Reverse mortgage - Be Sure You Need It

Reverse mortgage financing fees apply whether you use the money or not

Anyone who has ever applied for a home equity loan or mortgage knows that it’s a long, uncomfortable, drawn-out and expensive process. It can take weeks or even months to get approval, and in the meantime, you have to deal with home appraisals, credit checks, income checks and more, plus you have to spend endless hours on the phone with the lender. What could possibly be worse? Perhaps paying fees for a loan when you don’t use the money.

Years ago, a reverse mortgage

was considered a last-resort source of funding for retirees who had failed to provide for their own retirement. The typical client of such a mortgage was someone who was about to lose their home or had to take out a loan to pay emergency medical or retirement home bills. Times have changed, and with houses selling for record prices and longtime homeowners realizing record amounts of equity in their houses, more and more retirees of at least 62 years of age are using reverse mortgages to fund nicer lifestyles.

A reverse mortgage works in rather an opposite way from a conventional loan i that the borrower receives payments up front in a lump sum, monthly payments or a line of credit. The borrowed money constitutes a lien against the home, as with a conventional mortgage, but unlike a conventional mortgage, there are no payments to make. The loan need not be repaid until the homeowner dies, sells the home, or moves. At that time, the loan, plus accrued interest, comes due in full. Borrowers who are interested in a reverse mortgage should be aware that the costs associated with taking out such a loan are higher than with other real estate loans, and these fees are significant, especially if the borrower takes payment in the form of a line of credit.

All loans have costs, or fees. These fees involve home appraisals, paperwork fees, loan origination fees and more. There are also additional insurance fees added to a reverse mortgage, as the age of the borrower makes the loan a bit riskier than most. In addition, the loan is somewhat open-ended in that the date of repayment isn’t set at the time the paperwork is signed. This leads to higher costs than those associated with buying a home.

Most people who acquire a reverse mortgage take the money in the form of a line of credit, which allows them to use the money only when needed. The advantage of this over a lump-sum payment is that interest only accrues if money is actually drawn against the loan. The disadvantage is that if the borrower never actually uses the money, the fees are still paid. Many borrowers obtain a line of credit for “rainy day” emergencies, and have no real use for the loan at the time they take it. These borrowers are clearly thinking ahead, but if the owner dies or moves, the fees are due when the home is sold, even if no principal needs to be repaid and fees amounting in the low five figures are not uncommon.

In short, homeowners considering a reverse mortgage may wish to consider whether they intend to remain in their home for a number of years to come and that taking out such a loan is really necessary. It’s nice to have a rainy day fund, but this type of loan may be an expensive choice.