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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
Diana
March 17, 2014 at 1:25 pm

Isn't foreclosure a completely different thing?
When the homeowners die their heirs can either stay in the home,
take over the monthly home equity loan, sell the house at their asking price then pay the bank of any outstanding loan?

steve
March 17, 2014 at 12:55 pm

True but banks do not normally sell foreclosed homes at market value, as they have no legal responsibility to do so, if the bank is owed 50 they can start he bidding at 50k and if the house is valued at 300k and it sells for 85k well too bad. Thats the legalities of foreclosure sales.

Bank employee
March 17, 2014 at 12:51 pm

A home equity loan is the way to go - not a reverse mortgage.

john ruaao
March 17, 2014 at 12:16 pm

what is that rm that drawing 4.6% interest above jake is talking about?

Brother Dave
March 17, 2014 at 12:15 pm

I originated close to 100 reverse mortgages, so know a couple of things about them. Two recent comments need to be clarified. Details matter and should be understood by anyone considering a reverse mortgage.

First, Jake makes a comment above that isn't accurate. The interest he references earning is applied to the Line of Credit feature of the loan. The interest rate is equal to the rate applied against funds loaned. So his pay-off cannot decrease. The only way it could decrease is if he made payments on the loan (which is actually allowed on a reverse). What he may be saying is his home equity is increasing. That can happen as long as home values grow faster than the loan balance and accrued interest on it.

Ric's comment about the Fred Thompson commercial is something that I've also thought about. His friend he references would indeed be subject to foreclosure if unable to occupy his home for more than 12 consecutive months. Occupancy by the owner is a requirement of the reverse mortgage. However, Ric's statement is misleading when he says the home "being taken by the bank." The lender can force sale of the home, but must then pay any remaining equity to the homeowner after the loan balance is satisfied. Nothing is "taken." It is the same as any other mortgage in that respect. The loan is paid off with any balance returned to borrower. It's that simple.

chris
March 17, 2014 at 11:05 am

Made a big mismake I picked the wrong mortgage company

Diana
March 17, 2014 at 10:48 am

Sorry, should have said, "sell your property".

Diana
March 17, 2014 at 10:46 am

We took out a home equity loan instead of a reverse mortgage.
As retired people on a fixed income and owning our home it seems
the best way to go - but only if used for emergencies. Also, it's better for our heirs. They can either continue paying on it or see our property and pay it off. We only used $10.00.00 from it, so far anyway. The monthly payments are minimal.
Home equity loans are seldom, if ever, mentioned on the internet. Do your own homework on the matter and with an adviser
or trusted bank exec. discuss the pros and cons.

jake
March 17, 2014 at 9:48 am

A lot of doom and gloom here but I must be the exception. Have had RM for 4 months now. New RM rules do not require the homeowner to take the equity. Instead, it is there to use if and when needed. In the meantime that money is earning interest at 4.6%. In my case the interest on that is greater than the interest and insurance on the loan. My pay-off decreases monthly. When you take the equity, it then adds to the principal but I do not intend to do so. Since I no longer have a monthly mortage payment, I have plenty of money to pay bills and enjoy life. If my wife and I croke today, my kids can either pay off the principal and keep the house or sell it and at this point in time, leaves just short of what was owed when I took the loan. Life is short. Enjoy it or keep thinking that you owe more to your children than you have already given them. Have two and both own homes and are not in need of some legacy that many think they must leave behind.

ric
March 17, 2014 at 9:23 am

When Fred Thompson says that there is no catch, notice that he is walking past a small building that looks like an outhouse.
This is appropriate in light of what has happened to a neighbor who had a reverse mortgage. That neighbor became ill. After spending more than a year in rehabilitation facilities, he is having his home taken by the bank through foreclosure.

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