Reverse mortgages have been around since the 1960s, but only recently have they become popular among Americans who are at least 62 years of age. Unlike a traditional mortgage where a payment is due monthly, a reverse mortgage does not have to be paid off. The primary benefit to the property owner is that they can stay in their homes while at the same time receive cash. But reverse mortgages are very expensive luxuries, and people should do their research before getting them.
Depending on your age and the value of your house, the total closing cost of a reverse mortgages could approach 20 percent of the real estate's value. Fortunately, those closing cost can be covered by the equity in your home, but they will reduce the amount the you will receive. In addition, they will reduce the amount of money your heirs will receive upon your death.
The closing costs on a reverse mortgage includes an origination fee, closing costs, a mortgage insurance premium and a servicing fee. On a $250,000 home, the origination fee is 2 percent, or $5,000; the closing cost will be as much as $3,000. Lenders also require you to purchase mortgage insurance that will add $5,000 to your closing costs, plus 1/2 percent will be added to the interest rate on your loan, in addition to about a $30 servicing fee. Finally, most lenders will insist that your loan carry a variable interest rate that will fluctuate based on market conditions.
Given their high cost, many people decide against pursuing a reverse mortgage, even though it might guarantee that they will be able to remain in their homes and receive cash upon closing the loan. Furthermore, they must assess what effect a reverse mortgage will have on the properties they leave to the beneficiaries of their estates.
Before pursuing a reverse mortgage, weigh the cost of such arrangement with alternatives. For example, presuming you are in good health, would you not be better off selling your home and buying or renting something smaller? Or if you have substantial equity, a home equity line of credit could provide you the cash you need to improve your life.
Notwithstanding the cost involved in securing a reverse mortgage, they are of growing importance to the massive number of people who enter the later stages of their lives. For the most part, these people have found saving money difficult, and a reverse mortgage is one way they can improve the quality of their lives.
Bill Herrfeldt specializes in finance, sports and the needs of retiring people, and has been published in the national edition of "Erickson Tribune," the "Washington Post" and the "Arizona Republic." He graduated from the University of Louisville.