Before getting into a reverse mortgage, consider the drawbacks
By Sandra Block
USA Today
If you're still watching your favorite nature programs on a 25-year-old RCA console, perhaps you've considered buying one of those snazzy high-definition TVs that let you count the hairs on a hyena's back. You've heard that prices on high-def sets have tumbled. But should you buy now, or put up with blurry buffaloes a bit longer in hopes that prices will fall even more?
Homeowners considering a reverse mortgage face a similar dilemma.
In recent months, lenders have slashed closing costs and fees and added new features for reverse mortgages — a trend that's expected to continue as more lenders battle for business.
A reverse mortgage is a loan against home equity that doesn't have to be repaid until you move, sell your home or die. You can receive a lump sum, a line of credit, monthly payments or a combination. To qualify, you must be 62 or older. (If the home is owned jointly, both owners must be at least 62.) The amount you can borrow is based on your home's value, current interest rates and your age.
One reason for the growing interest in reverse mortgages is that seniors with lots of home equity can use the loans to pay medical bills or increase retirement income while staying in their homes.
Though they still represent just a thin slice of the mortgage market, reverse mortgages have boomed. But there are some drawbacks to reverse mortgages:
Homeowners who take out a federally insured reverse mortgage, known as a Home Equity Conversion Mortgage, typically pay an origination fee of 2 percent of the home's value plus a mortgage insurance premium of 2 percent. Once title searches, appraisals and other expenses are included, closing costs can exceed 5 percent of the home's value.
Homeowners who want to borrow more money can obtain reverse mortgages that aren't federally insured. There are no caps on these reverse mortgages.
In the past, costs and interest rates for those reverse mortgages were higher than for federally insured ones. But that's changing.
For instance, Countrywide recently introduced SimpleEquity, a reverse mortgage intended for homeowners who want to borrow more than the HECM limits allow. Countrywide will waive origination fees and closing costs for borrowers who take their entire loan in a lump sum. Countrywide doesn't charge mortgage insurance premiums, either, says Steve Boland, the company's managing director for reverse mortgages. Borrowers pay a monthly service fee of $20.
Financial Freedom and BNY Mortgage also offer reverse mortgages with no closing costs or fees for lump-sum borrowers. And several lenders have reduced interest rates on their reverse mortgages; that increases the amount that homeowners can borrow.
Meanwhile, the Department of Housing and Urban Development is re-examining the costs for federally insured loans.
A reduction in costs for HECMs is inevitable, says Darryl Hicks, associate director for the National Reverse Mortgage Lenders Association.
"Otherwise, it's not going to be as competitive" with other reverse mortgages, he says.
Which brings us back to the question of timing. For homeowners who don't need the money immediately, patience could pay off, says John Rother, director of policy and strategy for AARP.
A reverse mortgage "should be done very carefully and only for certain urgent situations," Rother says. "We think that the increasing competition in the next year or two will lower these costs."
Jim Mahoney, chairman of Financial Freedom, acknowledges that reverse mortgages probably will become cheaper. But if interest rates rise or home values decline, the proceeds available from a reverse mortgage will shrink, he says.
Whether you opt for a reverse mortgage now or later, take your time. Homeowners are required to meet with a HUD-certified financial counselor before obtaining a federally insured reverse mortgage.
"Given the complexity and cost," Rother says, "this is an example of a transaction where people should seek some help."
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