CNN: 5 Must-Knows About Reverse Mortgages

While reverse mortgages can be a useful retirement planning tool for some, there are potential downsides to the product, according to a recent article on CNN Money.

In his article, Walter Updegrave presents aspects of a reverse mortgage that prospective borrowers should consider before taking out the loan. Among these considerations are the basic guidelines, the fees and costs associated with the loan (including whether a borrower can afford to maintain the home), non-borrowing spouse issues and alternatives.

Some of the fees related to the HECM program itself include a mortgage insurance premium of 0.5% of the home’s value at closing (2.5% if more than 60% of the maximum loan amount is drawn), plus an annual mortgage insurance premium of 1.25% that’s added to the interest rate on the loan.

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Lenders may also charge an origination fee based on the value of your house, although the HECM program caps this fee at $6,000.

Like a forward mortgage, the borrower of a reverse mortgage also is required to stay current with homeowners insurance and property taxes and keep the property in good repair. Otherwise, the loan could go into default and the lender could demand payment.

Understanding what happens if a borrower moves or dies — particularly when a spouse is not listed as a borrower on the reverse mortgage — is critical when considering the loan, Updegrave says.

On Aug. 4 of this year, changes to policies regarding non-borrowing spouse scenarios went into effect, providing more protection for these people. Namely, the changes will allow non-borrowing spouses to remain in the home indefinitely under certain terms and conditions and if they uphold the original terms of the loan.

“The takeaway here is to make sure you understand the rights of anyone who may be living in the home has when one or both of the reverse mortgage borrowers die,” Updegrave writes.

Finally, consider downsizing before taking out a reverse mortgage, as this is another way homeowners can cash in on the equity in their home, he says.

Read the full CNN Money article here.

Written by Emily Study

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  • A lot of people rely on reverse mortgage nowadays including seniors who need money to cover their long term care expenses. According to LTCOptions, reverse mortgage is a loan against the market value or equity of your home. Once eligible, a portion will be taken off your equity and will be paid off to you periodically. It works like a cash advance off your home’s market value. You can use the amount of money in any way you want, so you can use it to pay for your long-term care expenses. While it’s a great alternative to long term care policy, people should be wary of its downsides. This is a comprehensive list of facts that people should be armed with before opting for reverse mortgage. It is beneficial but it comes with risks.

    • Terrence,

      There can be a huge difference between the market value of the home and its equity and, of course, equity in the legal context may have absolutely nothing to do with being the difference in the market value of the home and the amount of total liens against it. Since HECMs are the vast majority of reverse mortgages still active, they must generally be the first lien against the home following initial funding and thus cannot be home equity loans in the traditional since of the definition of what constitutes a home equity loan (that is it something other than a first mortgage).

      As to reverse mortgage proceeds substituting for LTC insurance, the article does not address that. The person most responsible for taking a position on using reverse mortgage proceeds as a source for long-term care is Dr. Barbara Stucki (and the Met Life Mature Market Institute).

  • While most of the CNN article is factually correct, the phrase “you can draw up to 70%” is not. On both the fixed rate product and the arm products the homeowner can access up to 100% of their principal limit if the mandatory obligations require the funds. In fact, the homeowner can take up to 90% for mandatory obligations and still have access to the additional 10% in cash at closing (fixed) or during the 1st year (arm) initial disbursement period.

  • The HECM is the safest loan and the ONLY loan that offers homeowners expendable income vs. mandatory debt. Therefore does not show up on a credit report which has all kinds of perks today when seeking credit or lowering home owners insurance. I am sick of reports like CNN reporting “some” of the facts and the way they word them. For example they don’t tell you that the fees are the same as a forward but less in some case. In NY there is no mortgage tax and right now many lenders are waiving service fees- built into regular mortgages and HELOC’s. Yes there is MIP insurance just like a forward has PMI insurance. Except PMI ONLY protects the lender-the FHA protects both. The fee makes it non recourse and releases the homeowner and heirs of any financial responsibility. In case the loan went upside down-which could in this lousy economy. In the housing crash-Florida lost up to 57% of its equity! and received nothing in return. This is the ONLY loan that has a “growing line of credit which is 1.25% above the interest rate-but CNN does not tell you how that can offset the fee. The fee is based on money borrowed not on whole home. Your home used to be the easy guaranteed investment-NOW it is not. The new clause on non borrowing spouse -makes that fear -gone-besides-non borrowing spouses that signed with me -did so for a reason- lien against the person so they were not on home or setting up a much younger spouse in case older one passed -they would be better off. Here is the sad truth the lawyers that want to make this program out to be so bad-these ppl signed at least 5 documents and went through counseling and knew exactly what they were doing. If the remaining spouse cannot afford the taxes and insurance once their spouse passes-they would have lost the home anyway-the reverse had nothing to do with it. It gave them more money to spend. As for equity in your home-it IS based off appraisal which IS market value. This is the only program that gives you possession of a portion of the equity without having to sell. You can put money into a fund of your choice to grow- or leave in line of credit guaranteed to grow. With 90% of homeowners retiring to the tune of 10,000 a day that do not have long term care insurance-add that to huge cost of living and people living longer than ever before and many outliving their retirement funds or forced to scale back to hopefully make it-Homeowners should be thrilled they have such a great retirement option. I told my husband-if I die-use the reverse to pay off the mortgage and use my 100k policy to invest and enjoy living and traveling. He has to pay taxes and ins about 150.00 a month-..I can see where it is such a horrible deal….!!!! I had a woman today that could save 30k lowering her interest and making payments and using as refinance, not as a reverse-she said that she doesn’t need it yet-doesn’t need to save 30k ??? If the truth be told a neighbor-who will not pay her bills when she realizes they were wrong..told her not to do it-but gave her no real reason why….. sad to see she will be 97 when her loan is paid off.

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