Key Elements of a Reverse Mortgage

• Fees. No surprise here, right? Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. Make sure you know all of the fees before you close on a loan.

Be aware, however, that these loans are not cheap. In fact, because many borrowers, in the past, have found the fees to be too high, origination fees now may not exceed 2% of the first $200,000 borrowed and 1% on the remaining balance to a maximum fee of $6000 (which is subject to inflation adjustment).
As you can see, these fees are still significant, so you need to carefully consider if a REM is right for you before you put your John Hancock on any loan documents. In addition, there are good reverse mortgages and bad ones, so be sure to do your homework!

• Increasing principal. The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month, so your total debt increases over time as the bank sends you checks and interest accrues on the loan.
• Interest. Reverse mortgages may have fixed or variable rates. Most variable rates that can adjust monthly, semi-annually or annually are tied to a financial index and will likely change according to market conditions.
  We STRONGLY recommend a FIXED rate ONLY.
  The interest rate charged does not affect the size of the loan, but it does affect the amount that you will ultimately "owe."
• Impact on your estate. Reverse mortgages can use up some or all of the equity in your home, leaving fewer assets for you and your heirs. A "non-recourse" clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid. We highly recommend this clause.
• Homeowner responsibilities. Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and all other expenses that go along with being Harry Homeowner. So, for example, if you don't pay property taxes or maintain homeowner's insurance, the bank considers the loan asset at risk and could make the loan become due and payable.
• Taxes. The interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Dolan Straight Talk Tip: Be wary of lenders who, as part of the deal, want you to give them a percentage of the increase in your home's value over the life of the loan. With home prices way down, there's a good chance your home will be worth more several years from now, which very much favors the lender. It would be less money for you or your heirs when the house is sold and the loan paid off. DON'T agree to it!

The Bottom Line on a Reverse Mortgage

As a rule, if you have other ways to bring in extra income, we prefer other options like part-time employment or perhaps a small interest-free loan from a close family member to help you over a temporary rough patch. However, if you have substantial equity in your home, need the income from it badly and see no other way to get it, consider a reverse mortgage.

Before closing on any reverse mortgage, we highly recommend that you discuss it with close family members, make sure that all of you understand all of the details of the loan and, very importantly, have a lawyer review the paperwork.

Also, see if you qualify for an FHA-based reverse mortgage, which will cost you less. To do so, you must discuss the loan with a federally-approved counselor employed by a non-profit or public agency. The session should be free or nearly free. You can find a local housing counseling agency by calling 800.569.4287.

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