A reverse mortgage, while an effective way to address the retirement income problem for many Americans, could also create new problems, depending on borrowers’ health and financial stability, a recent CNBC article suggests.
“Reverse mortgages can be an effective tool for retirees, but the problem is that the interest rates tend to be higher than for other home loans,” Grafton “Cap” Willey, managing director at CBIZ MHM tax accounting and consulting firm, told CNBC. “I’ve also seen people outlive their ability to take any more equity out of their home and then they’re forced to make tough decisions.”
In addition to interest and mortgage insurance premiums (MIPs), borrowers must pay closing costs, an appraisal fee and an origination fee. As with “forward” loan obligations, homeowners who take out a reverse mortgage must also continue paying property charges, such as taxes and insurance.
But with these costs comes more flexibility, as there are no restrictions on how the loan’s proceeds may be used. Often, seniors use the funds to pay off unexpected medical bills or renovate their home so they can age in place, Willey said.
For those borrowers in poor health, however, a reverse mortgage may only be helpful in the short term and not worth the upfront costs.
“We often tell people that if they are not well and there’s a chance they may end up moving to a nursing home in the near future, that a reverse mortgage could be a very expensive way to borrow money for a short-term need,” Lori Trawinski, a certified financial planner and director of the AARP Public Policy Institute, told CNBC.
Whatever the case, it’s important for borrowers to understand the costs and risks associated with a reverse mortgage before putting their home equity on the line.
“I think the most important thing to understand about reverse mortgages is that these are loans, and with any loan comes obligations,” Trawinski said.
To read the full CNBC article, click here.
Written by Emily Study