Reverse Mortgages Are Expensive… Compared To What?

Reverse Mortgages Expensive - Compared to what?Everywhere you turn you hear or see in print that reverse mortgages are expensive.  I wonder what they are comparing them to to come up with this statement.

A conventional mortgage where one has to qualify for the loan based on income, credit, assets and ability to make the payment?  Where the interest rate is based on one’s income, credit, and assets?  Where one has to make monthly payments?  Where the loan has to be repaid in full either from the sale of the property or from assets?  Selling and moving?  Where there are fees for a realtor, closing fees, moving costs and rent?  Do they really think these options are less expensive?

Have you compared the reverse mortgage to a conventional mortgage?  Let’s take a look:

Terms Conventional Mortgage Reverse Mortgage
Retain Title/Own Home Yes Yes
Use Home For Collateral Yes Yes
Lien Placed Against Property Yes Yes
Income Requirements Yes* No
Credit Score Requirements Yes* No
Monthly Payment Requirements Yes* No
Repayment Term 15 years, 30 years, etc* When home is no longer primary residence or 150th birthday of borrower
Closing Costs Origination fee, third party fees, possibly FHA Mortgage Insurance Origination fee, third party fees, FHA Mortgage Insurance Premium**
Amount To Be Repaid Loan Balance Loan Balance
Non-recourse, there is no personal liability to the borrower(s) or their estate Not an option – full loan balance is due and would be paid from the estate if not from the sale from the home Yes, the estate would NOT have to come up with the difference if the loan balance is higher than what the home can be sold for (fair market valued)

*Terms and interest rate is determined by income, assets, credit score, ability to make payments and points.

** When costs are compared side-by-side the difference is the FHA Mortgage Insurance Premium.  And the FHA MIP provides many benefits to senior homeowners who do a reverse mortgage.

Compared to Selling and Moving?  Let’s take a look.

Terms Selling & Moving/Rent In Senior Housing Reverse Mortgage
Retain Title/Own Home No Yes
Credit Score Requirements Yes (rental properties look at credit and income to determine if you’ll be able to pay the rent or need to rely on government programs) No
Monthly Payments Requirements Yes, Rent.  Rent in Assisted Living will range from $2,500 to $8,000/month depending on services.  Additional services, i.e. home care, will be additional. No
Realtor/Originator Fee 4% to7% Realtor Fee.  On a $200,000 home = $8,000 to $14,000. Origination Fee is 2% on the 1st $200,000; 1% thereafter max of $6,000.  On a $200,000 home = $4,000.
Third Party Fees/Other Fees Yes Yes; FHA Mortgage Insurance Premium
Non-recourse, there are is no personal liability to the borrower(s) or their estate Not applicable Yes, the estate would NOT have to come up with the difference if the loan balance is higher than what the home can be sold for (at fair market value)

Where else can one access funds with these benefits for the cost of the FHA Mortgage Insurance Premium?  To say the reverse mortgage costs are high compared to a conventional mortgage or to selling and moving is like comparing apples to oranges. 

So I still ask, reverse mortgages are expensive?  Compared to what?

© 2011 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

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