Anyone for a 19% Reverse Mortgage?

One of the benefits of a longer life may well be a lower interest cost.

Run the numbers for a FHA reverse mortgage — a home equity conversion mortgage (HECM) in government-speak — and the costs vary substantially with time.

Imagine that your home is worth $600,000, you get an initial advance of $30,000 and your remaining line of credit is $75,153. The stated interest-rate is 6.5%. Suppose you’ll have $10,000 in closing costs and an up-front insurance premium of $4,000. In addition, there will be a .5 percent annual insurance premium plus a $12 monthly servicing fee.

Okay, what is the real rate of interest, the actual cost of the loan?

The quoted rate in this example is 6.5% but that’s not the real cost.

If the loan ends in two years — that is, if you move or pass on in 24 months — the rate is 18.93 percent.

At nine years, the rate falls to 9.65 percent while if the loan lasts for 24 years the rate drops to 8.03 percent.

Of course, as the FHA explains, “your actual cost may differ if, for example, the amount of your loan advances varies or the interest rate on your mortgage changes. You may receive projections of loan balances from counselors or lenders that are based on an expected average mortgage rate that differs from the initial interest rate.”

In other words, whatever the real cost of the loan is, it isn’t 6.5%.

As always with any reverse mortgage, get all the facts. Look for an amortization statement and the “total annual loan cost rate” print out. And before you sign anything with anyone, speak with an attorney who specializes in elder law.

This entry was posted on Tuesday, August 7th, 2007 at 1:44 am 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.