A reverse mortgage has long been considered a loan of last resort because of its high fees. Now, a new type of reverse mortgage is attracting the attention of more-affluent borrowers eager to extract cash from their homes. But older homeowners—and the adult children who advise them—need to be aware of the new trade-offs.

Reverse mortgages allow people age 62 or older to convert their home equity into cash. The homeowner can elect to receive a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves, sells the house or fails to pay property taxes or homeowner’s insurance. (With a conventional loan, such as a home-equity line of credit, a borrower can tap into a home’s equity but must make monthly repayments.)

One of the biggest criticisms of reverse mortgages is their upfront fees, which can total as much as 5% of a home’s value. Last fall, the Federal Housing Administration, which insures virtually all reverse mortgages, introduced the “Saver,” which reduces these fees by about 40%. Lenders such as MetLife Bank, Bank of America and Wells Fargo have since begun marketing them.

To cover its potential losses on a reverse mortgage—which can occur when a home isn’t worth enough to repay the loan—the FHA traditionally pockets as much as 2% of the value of the property. This “mortgage insurance premium” is typically the largest upfront charge in a regular reverse mortgage.

With the Saver, the FHA has cut this insurance premium to 0.01%. That is because homeowners who apply for a Saver are typically limited to borrowing about 80% to 90% of what they could get with a regular reverse mortgage, says Peter Bell, president of the National Reverse Mortgage Lenders Association. On a $500,000 home, for example, a 75-year-old New York resident would receive about $262,000 with a Saver, versus $331,500 with a traditional reverse mortgage, according to MetLife Bank.

Source: Wall Street Journal

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