Why a Reverse Mortgage May Not be Good for You

Many articles, TV advertisements, and magazine articles promote the idea that reverse mortgages are the answer to senior citizens' monthly budget woes. This is often false! Reverse mortgages are a great thing for many, reverse mortgages many retirees, but, depending on your particular financial situation, a reverse mortgage may really mess up your future financial plan and eat up all of your equity.

Front Loaded Costs

First of all, the up front costs associated with getting a reverse mortgage are far more than those associated with traditional mortgages. FHA requires that you pay an origination and insurance fee of 2%, or the reverse mortgage amount. These costs are in addition to what you would normally see. A reverse mortgage will still require you to pay an appraisal, survey, title search, credit check, attorney's fees and express fees. It will be difficult to spread the cost or amortize these expenses over the term of the reverse mortgage if you aren't certain you will still live in your home after five years.

Home Equity Line of Credit

A reverse mortgage is very similar to a traditional home equity loan. Both are based on your equity in the home. However, their costs can be dramatically different. With a reverse mortgage, you can get the proceeds (after the home is paid off) as a lump sum, a line of credit or in monthly payments for as long as you live in the home. If you are considering refinance to improve your monthly cash flow, then the reverse mortgage wins, hands down. A home equity line credit is not likely to help you achieve this in most cases. The reverse mortgage is not an option if you need to pay for a significant medical bill or meet other unexpected obligations. However, the home equity credit line of credit might be a better choice than the reverse mortgage option. You would get the same benefits with no upfront costs and probably at a lower interest (APR).

Your Children's Inheritance

Another consideration that few people speak about is how a reverse mortgage eats into the equity that you have paid into your home up until now and dramatically changes the amount remaining to leave to your heirs. Many people are so worried about their financial future that they don't realize this is a problem. You have to do what you have to do. This is a situation where they see it as a "pay me now or later" situation. You can increase your cash flow now and then to avoid your children having to support your family in the future, even if it means sacrificing their inheritance. These are the trade-offs to consider before you take out a reverse mortgage.

One Big Reverse Mortgage Benefit

The whole point of reverse mortgages is the insurance provided by HUD. This ensures that your monthly payments from the reverse loan will continue even if the lender closes down or you die. Let's take, for example, a reverse mortgage that you get for $400 per month. The term of the mortgage is 25 (used to calculate interest) and it pays you 65 years old. With the actuarial life expectancy continuing to lengthen, it is not unreasonable to think that you may live to be 93 years old. The HUD insurance will provide for continuation of your monthly $400 check even after you outlived the mortgage end at age 90 - as long as you continue to live in the home! The reverse mortgage will have to be paid off if you become disabled, need to live in assisted living, or need to go into nursing home. chip reverse mortgage rates