CNN Money: Reverse Mortgages Are Expensive

The CNN Money Help Desk addressed a viewer question today which asks: What are the pros and cons of acquiring a reverse mortgage? Help Desk expert and Certified Financial Planner Doug Flynn answered the question.

The pros, he says, are access to home equity while being able to stay in the home. Flynn says the cons are that reverse mortgages are very expensive, and borrowers can end up disinheriting their children from the home.

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Flynn provides the example of a $100,000 reverse mortgage on a $200,000 home. Instantly, the borrower may owe $120,000 due to the fees, and “it can compound in a phantom way,” he says. “One day, that $120,000 is going to cross the value of the home…Once that happens, you can stay in it, but there’s nothing left for the kids. It has a need, but you have to be very careful.”

View the CNN Money Help Desk segment.

Written by Elizabeth Ecker

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  •   This segment was very disappointing.  Forgetting the old “reverse mortgages are too expensive” line, Doug seemed to believe it was OK to talk about a $20,000 cost on a home with an appraised value of only $20,000 at closing.  He talked about a net principal limit of $100,000 and a line of credit.
     
    Somehow Doug claimed the loan could suddenly be $120,000.  What a contrived conclusion.  Then he threw an incredibly inaccurate term to describe a mortgage – disinheriting the children.
     
    The response Doug gave reminded me of the advisor who always says “bad idea” to every investment decision his client makes.  After the advisor will rarely be sued if he calls something a bad idea but could easily be sued if he called it a good idea and the investment went bad.
     
    Yet Doug is exactly the type of financial advisor we must reach if we are to penetrate the more affluent senior.  There are too many Dougs out there and not enough Jonathan Neals.  This must become an industry effort or we are doomed to be at 100,000 to 200,000 endorsement level for the rest of this decade.

  • I agree that the closing costs are higher on these than forward mortgage, but that’s because of the added benefit of insuring the loan as non recourse over an indefinate period of time.  Expensive?  The borrower doesn’t pay anything except perhaps an appraisal fee,  so it appears the writer’s facts are lacking. Also, leaving the house to the children has become a financial burden now-besides that, what exactly WILL the borrower leave?  How much will the home be worth?  I’d rather leave my children a solid inheritance, like life insurance, rather than saddling them with a house that may not be worth much that they can’t sell. 

    It’s a real shame that financial planners are not bothering to educate themselves on this powerful financial tool that could allow some seniors to utilize a financial planner’s skill by using the reverse mortgage to obtain the funds needed to invest in a financial product that is more sound than home values.

  • **PLEASE NOTE** The fees noted in this segment were for illustrative purposes only. They were used as an EXAMPLE and meant to be for a much larger mortgage at the end of the first year when including closing costs, insurance costs and interest charges. This detailed information was edited from the discussion due to time constraints at CNN for this segment. Our apologies for any confusion.
    Please see here for our post of this video with explanatory text: http://www.youtube.com/watch?v=5ZtUKuf8ZPM

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