USA Today Says Reverse Mortgages Can Be Costly, Compared to What?

image USA Today journalist Christine Dugas writes that when faced with dwindling savings and mounting debt, elderly homeowners are turning to reverse mortgages for a cash infusion to wipe out a monthly home payment and even help them save their home from foreclosure.

The article features Helen Yomine, an 86-year-old widow in Lake Forest, Ill., who recently applied for a reverse mortgage because her home, valued at $410,000, was about to go into foreclosure. Her reverse mortgage paid off her home mortgage and taxes she owed, leaving her with no monthly payments.

image She still owns the home but will have to repay the loan, closing costs and interest when she sells it. If she stays in the home until she dies, the reverse-mortgage lender will be repaid when the house is sold.

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"It’s a scary time when you’re alone and don’t have anyone to lean on," she says. "But the reverse mortgage will give me comfort and the ability to stay in my home until I die."

The article also points out that the loan limits have been raised to $625,500 for the remainder of the year.  For now, this allows more elderly families to borrow enough money from a reverse mortgage to save their home from foreclosure.

"Our hope was that by raising the limit, more homeowners facing foreclosure and living in higher-valued homes might be able to take out a reverse mortgage and keep their homes," says Bronwyn Belling, director of the Reverse Mortgage Education Project for the AARP Foundation.

Of course the article touches on the costs involved in reverse mortgages and while the origination fees have been capped, not everyone is happy.  "The costs are still pretty staggering for someone who hasn’t looked at it closely," Belling says.

In addition to the lender’s origination fee, the upfront fees include a reverse-mortgage insurance premium, and standard closing costs — plus there’s a monthly servicing fee and interest.

"If I were a consumer, I would focus more on the interest rate," says Meg Burns, director of the Federal Housing Administration Single Family Program Development. "That’s an expense that is paid out over the long term of the loan, and it’s a place where the product could be costly."

I have no problem with articles that point out the costs but they never present an alternative that is available.  If the costs are “extremely” expensive and there is a better way for seniors to remain in their home comfortably, I’d love to learn more.

Reverse mortgages can be costly as seniors cash in on equity

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  • Exactly! Thank you. It is a fact that your life expectancy is longer in your own home than in a “home.” So, what would USA Today have the widow Helen do? Do they want her to sell her home, go into assisted living, and have a shorter life? Or, do they want her to go live with her children, if she has any, rather than independantly? Did they ask the kids? You are exactly right – expensive compared to what. What is it worth to enjoy a few extra years of life, living independantly, among family and friends, knowing that no debt can be passed on to your survivors? I hope this option is available to me when I reach 86.

  • Reverse Mortgages are like our democracy. The system is flawed, leads to inequities, is costly, and occasionally produces undesirable consequences. But it is still better than the alternatives . . . which are ???

    While the interest rate remains relatively low — it won’t for long — it is important to emphasize to seniors contemplating a reverse that the no monthly payments feature is an election (sure sounds like a democracy). They can elect to make no payments ever, or they can elect to make any payment they want if and whenever they want. In other words, they can choose the devil they know or the devil they don’t know. Either way, the interest rate, like many politicians, is a devil they can decide upon. Costly? Yes. Suspect? Deservedly so.

    One way or another, we’re going to keep politicians in the White House and the House of Representatives, but we are responsible to elect the ones that reside in those houses and the ones that won’t.

  • Over my 20 years in finaning, I have talked to people who couldnt pay their mortgage or other bills because of the cost of medicine. I think that if this loan helps them be able to buy their medicine, pay utilities, and keep their home, it is worth the cost.

  • In the AARP example, the remaining unused line-of-Credit will have grown at 1/2% above the interest rate for 12 years. Offering the borrower $166,152 in the line without any additional application or consideration of the value of her home. That may be very conforting and offer a degree of security no other program can offer.

  • I’m wary of the reverse mortgage products out there, mostly because they advertise them like crazy, which to me is always a sign of some sort of flaw with the system (otherwise advertising would be at normal levels). When I see Robert Wagner pitching a RM 20 times before I go to work, all I can do is pray that my grandparents, and later my parents, won’t need to take one out.

  • There is nothing to be afraid of. The advertising and marketing are intended to educate and inform which is essential to raising public awareness.
    Alternatives? As Peter Bell has stated; ‘I don’t know of another loan product that will give a borrower a substantial amount of money for some undetermined period of time during which they do not repay one penny. If I’m an investor, that doesn’t sound very inviting.
    Costs? Well again, what are the alternatives? If you sell your home (lucky you), you are paying a 5% sales agent commission, associated costs, moving expenses, and if it’s a new home/condo you’d better be paying cash cause most seniors won’t meet income requirements for a regular mortgage. I usually see closing costs for my clients stay in the 4-8% range of the net available coming to them. That’s not terrible. It’s all about perspective but I do hate seeing an MIP in five digits.

  • As one HUD underwriter we know says, “What can you compare a reverse mortgage to?”

    What other mortgage product does what a HECM does for seniors? Sure there are costs, and yes, they are heavy, but the alternatives require seniors to prove income, credit-worthiness, and the ability to pay back the money. Hello! Knock-knock! Do most of the seniors you know have great paying dependable jobs with income that allows them take on such a loan?

    I don’t like the double digit MIP any more than the next person (although with the recent disclosures about FHA insurance I guess that is just a cost of doing business). I also don’t like new seniors entering the RM market enduring higher margins because of Fannie Mae’s historical financial troubles (but that’s unlikely to change because I don’t like it). Still, I don’t know of another loan product that could do for Mrs. Yormine what a reverse mortgage did.

  • Based on the information in the AARP example, the TALC percentage on the total costs incurred is 9.21% after 12 years which is 1.71% higher than the assumed interest rate of 7% plus the 0.5% for the MIP fee on the outstanding balance. All of the AARP computations are correct; however, the information does not indicate what type of HECM the example is based on.

    The 1.71% higher effective interest rate reflects the effect of the upfront fees plus the $35 per month servicing fee. The facts are, percentage costs are much greater when significant portions of the available proceeds are not taken and taking the proceeds are delayed. Yet total costs are much lower.

    I hope this information is helpful.

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