About Alternative Costs

One of the big hurdles to reverse mortgage acceptance are the up-front fees, including with HUD-backed loans a bloated insurance premium and a generous origination fee.

These are real costs and there are strong arguments for their reduction. That said, there is another cost issue which does not emerge with much frequency that ought to be discussed.

The plain purpose of a reverse mortgage is to free household equity, either as a lump sum or in the form of monthly payments or line of credit in a way that does not require monthly repayments.

The alternative to a reverse mortgage is to sell the property. Such an option would indeed end current mortgage payments on the property and would free-up household equity.

But such benefits are not somehow free. There are significant costs to selling a home.

First, there are marketing and closing expenses, costs which often equal 8 percent or more of the property’s market value. For a $500,000 home we’re talking about $40,000 in cash at closing.

Second, while the current mortgage is paid off, the homeowner has to live somewhere else. Will “somewhere” cost money in the form of a monthly rental payment or a new mortgage? Or, will “somewhere” mean a no-cost option such as moving in with an adult child?

The point is that there should always be a push for lower consumer lower costs but the alternative should be seen for what it is — not free and not cheap. A reasoned analysis should look at all options, and all costs.

As always with reverse mortgages, speak with a variety of reverse mortgage lenders and consult with an attorney who specializes in elder law before signing any paperwork.

This entry was posted on Thursday, February 14th, 2008 at 3:44 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.