Reverse Mortgages, Part II: The Numbers

Continuing on with reverse mortgages, let’s take a look at some numbers. Because reverse mortgages can be a tad confusing, I have provided an example:

A 75-year-old woman owns a home valued at $250,000. She qualifies for a HECM credit line of $135,484 with a 7% interest rate. At closing, she withdraws only $67,742 of the loan. Assuming that the interest rate stays the same and she remains in the home for 12 years and does not take any other loan withdraws, this is the cost of her reverse mortgage:

Total Amount Borrowed	$ 67,742
Loan Costs
Upfront Costs	$ 12,000
Total Mort. Ins. Premiums	$ 7,933
Total Monthly Servicing Fees	$ 5,040
Total Monthly Interest Charges	$111,056
Total Loan Costs	$136,029
Total Loan Amt. Owed	$203,771
Souce: AARP (www.aarp.org/revmort)

Look at these numbers closely. Most reverse mortgage lenders will promise that the total will not exceed the appraised amount. However, the interest rate of 7% is on the whole credit line not the amount withdrawn.  That’s right, even if you don’t utilize 100% of the credit line, you are still responsible for paying the interest on the credit line.   It’s like having a $10,000 credit limit with an 18% interest rate and only $2,000 worth of charges but paying interest on the whole credit line.

My suggestion to anyone who would seek out a reverse mortgage is negotiate everything. Remember, there are two ways this mortgage is repaid: upon sale of the property or by no longer LIVING in the house.
I will cover Taxes and Estate issues in the final two parts.

Related posts:

1. Reverse Mortgages, Part I - What is a Reverse Mortgage?
2. Reverse Mortages, Part III - Tax Issues and
3. Reverse Mortgages, Part IV - Estate Planning
4. Bad Credit Mortgages
5. Mortgage Rates: Fixed Rates vs. Variable Rates