Posted on June 3rd, 2010
We are witnessing many changes occurring in the reverse mortgage industry and anticipate additional changes are to come. After 22 years of successfully helping folks over 62 access the equity in their home, we now have reverse mortgage programs offered with little to no closing costs? Is this good? Yes and no. Reverse mortgages are starting to look a lot like a ‘forward’ mortgage. You never want to get caught up in a loan with no closing costs unless you understand how the loan works. Banks do not offer loans for free! The costs will be there, but will be in the form of a higher interest rate. When considering any mortgage you cannot only look at closing costs. You also need to consider the interest accruing on the loan. The true cost of your loan will be both the closing costs and interest you have to pay back. If higher closing costs means you will pay less in interest over the life of the loan your total cost will be less. Be careful though because a low closing cost loan can sound very appealing.
What we are seeing today are fixed rate reverse mortgages with little to no closing costs. This is a great option, but the program requires a lump sum distribution at day one. If you are ok with this and understand interest will accrue on all the monies then this is a great option as rates are low today. If you do not have a very large mortgage or loan on your home then this option could end up costing you more down the road because it will accrue interest on monies you have not ‘used’ yet. It is important to remember interest only accrues on the monies you stick in your pocket. One other consideration in determining the total costs is to consider the interest earned on the lump sum distribution.
The adjustable rate program does provide a lot more flexibility in how you can borrow the monies available. If you do not have to pull out much money in the beginning the adjustable rate program will allow you to establish a line of credit and only draw down monies as you need them. The significance of this is you will only be charged interest on the monies you borrow as you borrow them. When deciding between a fixed and adjustable rate you want to consider how much money you are going to borrow and how quickly. If rates do rise, which we know they will, how high would they have to go in order for the interest accruing on the adjustable program to exceed what would be accruing on the lump sum fixed rate program. This will help you know which program may be more beneficial to you.
This is what we do when we sit down with people to help them understand the differences between the reverse mortgage programs. The more you know the better decision you can a make. A reverse mortgage continues to be a great planning tool for retirement, but you need to make sure you fully understand all the options and changes occurring to assure you are setting yourself up with the correct program.