honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser

Posted on: Thursday, November 20, 2003

Reverse mortgages come with high costs

By Anuradha Raghunathan
Dallas Morning News

How would you like your bank to hand you a monthly mortgage payment instead of the other way around?

That's what happens with a reverse mortgage. Seniors who own their homes outright, or nearly so, can boost their income in retirement by getting tax-free cash from the equity they've built up — even as they remain in their homes.

However, consumer advocates warn that a reverse mortgage comes with steep fees.

"This is a way to turn their largest and last asset into a cash flow," said Jan McLain, a reverse mortgage counselor at the Consumer Credit Counseling Service of Greater Dallas. "But it's a costly loan to get."

In a reverse mortgage, seniors 62 and older can take a loan against their homes and receive monthly payments from the lender as long as they live. Or they can take a lump sum. Or they can take monthly payments for a certain period.

Borrowers retain the title and ownership of the home. The lender, however, gets a lien.

The principal and the interest on the reverse mortgage are not due until the borrower or borrowers die. The loan also has to be paid off if the borrowers sell the home or move out for more than 12 months. Sometimes the loan is paid with proceeds of the sale of the home after the owners' deaths.

Origination fees may be as high as 2 percent of the home's value and the mortgage insurance may also be as high as 2 percent. There are costs for title insurance, an appraisal, a survey and a servicing charge that can reach $35 a month.

Typically, the interest rate for a reverse mortgage is variable. The rate is based on a formula set by the mortgage company Fannie Mae — a set amount added to the yield of the one-year Treasury bill. Currently the rate for the monthly option is 2.85 percent and 3.45 percent for the annual option.