Reverse Mortgage Drawbacks

Drawbacks
But if the reverse mortgage sounds like a godsend, be aware that it has drawbacks, too.

For one thing, they are expensive. Closing costs include all of the charges that come with a traditional mortgage -- application fees as well as appraisal, title insurance and document stamps charges -- plus 2 percent of the home's value to cover the FHA-mandated cost of insurance to insure that the amount owed will never exceed the value of the home.

Origination fees can add another 2 percent or more of the home's value to the closing costs, so they are not a good idea for those who do not expect to remain in their homes very long -- for at least three years.

They're also not for those who want a few thousand dollars to replace a heater or resod a lawn, or for those who are hellbent on leaving every last penny to their children.

"The closing costs are too high," explains David Klein, an elder law attorney in Suffern, N.Y. But for those who do plan to stay three years or more, reverse mortgages truly are useful and effective, says Klein.

He recently helped an equity-rich client -- a 66-year-old widow on a fixed income -- obtain a reverse mortgage. "It paid off her high credit card debt and her mortgage and gave her income, too," he says.

But being pressed for cash isn't the only reason to take out a reverse mortgage. For example, Aleck and Sheila Townsley took one out on their home that overlooks San Francisco Bay even though their retirement had been comfortable enough -- he's a retired attorney and she's a retired school teacher. They chose a line of credit in order to be able to enjoy the "extras."

"We have no children," Mr. Townsley explains. "So I want to spend my last dime with my last breath."

For more information, and to calculate how much you may be able to borrow, visit our online reverse mortgage calculator.