By Matt Allen
The information provided in this article is intended to give a general overview of the topic and is not intended as legal advice. For information specific to your situation, please talk with your reverse loan mortgage professional.
Article #6, Are Reverse Mortgages Expensive?
The answer to whether a reverse mortgage is expensive is that it depends. In some situations the upfront loan costs may be the same or even less than a traditional mortgage. In other situations they may be twice as expensive, or more, as a traditional mortgage. There are several factors that determine the upfront costs of the loan. These factors include the value of the home, your age, if you are purchasing or refinancing and the amount of liens against the property.
The reality is many people view a reverse mortgage as more expensive than a traditional forward mortgage. As just mentioned, there are situations where that may be true. However, you cannot compare the cost of a reverse to a forward mortgage. They are completely different products that accomplish completely different things for the borrower. In other words, you can’t compare apples and oranges.
Let’s assume you refinanced your home into a traditional mortgage. Let’s assume it cost you $4000 to refinance to save $200 a month. It will take 20 months to recover the costs of this new loan. And in ten years, you save $24,000.
Now, let’s assume you got a reverse mortgage and it cost twice as much, $8000, but it saves you $1000 a month. It will only take 8 months to recover the costs of the loan. And in ten years you have saved $120,000.
In the example above, the reverse mortgage was more expensive than a regular loan based on fees, twice as expensive to be exact. However, for the extra $4000 it cost you initially, you saved an extra $96,000. You end up saving almost five times as much as the traditional mortgage.
The rub to this is what is happening with each of these loans over that 10 year period. With the traditional loan, the loan balance is decreasing over time as payments are made. Assuming home prices do not decrease; equity in the home is increasing. With the reverse mortgage, the loan balance is increasing over time, assuming no payments are made. Equity in the home is decreasing as the loan balance rises.
Please remember that even though the loan balance increases with a reverse mortgage, you can never owe more than what the home is worth. This is a non-recourse loan which means you, your estate and your heirs are not personally responsible for the loan or any losses associated with it. With a traditional mortgage you are personally responsible for the loan and any losses associated with it.
As you can see there are pros and cons to each loan and each of these loans accomplishes different things for the person that uses them. It is unfair and unproductive to try and compare them from a cost stand point because they are so significantly different. Do not frustrate yourself by comparing the costs of a reverse mortgage to the last mortgage you received. There is really only way to determine if a reverse mortgage is expensive and that is to compare it to another reverse mortgage.