Is a reverse mortgage right for you?
Acquiring a mortgage loan
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Tess Vigeland: Earlier in the show, we heard some of the details of the housing bill, but here's one provision we didn't get to: The law makes it easier and financially safer for seniors to get reverse mortgages. It puts limits on the fees banks can charge for them. Lenders also cannot require borrowers to buy insurance products like annuities in order to qualify for the loan.
Now, for those of you who aren't sure what a reverse mortgage is, Lenora Chu has a primer.
Lenora Chu: Tom Robinson has a good job as a project engineer in Long Beach, but when his elderly mother started needing help around the house, he knew he couldn't carry the financial burden alone.
Tom Robinson: She's on a limited income obviously. Being 82, she didn't have much from what my dad had left her and her house was gonna start needing some repairs.
Robinson had seen ads for reverse mortgages on television and his mother had been getting flyers in her mailbox. In December, they signed on the dotted line. The loan tapped into the equiStity she'd accumulated to pay off her mortgage and get rid of her monthly payments and it left her with a $20,000 line of credit to draw down for a paint job, plumbing repairs and the occasional splurge. When his mother passes on, there will be less equity to leave to her children, but Robinson says he's not bothered.
Robinson: Not really knowing how long she was going to be here with us, we felt she might as well enjoy life while she can.
That's ideally how a reverse mortgage is supposed to work, says Meg Burns of the FHA. The FHA insures 9 out of 10 reverse mortgages in the United States. All are offered through traditional lenders.
Meg Burns: It's a good way for seniors who have some equity in the home, value in the home, to tap into some additional resources to live more comfortably.
Demand for reverse mortgages is expected to rise, but many consumer advocates continue to see reverse mortgages as a last resort for house-rich, cash-poor seniors.
Kathy Kristof: It's one of the options, it's just an expensive option.
That's personal finance columnist Kathy Kristof. She points out that mortgage insurance and origination fees will put you out 4 percent of the value of the property. Then there's a service charge that averages out to $30 a month over the life of the loan.
Kristof: And these fees can add up to tens of thousands of dollars, even on a relatively small reverse mortgage.
Kristof suggests considering other options first, such as downsizing to a more affordable home to free up some cash. Some local governments also sponsor programs that get seniors into similar loans with lower fees. Or you could sell the home to your adult children and rent it back from them.
There are also a few scams to watch out for, says Burns of the FHA. Beware of brokers who sell you a reverse mortgage and encourage you to use that money to buy another one of their financial products.
Burns: And that is because the interest rate you will pay on that loan will likely be higher than any interest you would accrue through the investment vehicle or savings account.
And don't let anyone convince you to draw down the entire loan balance at once -- you'll be accruing interest on money you don't necessarily need. And one more thing, says financial adviser Michael Laine. Because upfront fees are hefty, take out a reverse mortgage only if you plan to stay in the home for a few years.
Michael Laine: As long as the client will be in the house for a sufficiently long period, the expense is amortized over time.
In other words...
Laine: If you plan on dying soon, let's not go this way.
But Laine says, happily, most of his clients plan on sticking around for a long, long time.
In Los Angeles, I'm Lenora Chu for Marketplace Money.