Reverse Mortgages: Good or Bad Idea?

Every time I see a certain celebrity talking about reverse mortgages on television, I wonder if they are a good or bad idea. Reverse mortgages have been around for a long time. The older products for a variety of reasons usually turned out to be a bad idea. The product Mr. Wagner is talking about though is very different from the older products and may be a good idea under the right circumstances. The rest of this article concerns only the newer, federally insured products.

A reverse mortgage is a way to access the equity in your home without selling it. You can receive a lump sum, periodic payments, a line of credit or any combination of the above. The cash you receive is not taxable, nor does it affect Social Security or Medicare. The federal government through HUD sets the terms, including interest rates, fees and payments. The note is a federally insured non recourse obligation. The result is that you never have to make a payment unless you sell your home and you will never owe more than your home is worth.

In order to be eligible for this product all borrowers must be at least 62 years old. The home must be the principal residence of the borrowers. The borrowers must consult with a HUD certified counselor before their application is approved.

The downside is that a reverse mortgage is an expensive alternative to more traditional ways to tap the equity in your home. Settlement costs are approximately 5%, including a 2% origination fee, a 2% insurance fee and approximately 1% for other settlement costs. The interest rate will be increased by .5% to help pay the cost of federal insurance and the bank will also charge a service fee. Most of these fees would not be charged if you were able to access your equity with a traditional line of credit or simply sell your home.

If your income is such that you cannot qualify for a line of credit or you cannot or do not want to sell, this product may just be a good idea for you. Take Mr. Wagner’s advice and consider this alternative. The AARP web site may be a good place to start.