New rules rev up reverse mortgages
"It can be a good thing for
an older retiree who is house-rich and cash-poor,"
says Eric Tyson, author of "Personal Finance
And that seems to be exactly
who is using them, according to Bronwyn Belling,
reverse mortgage specialist for the AARP Foundation.
"Your typical borrower is a 73- or 74-year-old
who has lived in the home a long time, seen
a lot of appreciation but is having trouble
making ends meet," Belling says.
However, reverse mortgages are not the automatic answer for everyone. "These loans work very well for some people and not so well for others," she says.
Because the fees are front-loaded
-- paid first out of the proceeds of the loan
-- reverse mortgages "are better for someone
who wants to stay in their home a long time,"
Belling says. That's because, unlike a traditional
mortgage, most of the fees associated with
a reverse mortgage are paid upfront (subtracted
from the overall balance that the homeowner
Currently, with a federally
backed loan, that includes a 2 percent fee
for insurance on the loan, plus an equal amount
for the lender's origination fee, plus regular
closing costs, which often run $2,000 to $3,000,
For a 74-year-old borrower, that could total $14,000 to $15,000 on a $300,000 home loan, she says. Over the life of that loan, those costs can easily stretch to $30,000, she says. And that doesn't include interest.
It's not a good move for someone
who wants to leave a home to his or her adult children.
And, in some cases, the loans can affect eligibility
for Medicaid and Supplemental Security Income,
or SSI. So if you rely on those benefits,
you'll want to talk with a knowledgeable,
neutral third party (not your lender) to make
sure that the loan or the way you've structured
your payments won't interfere with your income.
Some borrowers also are getting
new reverse mortgages to get out from under
their existing mortgage for retirement, Belling
says. "Depending on where you live and what
the house is worth, you may be able to borrow
enough to pay off the debt," she says. But
if you're in financial trouble because your
existing mortgage is a loan you really couldn't
afford in the first place, you might be better
off pursuing legal recourse against the original
lender, Belling says. Always exhaust the legal
remedies first, she says. "Some of those loans
shouldn't have been made in the first place."
Many financial planners and consumer advocates view reverse mortgages as a tool of last resort.
"Reverse mortgages are a wonderful tool to have at your disposal, but you should only play that card if you're out of other options," say Phil Cook, a Certified Financial Planner in Torrance, Calif.
Updated: Dec. 30, 2008