MortgageReverse

U.S. News: Reverse Mortgages Not Worth the Costs

Reverse mortgages, though a great option for some people, carry high costs that should be considered before making a decision, U.S. News & World Report writes.  

“In a very small set of cases, where it helps someone who’s elderly to stay in their home the final years … it’s a powerful tool,” Matt Kelly, a personal finance coach in Colorado told U.S. News. For the wrong people, he says, “it’s a colossally bad idea for a number of reasons.”

U.S. News cites cost as a major reason reverse mortgages could have negative effects on borrowers. 

Origination fees can range in price — from $0 to $6,000 — and must be paid in addition to the normal mortgage refinancing closing costs. An upfront cost for private mortgage insurance costs .5% or 2.5% of the appraised value of the home. Mandatory counseling adds another $125. And recurring charges for mortgage insurance (1.25% of the amount borrowed every year) and servicing costs, which are about $30 to $35 a month. 

The interest rate also varies for reverse mortgages, and the higher rate a person pays, the more the lender makes, according to U.S. News source Casey Fleming, mortgage professional and author of “The Loan Guide: How to Get the Best Possible Mortgage.” This compensation, Fleming says, is not disclosed in reverse mortgage deals. 

“Fleming says he is seeing reverse mortgages pushed to mortgage brokers as a way to make high commissions, perhaps as much as $20,000 on one loan,” the article states.

The base interest rate is an adjustable rate that changes with the index, and the margin — the extra a person pays as compensation to the lender — adds on top of that. 

Because origination fees, interest rates and margins are negotiable, U.S. News encourages prospective borrowers to shop around to find the best prices. 

But other options should be explored before deciding to take out a reverse mortgage, the article states. 

“Can you sell your large, expensive house and buy a much cheaper one? Does your city, county or state have grants that will help you pay for a new furnace or new roof?” 

To read the full article, click here

Written by Emily Study

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