The Pros And Cons Of Reverse Mortgages

A reverse mortgage works like a traditional mortgage, only the other way around. Instead of a borrower making payments to a lender, the lender makes payments to the borrower against the equity in the home. You can take the payments in one lump sum, use it as a line of credit or receive monthly payments for the life of the loan. And you get to choose how you use this money. It can supplement your Social Security income, pay off high-interest debt or pay for in-home health care.


The borrower has to be at least 62, and the loan typically doesn’t have to be repaid until the borrower dies or sells the home. Therefore, this is a popular option for seniors who own a house but have no savings.

Nevertheless, before you move forward, there is a lot to consider.

First, find out about all closing costs and fees — which can be steep — and then decide if the fees make sense for the amount that you will be borrowing.

Sandie Guenther, loan originator with Cherry Creek Mortgage, says that many people have been led to believe that obtaining a reverse mortgage is unduly expensive. She says that an actual cost comparison between a first-time home buyer (using an FHA-insured mortgage to purchase a $200,000 home) and a senior (accessing their equity in a $200,000 home) will show a range of savings from approximately $1,900 to $2,000.

Guenther explains that the upfront FHA mortgage premium of 2 percent of the maximum loan amount can elevate the initial reverse mortgage cost. However, a relatively new product called the HECM Saver lowers the initial cost significantly by eliminating most of the upfront mortgage insurance premium. Depending on the home’s value, the new HECM Saver program reduces the cost between 32 and 58 percent.

No matter how appealing it is to use your home as a piggy bank, a reverse mortgage isn’t something you should take on lightly. In addition to continuing to pay homeowners insurance premiums and property taxes, you will have to keep the property in tip-top condition. If you don’t, you may be asked to repay your loan — even while still living in the house. If you don’t have the means to do that, you could be forced to sell your home.

So before going ahead with a reverse mortgage, consider other options, such as taking out a home equity loan or selling your home and buying a smaller one.

Guenther agrees that reverse mortgages may not be the right option for everyone. She says that, as with any refinance, if the borrower has some degree of certainty they will be selling their home within a short time (within two or three years), the homeowner would be advised to carefully consider if this loan is their best option.

Using your home as a piggy bank isn’t as easy as breaking open the pig. Weigh your options before grabbing the cash.

Denisa Tova MBA, CFP, CFDP(TM), ChFC, CLU provides divorce financial expertise to divorcing individuals. She is a Certified Financial Planner(TM) practitioner and Certified Divorce Financial Analyst. You can find more information about Denisa Tova at: http://www.denisatova.com

Reprinted with permission of The Colorado Springs Gazette