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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
Jennifer Mandl
March 18, 2014 at 6:04 pm

I got offers from my bank and from a few brokers. Each explains that their offer is best...
Where can I get objective advice on choosing a mortgage?

Jennifer Mandl
March 18, 2014 at 6:02 pm

I got offers from my bank and from a few brokers.Each explains that their offer is best...
Where can I get objective advice on choosing a mortgage?

Joyce
March 17, 2014 at 7:26 pm

Hi Louise, you must have approximately 50% equity in your home. If you are older, that percentage decreases. I do reverse mortgages and if you are having trouble making your mortgage payments, this could be your answer! I saved 5 homes from foreclosure last year! Why scrimp and not enjoy your senior years?? In most cases, your children are better off financially than you are. Why not enjoy life while you can!! Look at the message from Shirley Bailey, she says it all!

jake
March 17, 2014 at 6:00 pm

Brother Dave you are not accurate. The interest on the principal is 2%. The interest on the line of credit is 4.6. The line of credit is only 5000 less than the principal. Do the math. Yes, monthly the principal is getting larger but not at the rate that the line o c is increasing.

Marion
March 17, 2014 at 5:29 pm

Yes Shirley! My sentiments exactly. I researched this mortgage thouroughly and will be getting one shortly. It will make mywill make the rest of my years so much better. My kids all have their own lives and do not have to depend on an inheritance.

Lem Hollins
March 17, 2014 at 2:58 pm

A Reverse Mortgage can be a Scaffold with a Trap Door. It can lift you up but be careful of the down side. A few years ago in Detroit a 101 year old lady got evicted from her home because she fell through the "trap door". Yes you can live in your home but you must pay your own property taxes. This is the trap door in which her home fell. Her Son was not aware he had to pay taxes. The property was sold for taxes and she was evicted. There is a certain amount of training that HUD insist you get prior to getting the loan. Critical items should be noted:
1 You must pay taxes.
2.There is an outrages charge for Mortgage Insurance which is calculated on a monthly basis. This charge must be calculated into your total interest charge.
As for the scaffold to lift you up. You can use it as a low rate revolving line of credit but I would advise you to treat it as such. Make monthly payments that will at least cover the interest. Otherwise the interest is compounded and before you realize it, there will be little or no equity remaining in the home. Bottom line, you would have sold your home for less than fifty percent of its value.
Ask plenty question before signing.

Jake
March 17, 2014 at 2:55 pm

Louise - I'm pretty sure that as long as you pay your taxes, etc.
you may stay in your home.

James
March 17, 2014 at 2:23 pm

Louise, if you don't have a lot of equity you probably won't qualify.

Shirley Bailey
March 17, 2014 at 2:21 pm

I am a 74yr old woman and I took a reverse mortgage several years ago. It has been excellent for me. I now have no house payment, put in Geothermal heating and AC, installed a full house generator, had a handicapp ramp built on the front of my house, had a Bathfitter walk in shower installed ( both of those for my elderly mother, bought a great used car for $12,000, plus numerous small things from that mortgage. I plan to live here till they carry me out feet first, so the cost of it all does not concern me. Whatever equity is left will be left to those in my will. My life is so much better because I don't have to worry about money and can do what I like. I have SSA and a small government pension so could have made it with watching my pennies, but now I don't have to and can really enjoyed my last years. I live healthy so perhaps I can live into my nineties like my Mom did. So people make informed decisions and don't listen to scare tactics. It is NOT a ripoff, it is a great advantage. Your kids don't need to have all of your money when you die, but you do need to enjoy yourself, you earned it.

louise
March 17, 2014 at 2:05 pm

quick question, suppose you don't have a lot of equity and you live past it. Do you have to leave?

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