEATH to build these new schools, so the Police and Fire Dept. to all Dept.. of city county state and even the Federal Government can get the most expensive up-today toys for there trades and Dept. to exploding tax surplus ( over Tax collection ) one year to saying they Need more money to run there Dept. the Next it a Game The Progressive Liberal left wing game and as time goes on all I can say were going to loose it all so they can be large and uncharged in this New World Order BS utopia that they are pushing us Too, GOD help United State and these fools to see that they are Destroying the United States and it Constitution . 
Apr 2, 2014 2:54AM

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.

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