There are so many articles out there that share the “secret pitfalls” of the reverse mortgage. Be careful what you read. You might get frightened out of getting the loan that can save you. Articles like this Sundays “Are reverse mortgages easy money or just a dumb move?” on CNBC are designed to give minimal education and much too much doom and gloom. Reverse mortgages can be an amazing blessing when used properly and obtained with the right loan officer.
First let’s talk about that loan officer and why who you chose is so important. Most of the loan officers out there selling reverses only do reverse. I would always recommend going with someone who only focuses on reverse, people who sell more than one type of loan don’t care enough about the reverse client to focus only on that one thing. Also here is a secret you may not know, 90% of those reverse mortgage loan officers make more money depending on how much you take in the initial draw or lump sum. For this reason those who have no scruples will sell you all day on a fixed full draw or tell you to take the ARM but do a full draw and not the line of credit because “why trust someone else to hold your money?” You need to deal with a loan officer that is up front about that and will sell you on the reverse that is right for you not them.
Second topic is origination fees. Yes origination fees can be high, as high as $6,000 depending on the value of the property but they can also be waived completely or in part. That brings us back to how the LO gets paid. If you are not taking a draw there is no money to be made (not really) unless an origination fee is charged. So if you are paying off a loan or drawing out a decent amount up front for whatever reason, tell that LO to lower or waive the origination fee. There are other fees like third party closing costs (title, escrow, appraisal etc.) that can be between about $1,500 and $2,500, those are normal fees involved in an home loan and not specific to reverse. Lastly the mortgage insurance premium which is the Government mortgage insurance fee and is not negotiable. This fee is charged as an add on to the rate and a onetime up front cost added to the loan. The fee added to the rate is 1.25% of the loan amount annually. The onetime fee is 0.5% of the value of the home if you only use 60% or less of the loan amount you qualify for in the first 12 months or 2.5% if you have to go over that.
Lastly let us talk about what the reverse does to the equity position and what is saved for the heirs. The reverse pays you your own equity without charging you until you sell of vacate the home for whatever reason. You are charged interest over time for what you have pulled out (not for what sits in a line of credit). The interest on the reverse is compounded as you are not paying it down. That is the bug bad secret, you will owe more than you borrowed. A traditional home mortgage would do the same thing if you never had to make a payment. As far as the heirs not getting more money, at least they will save money not having to help their parents pay for care, medical bills or whatever. All of the kids who aren’t more concerned with “getting theirs” should be happy that their loved ones found a way to support themselves. You have worked for that equity, enjoy it. A reverse is perfect for those who want to have money there just in case as well. They are also much easier to obtain than a HELOC and you can never owe more than the home is worth no matter what. Do yourself a favor, educate yourself. Take the mandatory counseling just to get more info. Stop being afraid, a reverse mortgage may not be right for you and is not for everyone but it may also be the best decision you ever made.