Reverse Mortgages Are Nearly Never A Smart Choice - Here's Why
I'm not a big admirer of financial goods promoted by former TV stars like Henry Winkler and Alan Thicke — and it's not because I had a shouting dispute with Thicke once (true story).
It's probably not a smart idea if financial items need the Fonz or the father from Growing Pains to persuade you.
On television, what were they pitching? Reverse mortgages are a kind of reverse mortgage that allows you to borrow money
When you purchase a house and take out a mortgage, you borrow money, pay interest monthly, and make monthly payments.
In some ways, a reverse mortgage is the polar opposite. You already own the home, the bank provides you the funds up front, interest accrues every month, and the loan isn't repaid until you die or move out.
You never repay the debt if you die. It belongs to your family. Furthermore, your estate will not be required to pay more than the home's worth.
You may accept the money as a lump amount or as a line of credit when you take out a reverse mortgage.
Reverse mortgages, on the other hand, are very costly loans. You'll pay a variety of fees and closing expenses totaling thousands of dollars, just as you would with a traditional mortgage. You'll also have to pay an insurance premium on your mortgage.
If your down payment is 20% or more of the purchase price, you may avoid paying mortgage insurance with a conventional loan. You pay the mortgage insurance premium since you don't put any money down on a reverse mortgage.
If you take out a loan for less than 60% of the home's assessed worth, you'll pay a surcharge of 0.5 percent. If the loan is for more than 60% of the home's value, the premium increases to a stunning 2.5 percent.
If your property is worth $450,000 and you get a $300,000 reverse mortgage, you'll have to pay an extra $7,500 on top of everything else.
A service fee of $30 to $35 will be added to your monthly bill. The sum is calculated depending on the length of your life. You'll be paying an additional $3,600 to $4,200 if you anticipate to live another ten years (120 months). The amount you get will be reduced by that amount.
Most fees and expenditures may be rolled into the loan, meaning they will accumulate over time.
And there's a key difference between a traditional mortgage and a reverse mortgage: When you make monthly payments on a standard mortgage, you are lowering the amount you owe by paying off interest and principle. Because you never pay off your reverse mortgage, the amount grows over time.
Each month, a monthly mortgage accumulates at a lower rate. The interest on a reverse mortgage accumulates at a faster rate.
If you die, your estate uses the earnings from the sale of your home to repay the debt. If one of your heirs wishes to stay in the property (even if they currently do), they must find the money to repay the reverse mortgage; otherwise, the house must be sold.
Moving out of the house is another reason for repayment. You have a year to repay the loan after you've done so.
If you need to go to a nursing home, you'll almost certainly need your house's equity to cover the bills. The average annual cost of a semi-private room at a nursing home in 2016 was $81,128. There won't be much left for the nursing home if you owe a lender a significant portion of your house's equity. You'll have to go to a Medicaid facility unless your children step up to pay for it, which you definitely don't want to do.
Reverse mortgages aren't worth it for most individuals because of their exorbitant prices. Instead of owing money to a reverse mortgage lender, you'd be better off selling your house and relocating to a less expensive location, preserving any equity you have.