Thinking of a Reverse Mortgage? Think carefully... Are reverse mortgages easy money or just a dumb move? Published: Sunday, 23 Mar 2014 | 7:00 AM ET By: Shelly K. Schwartz, Special to CNBC Faced 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. Tetra Images | Getty Images 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 homes 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. (Read more: Plan for financial independence, not retirement) 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 homeowners 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. That means fewer assets left in your estate to pass along to your heirs, which may not matter if you dont intend to preserve your assets for future generations, said Marla Mason, a certified financial planner and vice president of Presidential Brokerage. Play Video West sees biggest drop in home sales While Realtors blame rough winter weather on flat home sales in many part of the U.S., that theory doesnt support the sharp drop in the West. CNBCs Diana Olick digs deeper into the data. If you plan to live out your life in your house and you dont 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 homes 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. (Read more: CNBC audience gets importance of retirement planning) 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 its 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 theyre 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.
Posted on: Mon, 24 Mar 2014 12:33:19 +0000
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