You may have heard of the “reverse mortgage,” a financial arrangement by which a homeowner can draw out home equity, in installments or in a lump sum, without having to sell. It’s a creative financial instrument and, in the right circumstances, could be the means by which elders with limited income could afford to stay in the home they love. The loan term typically runs until the homeowner sells the property, dies or moves into a care facility, or somehow puts the loan into default (for example, by failing to keep the taxes paid). When the loan terminates, the property is sold and the loan balance is paid from the proceeds of sale.
In the photo op version of the reverse mortgage story, Mom and Dad, bathed in the golden light of a perfect October afternoon, smile and wave from the front steps of the beloved home they no longer have to leave.
The reality is somewhat more complicated. The Federal Trade Commission’s Facts for Consumers page is a good place to begin your research if you think you or your aging parents might be interested in pursuing a reverse mortgage. The advice given there seems solid to me, and I guess my own concerns are matters more of emphasis than anything else.
It seems to me that a reverse mortgage is going to be expensive - very expensive - and that most of the costs are going to be incurred right up front. For more than 10 years I worked as a mortgage closing attorney, so I know that costs in a reverse mortgage will include most or all of the following:
- Application fee
- Real estate appraisal fee
- Loan origination fee
- Loan origination and discount points, as applicable
- Title examination fee
- Mortgage insurance premium
- Title insurance premium
- Survey or plot plan fees
- Document preparation and closing fees
- Document recording fees
Obviously some of these costs will be small and others large, but together they will add up to thousands of dollars. The thing about these costs is that most of them are due in full even if the loan terminates almost immediately. Additionally, reverse mortgages are often written with adjustable interest rates. When the rate goes up, installments paid out to the homeowner become more expensive in terms of how much equity they consume, but this can be an almost invisible phenomenon since nothing is paid to the loan holder until the loan terminates. “Sticker shock” hits then.
My own instincts have always leaned toward fixed interest rates even if they are more expensive to start with. It seems to me that the circumstances of the property owner will determine what sort of loan is best. An older homeowner, for example, with a shorter life expectancy, might be better served by a loan with a higher interest rate but lower costs and fees. Conversely, a younger home owner might do better by agreeing to higher costs and fees in exchange for a lower interest rate.
As with any large financial transaction, your best course of action is to proceed slowly and to keep asking questions until you understand the answers you’re getting and until you know exactly what is going to happen and how much it is going to cost once the papers are signed.
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