What do Robert Wagner, Pat Boone, Fred Thompson and Henry Winkler have in common? If youve watched TV lately, you probably know the answer: They are all celebrity spokesmen for companies that offer reverse mortgages.
Like a traditional mortgage, a reverse mortgage allows you to borrow against your home equity. You dont have to repay the loan as long as you remain in your home. You must be 62 or older to qualify, and your home must be your primary residence. If you need extra income to supplement your retirement savings, a reverse mortgage may seem like the answer to your prayers. But the TV ads dont say much about the downsides.
• You could run out of money. You can take your payout as a line of credit, monthly payments or a lump sum. In recent years, the majority of borrowers have opted for a lump sum, according to a recent report from the Consumer Financial Protection Bureau. But, says the CFPB, borrowers who withdraw all of their available home equity up front will have fewer resources to draw upon to pay for everyday and major expenses later in life.
• Reverse mortgages are expensive. The most common reverse mortgage, the federally insured Home Equity Conversion Mortgage (HECM), charges an initial 2 percent insurance premium on the full value of the home. That means you would pay a premium of $8,000 on a home valued at $400,000, no matter how much you borrow.
Lenders that offer HECM loans are also allowed to charge an origination fee ranging from $2,500 to $6,000. And youll pay closing costs that typically include an appraisal, title search and other fees, along with servicing fees of up to $35 a month.
The HECM Saver, available since 2010, charges an initial insurance premium of just 0.01 percent of the homes value. However, the amount you can borrow is much lower than it is for the standard HECM, and the interest rate is higher.
• You could lose your home. Even though you dont have to make payments on a reverse mortgage, youre still responsible for homeowners insurance, property taxes and maintenance. As of last February, more than 9 percent of reverse-mortgage borrowers were at risk of foreclosure because they had fallen behind on tax and insurance bills, reports the CFPB.
Because of the cost and complexity of reverse mortgages, the Department of Housing and Urban Development requires that you obtain counseling from a government-approved agency. You can find a counselor in your area by calling 800-569-4287 or visiting hud.gov/counseling.
Sandra Block is a senior associate editor at Kiplingers Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. Kiplingers has a new service to pinpoint the ideal time to claim Social Security to maximize benefits. Visit http://kiplinger.com.