Assessing the Risks of a Reverse Mortgage
Learn the Downside to getting Money from a Reverse Mortgage
Aug 20, 2009 Armand Famiglietti
A reverse mortgage is an option that allows a homeowner to draw a piece of the equity from the home every month in order to pay expenses. A reverse mortgage is usually targeted at people over the age of 65 who do not have plans of moving again and want to access some of the capital in their home to ease the burden of every day expenses. But before one starts drawing down on the equity, it’s imperative to understand the potential risks associated with obtaining a reverse mortgage. Here is a look at a few of those risks.
Determine How Much May be Borrowed
The economic stimulus package passed by Congress actually raised the limit of the maximum home value that could be considered for a reverse mortgage up to $625,000. But one must take into consideration several factors in determining exactly how much may be borrowed. The equity in the property, current interest rates, and the borrower’s age are all factors in the equation. Check out this reverse mortgage calculator to determine how much may be borrowed.
Borrowing Money Always Comes at a Price
Just like any other home loan, closing costs will be assessed when completing a reverse mortgage. However, fees that one might not expect are origination fees. Origination fees run about 2% on the first $200,000 and 1% on the loan balance after that. On top of the origination fee expect to pay a mortgage insurance premium of 2%. And if that sounds like a lot, don’t forget that a monthly service charged might be assessed as well. It should be noted that a recent law passed by Congress caps the origination fee at $6,000, however because of the additional fees and expenses, expect to pay somewhere in the neighborhood of $8,000 to $15,000.
Age is a Big Factor
One of the largest risks associated with a reverse mortgage is someone’s age. To qualify for a reverse mortgage a person must be at least 62 years of age. However with people living well into their eighties and even nineties that means the home must supplement their income for over 20 years or more in some cases. If obtaining a reverse mortgage, be sure to factor in longevity into the equation so that one is not left short toward the final years of their life. Case in point, because reverse mortgages have become so attractive, the average age of people obtaining them has dropped from 76 to 72 in the past decade.
Look at All the Financial Options on the Table
The equity in the home provides security for a lot of people. However, once it is tapped it can be a slippery slope where people think the money will never end. Before taking a reverse mortgage, explore everything from reducing the monthly budget, to maximizing pension and health care benefits, annuities and if one is still young enough, getting a part-time job to make ends meet.
Sources
"Is a Reverse Mortgage Right for You" by Cybele Weisser, Money Magazine September 2009.
A Home Being Considered for a Reverse Mortgage.
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