Reverse mortgages, while marketed nationally by celebrities with strong senior appeal, are not without some serious cautions, writes Kiplinger in an article this week about long-term care insurance, annuities and reverse mortgages. Kiplinger counts the three products among “high-cost financial products” for retirees, noting the 2% upfront fee for federally-insured Home Equity Conversion Mortgages, origination fees and closing costs associated with the loans.
The article seeks input from National Reverse Mortgage Lenders Association President and CEO Peter Bell as well as the Center for Responsible Lending, and a borrower.
…Reverse mortgages are expensive. Although fees have come down, reverse mortgages are still a costly source of cash. The most common reverse mortgage, the federally insured Home Equity Conversion Mortgage (HECM), charges an initial 2% insurance premium on the full value of the home, which guarantees that you will receive expected loan advances. That means you would pay a premium of $8,000 on a home valued at $400,000, no matter how much you borrow. Lenders that offer HECM loans are also allowed to charge an origination fee ranging from $2,500 to $6,000, depending on the appraised value of your home. And you’ll pay closing costs that typically include an appraisal, title search and other fees, along with servicing fees of up to $35 a month.
The HECM Saver, available since 2010, charges an initial insurance premium of just 0.01% of the home’s value. However, the amount you can borrow is much lower than it is for the standard HECM, and the interest rate is higher.
Because fees are so high, you should explore other sources of funds before taking out a reverse mortgage, says Susanna Montezemolo, vice-president of federal affairs for the Center for Responsible Lending, in Washington, D.C. A traditional cash-out refinancing or home equity line of credit is less costly, although retirees who are living on a fixed income may have trouble meeting post-2008 lending standards. Tapping your savings is another alternative. “I know some people are loath to go into retirement savings, but their home is their savings as well,” Montezemolo says.
You could lose your home. Even though you don’t have to make payments on a reverse mortgage, you’re still responsible for homeowners insurance, property taxes and maintenance. As of last February, more than 9% of reverse-mortgage borrowers were at risk of foreclosure because they had fallen behind on tax and insurance bills, reports the CFPB….
Written by Elizabeth Ecker