CNBC: Look at Reverse Mortgages in Retirement

Reverse mortgages made the cut in a recent article from CNBC that explores several ways to tap one’s home for money in retirement.

The article lists four methods that can allow retirees to leverage their homes during retirement, including using a reverse mortgage, borrowing against the house via a home equity line of credit, renting out the house to share expenses, and lastly, downsizing. 

“Borrowing against your house or renting it out to generate income can be viable retirement strategies,” writes CNBC. “If the Federal Reserve begins to raise interest rates—a shift that many expect to see this Thursday—Americans who need to bolster their retirements should look at their options sooner rather than later.”

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On the topic of reverse mortgages, CNBC references the book “Falling Short: The Coming Retirement Crisis and What to Do About It” by Charles D. Ellis, an investment consultant, and Alicia H. Munnell and Andrew D. Eschtruth of the Center for Retirement Research at Boston College—which suggests that reverse mortgages could be an option for many Americans who cannot afford to retire. 

Read more at CNBC.

Written by Jason Oliva

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  • This article makes it once again imperative that we get better information to columnists.

    After citing the book by Dr. Alicia Munell, Ms. Elizabeth MacBride writes: “Reverse mortgages are sometimes criticized for high fees, which can be as much as 2.5 percent of what you borrow.” At best that is misinformation unless there are lender credits available to the borrower which Ms. MacBride fails to mention. Can that percentage get to over 8 times that size or even more? You bet but let us look at a few examples.

    If the expected interest rate is 5%, the age of the youngest borrower is 90 and the value of the home is $600,000, the principal limit is $450,000. If the permitted first disbursements exceed $270,000, MIP will be 2.5% of the value of the home not the amount borrowed. So let us say the MIP is $15,000, maximum origination fee is $6,000, and other closing costs are $3,800. The total upfront fees are 5.51% of the available proceeds but if the amount borrowed is just $300,000 then upfront costs are 8.27% of the amount borrowed, hardly 2.5%. but since available proceeds differs by age and the expected interest rate, a few more examples are in order.

    If the expected interest rate is 6%, the age of the youngest borrower is 62 and the value of the home is only $200,000 what is the percentage of the amount borrowed in that case? The principal limit is only $79,000. Again assuming the borrower is subject to the 2.5% upfront MIP rate, upfront costs would be about the following: MIP would be $5,000, the maximum origination fee would be $4,000, and other costs about $2,500, making total upfront costs $11,500 or 14.56% of the principal limit and if all that is borrowed is $52,667, it is 21.84% of the amount borrowed (before accrual for the upfront costs), over 8 times the percentage the author presents.

    It is important that we understand the various ways that upfront costs can be measured for comparative purposes. Looking at the funds borrowed at closing before the accrual of upfront costs is one of those of ways. Understanding the TALC disclosure document can help offset those concerns on an adjustable rate HECM.

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