Are Reverse Mortgages Too Expensive?
- By:
- Tom Kerr | September 26, 2008
Reverse mortgages are now wildly popular because the senior citizen population they serve is growing faster than any other demographic group in the entire U.S. But some critics argue that reverse mortgages cost too much to make them a suitable retirement planning vehicle.
Reverse mortgages are loan products that allow homeowners over 62 to get paid for their accumulated home equity. The homeowner doesn't pay a mortgage; instead he receives payment from the lender in exchange for a stake in the value of the home. Seniors can choose to receive their money in a lump sum, monthly installments, a line of credit or, depending upon the reverse mortgage terms. a combination of means and methods. Because the homeowner isn't paying off a loan, there are no minimum income requirements to meet like those associated with traditional mortgages.
Baby Boomers-defined as people born after 1945-make up about 30 percent of the country's population. There are 78 million Americans in this demographic, and the first of them turned 60 in 2006, representing the largest-ever segment of American society to hit retirement age. That means that they're all potential candidates for a reverse mortgage, and companies are heavily marketing these products to them in order to take advantage of that fact. But critics point out that the reverse mortgage rates offered by most lenders are prohibitively expensive. That's mainly because, as the homeowner takes equity payments, the mortgage interest is tacked onto the balance of the loan, creating a scenario in which interest gets paid on top of interest.
Reverse mortgage rates may be low compared to other mortgage rates, but because of the way the interest is compounded, they become expensive over time. Then there are the other costs involved in setting up a reverse mortgage. Borrowers often have to pay origination and appraisal fees, the cost of a title search, and additional mortgage insurance premiums. Fortunately, a newly enacted law will change some of that in favor of the borrower by limiting origination fees on reverse mortgages to 2 percent of the loan up to the first $200,000, and 1 percent of the rest, with a cap at $6,000.
Selling a house, moving into a less expensive home, and investing the profits may be a more appropriate strategy for some homeowners. The AARP, for example, suggests that home equity lines of credit or loans are less expensive if the homeowner has enough income to manage the monthly payments. For those who are much older than 62, however, the higher cost of the reverse mortgage rates may not be a big deal because they won't be paying those steeper mortgage rates for too long.
Choices regarding the financial sense of a reverse mortgage have to be made on an individual case-by-case basis. Seniors should pay heed to mortgage rates when making their decisions.
Reverse mortgages are loan products that allow homeowners over 62 to get paid for their accumulated home equity. The homeowner doesn't pay a mortgage; instead he receives payment from the lender in exchange for a stake in the value of the home. Seniors can choose to receive their money in a lump sum, monthly installments, a line of credit or, depending upon the reverse mortgage terms. a combination of means and methods. Because the homeowner isn't paying off a loan, there are no minimum income requirements to meet like those associated with traditional mortgages.
Baby boomers candidates for reverse mortgages
Baby Boomers-defined as people born after 1945-make up about 30 percent of the country's population. There are 78 million Americans in this demographic, and the first of them turned 60 in 2006, representing the largest-ever segment of American society to hit retirement age. That means that they're all potential candidates for a reverse mortgage, and companies are heavily marketing these products to them in order to take advantage of that fact. But critics point out that the reverse mortgage rates offered by most lenders are prohibitively expensive. That's mainly because, as the homeowner takes equity payments, the mortgage interest is tacked onto the balance of the loan, creating a scenario in which interest gets paid on top of interest.
Controlling fees
Reverse mortgage rates may be low compared to other mortgage rates, but because of the way the interest is compounded, they become expensive over time. Then there are the other costs involved in setting up a reverse mortgage. Borrowers often have to pay origination and appraisal fees, the cost of a title search, and additional mortgage insurance premiums. Fortunately, a newly enacted law will change some of that in favor of the borrower by limiting origination fees on reverse mortgages to 2 percent of the loan up to the first $200,000, and 1 percent of the rest, with a cap at $6,000.
Alternatives to reverse mortgages
Selling a house, moving into a less expensive home, and investing the profits may be a more appropriate strategy for some homeowners. The AARP, for example, suggests that home equity lines of credit or loans are less expensive if the homeowner has enough income to manage the monthly payments. For those who are much older than 62, however, the higher cost of the reverse mortgage rates may not be a big deal because they won't be paying those steeper mortgage rates for too long.
Choices regarding the financial sense of a reverse mortgage have to be made on an individual case-by-case basis. Seniors should pay heed to mortgage rates when making their decisions.
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