Should Upfront Fees on a Reverse Mortgage Deter You?

March 7, 2005, Revised January 27, 2010, July 27, 2012

Inter-Generational Conflict Over Reverse Mortgages

Reverse mortgages allow elderly homeowners to cash-out some or all of the equity in their houses while preserving the right to live there as long as they want. This occasionally creates an inter-generational difference of opinion, as illustrated by the following exchange.

"My parents are thinking about a reverse mortgage, they own their house outright valued at $345,000, and they have a monthly income that they can live off. What they are looking for is to pay off about $20,000 in bills, and maybe take a trip. I looked into a reverse mortgage but don’t like the idea of paying $14,000 in upfront fees. What do you suggest?"

I suggest that you pay off their bills and send them on a nice trip.

Can’t afford that? Then encourage them to go ahead with a reverse mortgage. The upfront cost is included in the mortgage. They will get a credit line that they can draw on for any purpose, and the portion that is unused grows over time. For elderly homeowners, it is like having money in the bank.

Difference Between Reverse Mortgage and Credit Line

"Wouldn’t a home equity line of credit serve as well, and save most of the upfront fees?"

No, they will have to pay off a home equity line, which defeats the whole purpose. If they have trouble paying their bills out of current income, they will find it more difficult paying off a home equity loan.

The difference between a reverse mortgage credit line and a home equity line is that the reverse mortgage line doesn’t have to be repaid during the lifetime of the owner. Of course, this reduces the size of their estate. I hope you aren’t being influenced by that.

When Upfront Fees On Reverse Mortgages Are a Plausible Deterrent

Home owners who expect to be in their houses for only a few more years but need to extract some cash from their home equity should use a home equity loan rather than a reverse mortgage. The high upfront costs of a reverse mortgage may make it a poor choice for owners with a short time horizon. Read Can a Small Reverse Mortgage Make Sense?

Note, however, that the HECM Saver option reduces upfront fees for borrowers with a short-term orientation who want to minimize loss of equity. See New Options For HECM Borrowers.

In or near retirement? The Professor’s Retirement Funds Integrator (RFI) might enhance your life during retirement.

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