Are Reverse Mortgages Really All They’re Cracked Up to Be?

Reverse mortgages

There are two sides to reverse mortgages. Educate yourself well on both sides before choosing to take out a reverse mortgage when you retire.

Like every story, reverse mortgages have two sides, good and bad, pros and cons, benefits and disadvantages.

What are Reverse Mortgages?

You’ve probably heard of reverse mortgages, but do you really know what it is?

According to reversemortgage.org, “A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash.

The product was conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there is no restriction on how reverse mortgage proceeds can be used.

The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower.

The borrower is not required to pay back the loan until the home is sold or otherwise vacated.  As long as the borrower lives in the home, they aren’t required to make any monthly payments towards the loan balance. The borrower must remain current on property taxes, homeowners insurance, and homeowners association dues (if applicable).”

Why are Reverse Mortgages a Bad Idea?

Let’s address why reverse mortgages are a bad idea, or what about reverse mortgages some say is a bad idea. Here’s what contributor Marc Lichtenfeld had to say about reverse mortgages for  businessinsider.com in April 2018.

“Taking out a reverse mortgage is almost never a good idea — here’s why, basically:

  • Reverse mortgages are loans available to people over 62 who would like to borrow against the value of their homes.
  • They are often exorbitantly expensive — requiring additional premiums and fees.
  • Instead of interest compounding on a lower number every month, like a regular mortgage, reverse mortgages compound on a higher number because of the additional premiums.
  • In the case of death, your estate will have to pay off the remaining balance — and if you move out of the house, you have a year to close the loan.

In-Depth Reasons Why Reverse Mortgages are a Bad Idea

If a financial product needs a celebrity to convince you it’s a good idea, that’s a pretty good indication that it’s not.

Exorbitant Fees, Costs, and Mortgage Insurance Premiums

Reverse mortgages are exorbitantly expensive loans. Like a regular mortgage, you pay various fees and closing costs that total thousands of dollars. But unlike a regular mortgage, you pay a mortgage insurance premium.

You can avoid paying for mortgage insurance with a regular loan, provided your down payment is 20 percent or more of the purchase price. But since you don’t make a down payment on a reverse mortgage, you pay the premium on mortgage insurance.

The premium equals 0.5 percent if you take out a loan equal to 60 percent or less of the appraised value of the home. The premium jumps all the way up to an exorbitant 2.5 percent if the loan totals more than 60 percent of the home’s value.

For example, if your home appraises for $450,000 and you take out a $300,000 reverse mortgage, it will cost you an additional $7,500 on top of all of the other closing costs.

You’ll also get charged around $30 to $35 per month as a service fee. The total is charged based on your life expectancy. If you are expected to live another 10 years (120 months), you’ll be charged another $3,600 to $4,200. That figure is deducted from the amount you receive.

Most of the fees and expenses can be rolled into the loan, which means they compound over time.

The following distinction between a regular mortgage and reverse mortgage is important to note. When you make payments on a regular mortgage each month, you’re paying down interest and principal, reducing the amount you owe. Because you never pay down your reverse mortgage, the figure compounds month after month.

A regular mortgage compounds on a lower figure each month. A reverse mortgage compounds on a higher number.

When You Pass Away, Your Estate Gets Stuck

If you pass away, your estate pays back the loan with the proceeds from the sale of your house. If an heir is living or wants to live in the house, they’ll have to pay back the reverse mortgage or sell the home.

When You Choose to Move Out of Your Home

If you decide to move out of the home, you have a year to close the loan.

And what if you move into a nursing home? You’ll probably need the equity in your home to pay for the cost of living there. In 2016, the average cost of a nursing home was $81,128 per year for a semi-private room. If you owe a lender a substantial piece of the equity in your home, there won’t be much left to pay for living in a nursing home. Unless your kids step up to pay for it since you can’t, you’re going to a Medicaid facility. And having to live in a Medicaid facility isn’t the least bit ideal.

After All That …

Because of the high costs of reverse mortgages, it’s safe to say they aren’t worth it for most people. You’re better off selling your home and moving into a cheaper place. Keep whatever equity you get from your home and pocket it. This is far better than owing it to a reverse mortgage lender.”

Do you have questions about reverse mortgages? Contact Charles D’Alessandro, your Brooklyn Real Estate Agent with Fillmore Real Estate. Call (718) 253-9600 ext.206 or email [email protected]esales.com with your questions today.


Brooklyn Real Estate Agent

 Charles D’Alessandro

Your Brooklyn Real Estate Agent

718-253-9600 ext. 206

[email protected]

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