Reverse mortgages: A costly mistake
September 11, 2016
Many Americans that have sacrificed through sweat and hard work to build their nest egg are being ripped off under the guise of "retirement planning." If you spend just a few hours watching the tube, you are bound to see commercials touting reverse mortgages by a celebrity spokesman. These wise and trustworthy spokesman encourages seniors to consider using the equity in their home as part of their retirement plan, so that they too may take full advantage of their golden years.
Unfortunately, too many people are buying in to this garbage. In addition to gambling, playing penning stocks, or sending money to a Nigerian Prince, a reverse mortgage can be one the worst possible financial decisions a senior can make.
A reverse mortgage is a loan by a bank secured by your home, just like a home equity loan. Generally a reverse mortgage has no stated term, and no requirement that payments be made for accruing interest. It can make monthly payments to the borrower over a period of time, or provide the borrow with a single large influx of cash. Thus, the borrower can take out a percentage of the equity in their home in a lump sum or over a period of time and not be required to make a payment during his or her life.
For many, a reverse mortgages sound great! You get cash now and keep your home; all while not having to make payments. What's not too like? For starters the COST. A Reverse Mortgages is an expensive product.
Nearly all reverse mortgages are insured by the Federal Housing Authority (FHA). Thus, each reverse mortgage is subject to a mortgage insurance premium at closing and an annual premium that is charged over the course of the loan. Mortgage insurance protects the lender from losses that the lender may suffer from a default. The closing premium is usually about .5% with an annual premium of about 1.25% of the balance of the loan.
Most Reverse Mortgages are subject to origination fees that are also tacked onto the balance of the loan. Origination fees are loan processing fees which are usually determined by the value of the home securing the loan. A home worth $400,000 or more may have origination fees of up to $6,000.00.
3.Third Party and Servicing Fees
Third party fees for appraisal, credit checks, and title insurance are generally added to the balance of the loan. Additionally, most Reverse Mortgages are subject to monthly servicing fees which range between $25 and $35 per month. Servicing fees are added monthly to the balance during the length of the loan.
A Reverse Mortgage is a costly mistake. It is marketed with promises of hope, but often cannot deliver on those promises. Instead, it can consume your retirement nest egg in a matter of years leaving you with no recourse after the equity in your home is exhausted.
Like any other mortgage, the balance of loan is subject to an interest rate. For the years 2014 and 2015 as reported by the Department of Housing and Urban Development, the average Reverse Mortgage fixed rate of interest was 4.96% and the average adjustable rate of interest was 2.90%.
Thus, for an individual with equity of $150,000 on a home, a Reverse Mortgage could cost $7,500 just to get started! This would assume origination fees of $5,000.00, third party fees of $2,000, and closing mortgage insurance fees of $500.00. If the Reverse Mortgage had a fixed interest rate of 4.96%, the balance of the loan after ten years will be about $296,000.00.
If you were refinancing a $300,000 home that had 50% equity today, then that equity would be wiped out in about ten years. At current interest rates, which are relatively low, a Reverse Mortgage can take half of your equity in less than 10. That means that decades of your hard work could be eliminated in a matter of years.
Cassandra Jones and Michael Millward are the attorneys of Heritage Law Group, P.C. Both are residents of Gardnerville, focusing their law practice on estate planning, business planning, and probate. They can be reached at 782-0040 or http://www.HeritageNevada.com.