U.S. News: Reverse Mortgages Not Worth the Costs

Reverse mortgages, though a great option for some people, carry high costs that should be considered before making a decision, U.S. News & World Report writes.  

“In a very small set of cases, where it helps someone who’s elderly to stay in their home the final years … it’s a powerful tool,” Matt Kelly, a personal finance coach in Colorado told U.S. News. For the wrong people, he says, “it’s a colossally bad idea for a number of reasons.”

U.S. News cites cost as a major reason reverse mortgages could have negative effects on borrowers. 

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Origination fees can range in price — from $0 to $6,000 — and must be paid in addition to the normal mortgage refinancing closing costs. An upfront cost for private mortgage insurance costs .5% or 2.5% of the appraised value of the home. Mandatory counseling adds another $125. And recurring charges for mortgage insurance (1.25% of the amount borrowed every year) and servicing costs, which are about $30 to $35 a month. 

The interest rate also varies for reverse mortgages, and the higher rate a person pays, the more the lender makes, according to U.S. News source Casey Fleming, mortgage professional and author of “The Loan Guide: How to Get the Best Possible Mortgage.” This compensation, Fleming says, is not disclosed in reverse mortgage deals. 

“Fleming says he is seeing reverse mortgages pushed to mortgage brokers as a way to make high commissions, perhaps as much as $20,000 on one loan,” the article states.

The base interest rate is an adjustable rate that changes with the index, and the margin — the extra a person pays as compensation to the lender — adds on top of that. 

Because origination fees, interest rates and margins are negotiable, U.S. News encourages prospective borrowers to shop around to find the best prices. 

But other options should be explored before deciding to take out a reverse mortgage, the article states. 

“Can you sell your large, expensive house and buy a much cheaper one? Does your city, county or state have grants that will help you pay for a new furnace or new roof?” 

To read the full article, click here

Written by Emily Study

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  • When is a cost not really a cost? I’d like to have someone lend me a million dollars on my promise to pay it back after I die. Cash is king and businesses are often valued on a free cash flow basis. The upfront financed costs of doing a reverse mortgage really don’t impact a person’s cash flow. Pledging to pay those costs sometime in the future out of the increase in their home;s equity seems like a great deal to me.

    • Ray,

      Like so many, you confuse a reverse mortgage with a loan for life. Most reverse mortgages, particularly HECMs, have terminated on average before the ninth year anniversary of their original funding.

      Many of these loans terminate by triggering events other than the death of the last surviving borrower, i.e., 1) sale of the home, 2) foreclosure resulting from A) default for not paying property charges or B) failure to maintain the property in structurally sound condition, 3) not maintaining the home as the principal residence of at least one surviving borrower, 4) etc.

      There is no pledge “to pay those costs sometime in the future out of the increase in their home;s equity.” All reverse mortgages are a nonrecourse contracts to repay borrowed monies with accrued costs for which the home stands as collateral. Where do you get the idea that costs are paid from increased equities?

  • What you’re leaving out is the homeowner has lived in the home at no cost for those 18 years. In addition, they still own the home which will have increased in value.

    • Bert,

      Well, not exactly. There are property taxes, homeowners insurance, perhaps HOA fees, minimum maintenance costs, yard, utilities and other costs unrelated to daily costs of living.

  • Alessandro,

    Why no one has responded to your ridiculous example is odd.

    You give us such a minimal fact pattern, if one assumes there is no existing mortgage which your fact pattern allows and that max upfront costs apply which could normally apply to a $500 per month tenure payout, let us look at why I call your example ridiculous.

    First let us assume that the upfront MIP is $2,500, the origination fee $6,000, and other upfront costs, $3,500 so that total upfront costs are $12,000. At $500 per month, the total proceeds which would be taken after 18 years is $108,000 in tenure payouts and with the upfront costs $120,000. That means to have a balance due of $270,000 total accrued costs of interest and ongoing MIP would have to be $270,000. So is that reasonable?

    The total effective average accrual annual rate would have to be 52.344%, which is a MIP rate of 1.25% plus an interest rate of 51.094%. With a lifetime cap of 10% that would mean that the starting interest could have been no less than 41.094% which is ridiculous.

    I have read a lot of sophomoric presentations about HECMs but this has to be among the most “omoric”, in other words, not exactly wise.

    If we say the effective average interest rate on the balance due is 8% (a relatively high assumption compared to the market expectations reflected in the HECM expected interest rate), the balance due in 18 years is $214,910 or $94,910 in accrued costs.

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