For instance, if you borrow $300,000 in a reverse mortgage, you can expect to pay more than $12,000 in fees. But unlike a traditional mortgage, it’s important to realize that you are not building up equity, you are taking on a sizeable debt.
Complex, potentially risky
Besides being costly, reverse mortgages are also complex. The Texas State Office of the Consumer Credit Commissioner has a public service announcement that says the high up-front costs associated with reverse mortgages make them less feasible for people planning to move out of their houses in a few years.
And consumers should also be aware of the potential to get scammed. As reverse mortgages grow in popularity, the marketplace is seeing a proliferation of lenders looking to get in on the action.
When entering into such a complicated and potentially risky financial transaction, it’s critical to make sure you shop around, choose a credible lender, and seek advice from an objective third party.
An alternative without the risk
It’s important to know that reverse mortgages are just one of the options available to retirees. Many older adults are taking a different path—full-service retirement living at Eagle’s Trace.
Instead of whittling away home equity with a reverse mortgage, people moving to Eagle’s Trace can use a portion of proceeds from the sale of a house to fund the fully refundable entrance deposit. But unlike a reverse mortgage, that entrance fee is 100% refundable to residents or their heirs. “We make sure that the nest egg you worked so hard to preserve is left intact either for you or your loved ones,” says Tami Jensen, retirement counselor at Eagle’s Trace.
Once they move in, residents pay one monthly package that includes all home maintenance and one meal every day at the restaurants on campus. Having a set cost for living expenses takes the guesswork out of financial planning—giving community members a priceless sense of security. And residents will never be forced to move, even if they outlive their money.
“It’s peace of mind for residents knowing they’ve planned completely for their future and no unforeseen financial catastrophe will ever force them to leave their home at Eagle’s Trace,” Jensen says.
Borrowing your own home equity can cost you
Under the FHA Home Equity Conversion Mortgage program, which accounts for 90% of reverse mortgages in the U.S., borrowing is capped somewhere between $200,160 for rural areas and $362,790 for high-cost metropolitan areas.
The example below estimates the additional costs you would incur on a $300,000 reverse mortgage loan. On top of these, you can also expect to pay a monthly servicing fee ranging from $15 to $40.
Origination fee $6,000
Initial mortgage insurance premium $6,000
Estimated appraisal fee $300
Estimated Closing costs $500
Total costs = $12,800
Source: National Reverse Mortgage Lenders Association