By Alain Valles
With recent improvements made by the federal government to the reverse mortgage program, the cost of most reverse mortgages have dropped by more than 30 percent. But cost should be viewed in terms of your goal to be financially independent, stay in your home and have peace of mind about your financial future. Below are the most important cost issues to consider.
Cost compared to a traditional mortgage — Obtaining a conventional loan is less expensive than most reverse mortgage loans. The exact calculation is based on many factors, but a rough rule of thumb is for a $300,000 home the cost of a reverse mortgage will be about $9,000, compared to about $4,000 for a traditional mortgage.
But the out of pocket costs are about the same for both types of loans, and the $5,000 difference is added to the loan amount, not required up front.
The extra cost pays for the federally guaranteed advantages of never making a mortgage payment for the rest of your life, a guaranteed equity line that grows, a monthly check for life, or the ability to receive tax free cash, to name just a few benefits. Another advantage: Many homeowners would not qualify for a traditional bank loan, while a reverse mortgage has more lenient qualification guidelines.
Cost to move — Many people don’t factor in the cost of moving: the Realtor commission of up to 6 percent, home improvements, the moving company and hiring a someone to get rid of personal belongings. There is also the emotional cost of downsizing.
Selling a $300,000 house can cost over $30,000. And where will you live? Can you afford to pay rent? Even moving in with relatives is seldom free. A reverse mortgage gives you the option to afford to stay in your own home and remain financially independent.
Cost of indecision — This can be the biggest challenge for seniors contemplating a reverse mortgage. Putting off a decision only makes it more expensive. New guidelines are scheduled to be issued that will reduce the number of people who will qualify for a reverse mortgage. Just as important, the interest rates on reverse mortgages are at an all time low. When they increase you will get less money. There is nothing more frustrating than saying, “I should have gotten a reverse mortgage when I had the chance.”
Costs of misinformation — Our loved ones and trusted advisors have our best interests at heart. But when it comes to reverse mortgages, more often than not the advice being given is based on what they overheard — not the facts. Not everyone should get a reverse mortgage. But everyone should understand the pros and cons in order to make your own decision.
Alain Valles, president of Direct Finance Corp., was the first designated Certified Reverse Mortgage Professional in New England. He can be reached at 781-878-5626 x224, or by email at av@dfcmortgage.com or visit www.lifestyleimprovementloan.com. Articles from previous issues can be read on fiftyplusadvocate.com.
