One of the biggest drawbacks to a reverse mortgage is cost. The upfront closing costs and loan origination fees can be from 8 percent to 10 percent of the loan limit. That's equivalent to paying 8 to 10 points on a conventional mortgage loan. With fees this high, a reverse mortgage only makes sense if you expect to live in your home for a number of years.
Plus, it's important to realize that, even though you don't have to repay the loan until you leave the house, you're still incurring debt. If your home value appreciates fast enough - a big "if" these days - that appreciation could offset some of your borrowing costs. But in most cases the amount you owe (your loans plus interest) grows overtime, while your equity declines. And don't forget that you're still responsible for the ongoing costs of maintenance, insurance and real estate taxes.
Another possible drawback is family disharmony. Do the kids expect to inherit the house? If so, they might be upset to discover that the bank owns a substantial portion, or even all, of your home. Be sure to talk to your heirs if you plan to take out a reverse mortgage. Granted, they'll want what's best for you in the long run, but it's always wise to avoid surprises.
THE OPPORTUNITIES
A reverse mortgage should never be the centerpiece of your retirement plan, but it can make sense for some people. For instance, if you're older, intend to remain in your home for a long time and have limited retirement savings, it could be a good way to supplement your income. It also may serve as a viable option for cash-strapped seniors who might otherwise be forced to leave their homes. Some families have used reverse mortgages to provide home-care for an elderly parent.
If you or a loved one decides that the benefits of a reverse mortgage outweigh the drawbacks, you have a few choices for loans. The loan limits and fees vary by provider, so be sure to research them thoroughly. Options to explore include:
- Federally Insured Home Equity Conversion Mortgage (HECM): This loan is insured by the U.S. government. Loan limits vary by county and currently range from $200,160 to $362,790.
- Fannie Mae "Home Keeper" Mortgage: Also federally insured, it offers a higher loan limit than an HECM, currently up to $417,000.
- A private lender, such as a bank: Costs may be higher, but you may be able to get a larger loan.
THE ALTERNATIVES
Reverse mortgages aren't for everyone. In fact, because they're often considered a "financial tool of last resort," it pays to explore other ways to generate cash from your home. A home equity line of credit might be a practical alternative. Even though you'll have to repay the loan, the upfront costs are usually much lower than for a reverse mortgage. Downsizing and pocketing the difference is another possibility, or you could get creative and consider selling your home to family members and renting it back.
As with any mortgage, the most important thing is to do your homework before you sign on the line. The AARP Web site (www.aarp.org) is a great place to begin your research. It offers a wealth of information, including a Reverse Mortgage Calculator and a Consumer's Guide to Reverse Mortgages, available online or by phone. You can also get reverse mortgage counseling sponsored by the FHA. Go to www.hud.gov or call 800-569-4287 to find a counselor near you.
The bottom line is: Get all the facts and run all the numbers. Make sure you know what you're getting into - just like the old cliche "there's no free lunch," there really is no such thing as free money.