Should Upfront Fees on a Reverse Mortgage Deter You?

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7 March 2005

Reverse mortgages allow elderly homeowners to cash-out some or all of the equity in their houses while preserving the right to live there as long as they want. This occasionally creates an inter-generational difference of opinion, as illustrated by the following exchange.

"My parents are thinking about a reverse mortgage, they own their house outright valued at $345,000, and they have a monthly income that they can live off. What they are looking for is to pay off about $20,000 in bills, and maybe take a trip. I looked into a reverse mortgage but don’t like the idea of paying $14,000 in upfront fees. What do you suggest?

I suggest that you pay off their bills and send them on a nice trip.

Can’t afford that? Then encourage them to go ahead with a reverse mortgage. The upfront cost is included in the mortgage. They will get a credit line that they can draw on for any purpose, and the portion that is unused grows over time. For elderly homeowners, it is like having money in the bank.

"Wouldn’t a home equity line of credit serve as well, and save most of the upfront fees?"

No, they will have to pay off a home equity line, which defeats the whole purpose. If they have trouble paying their bills out of current income, they will find it just as difficult paying off a home equity loan.

Most elderly homeowners take a reverse mortgage in the form of a credit line. The difference between that and a home equity line is that the reverse mortgage line doesn’t have to be repaid during the lifetime of the owner. Of course, this reduces the size of their estate. I hope you aren’t being influenced by that.