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Is reverse mortgage a good deal?

By Judy Martel · Bankrate.com
Friday, March 14, 2014
Posted: 6 am ET

Seniors are seeing their home equity increasing, but before they turn it into a stream of income through a reverse mortgage, they should understand what they're getting.

Seniors need to ask themselves why they need a reverse mortgage before applying.

Seniors need to ask themselves why they need a reverse mortgage before applying.

Late last year, the Department of Housing and Urban Development enacted stricter requirements for reverse mortgage loans backed by the Federal Housing Administration. The result is that seniors age 62 or older who want to cash out on their home equity through a loan paid to them will be limited in the amount of cash they can take.

Reverse mortgages can be a fit for some

The new rules are designed to prevent homeowners from borrowing against too much of their home equity and require them to prove they have enough income to pay expenses such as property taxes and insurance.

Despite the restrictions, Don Frommeyer, president of National Association of Mortgage Professionals, says homeowners are still interested in reverse mortgages and they can be the right fit for some.

"They're not for everyone, but they can make life easier for older people who need to pay off debt," he says. Homeowners are required to take classes, which results in a more educated consumer, he adds.

Home equity steadily increasing

Seniors 62 and older have more home equity than at any time since 2008, according to the National Reverse Mortgage Lenders Association. Over the past two years, aggregate home equity has grown 12.5 percent to a total of $3.34 trillion. Rising home prices are lifting all borrowers into positive equity. But that doesn't mean seniors should rush out to tap into a reverse mortgage.

"People really have to have a reason why they want the loan," Frommeyer says. "It has to make life easier." The amount of money a homeowner receives depends on their age, the amount of home equity in the home and the interest rate on the loan. "The older you are, the higher the value," says Frommeyer, "so it can be a good option for a 75- or 80-year-old to not have a house payment, and the good thing is they won't lose their house."

Fees can make these loans expensive

Frommeyer cautions homeowners to make sure they understand fees associated with reverse mortgages. "I think one of the main issues with reverse mortgages is that people don't realize how expensive they are," he says. "There is an origination fee, an upfront mortgage insurance fee and a variety of additional fees that can result in a significantly smaller lump sum than expected."

Read more about the new reverse mortgage rules.

Keep up with your wealth and mortgages and follow me on Twitter: @JudyMartel.

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34 Comments
regretful
August 03, 2014 at 9:24 am

Don't Do it!!!!! The interest accumulated monthly is ridiculous!! It can put you in a terrible financial situation. Sure it sounds great that you get some money but unless you plan on letting the bank have the house in the end it's a really bad deal!

George E. Bayless
August 03, 2014 at 7:25 am

PLEASE, SEND DATA "ASAP"; WE ARE TO CLOSE ON A "NEW HOME" ON JULY 12, 2014.

rayz
May 08, 2014 at 11:44 am

Gee, seems nobody bothers to emphasize that you still have to keep paying interest on the money you borrow. That means the amount you owe keeps growing. You borrow $200K and, before you know it, you owe $300K, or $400K so when you sell your house you have nothing.

klw
April 27, 2014 at 4:10 pm

It may have worked for Shirley which is great, but it does not work for everyone. Check out the other article here on Bankrate.

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