Lending Club Blog

Reverse Mortgages are Just One Option Available

A reverse mortgage is a loan against a home’s equity that doesn’t need to be paid back until the homeowner dies, sells the home, or moves out. Available to homeowners age 62 and older, it can be paid in a lump sum or in monthly installments. There are benefits to using a reverse mortgage, but there are downsides as well. Many homeowners, particularly those with good credit, can often find less expensive alternatives.

The main reason people use a reverse mortgage is that they get to stay in their home for as long as they wish. As stated above, no payments are required while you remain in your home, though the balance due does rise as more payouts are made and interest accrues. If home prices rise at a significantly higher rate than interest on the loan, then reverse mortgages can be affordable. Of course, as the recent housing downturn has shown, prices don’t always rise. Another reason people use reverse mortgages is that you can usually get one if you have equity in your home, regardless of your credit. This may be a reason for people with poor credit to use them, but it doesn’t mean they are the best option for everyone.

The main downside of a reverse mortgage is the high upfront costs. Wikipedia reports that

For the most popular type of reverse mortgage in the U.S., there is an insurance premium of 2% of the loan and a 2% origination fee in addition to normal closing costs.

Interest rates tend to be adjustable, as the duration of the loan is unknown. Rates are reset on a regular basis, as often as every month.

As mentioned above, reverse mortgages are available to homeowners aged 62 or older. As such, the senior citizen advocacy group American Association of Retired Persons (AARP) has covered the topic at length. To get you started, see their brief discussion of 5 questions to ask before considering a reverse mortgage, listed below.

  1. Do you really need a reverse mortgage?
  2. Can you afford a reverse mortgage?
  3. Can you afford to start using up your home equity now?
  4. Do you have less costly options?
  5. Do you fully understand how these loans work?

This is just an overview of reverse mortgages. In addition to answering the above questions from the AARP, I urge anyone thinking of using a reverse mortgage to thoroughly research them, and other options, before making a decision. Reverse mortgages are one option, but for many people there may be more affordable alternatives.

Friday, April 11th, 2008 at 7:20 am

Comments (2)

  1. Mike, you mention 5 different times that there may be a less
    costlier alternative to a reverse mortgage but there’s not ONE
    mention of anything. I would be interested in what else is
    available for someone that has lived in their home for 30 years,
    has outlived their retirement income, has borrowered against the
    home for emergency funds and whose taxes and everyday living costs
    have increased to the point that they have to decide what bills to
    pay and which to ignore. They could move out of the home into an
    apartment or smaller home in a neighborhood where they have no
    physical or emotional attachments, they could get another loan to
    payoff the one they currently have (the loan they can struggle to
    pay each month), they could do nothing and continue to suffer the
    concerns of unpaid bills every night before they go to bed- or if
    they have enough equity in their home they could get a reverse
    mortgage and put all their financial problems behind them. Often
    times there are no “other” alternatives, especially in this market.
    Tobin cmghoa@verizon.net

    April 14th, 2008 at 8:35 am

  2. Mike:

    Tobin, Some people will go through the exercise and find that a
    reverse mortgage is the best, or perhaps the only, option. The
    scenario that you described may be one such case. In different
    situations, other options present themselves. Some of the options
    suggested by AARP are: 1) Using other financial resources instead
    of taking out a loan. 2) If you could easily make the monthly
    repayments on a home equity loan or home equity line-of-credit,
    these alternatives are much less costly than a reverse mortgage. 3)
    Many state and local governments offer very low-cost loans for
    paying your property taxes or making home repairs. 4) Have you
    seriously looked into the costs and benefits of selling your home
    and moving to a less expensive one? To that list, I would add peer
    to peer loans, which can be as affordable as HELOCs, without
    tapping the equity in the home. Again, there are some cases where a
    Reverse Mortgage makes sense. I hope that these suggestions are
    helpful and I apologize for not including them originally.

    April 14th, 2008 at 10:44 am

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