What Does a Reverse Mortgage Cost?
A reverse mortgage generally costs more than conventional mortgage financing. The important distinction is between the upfront costs of arranging the mortgage and the longer-term cost of interest accumulating on the balance.
← Back to Reverse Mortgage QuestionsThe Biggest Cost Is Usually the Interest Over Time.
Reverse mortgage rates are generally higher than conventional mortgage rates. If you choose not to make voluntary payments, interest is added to the mortgage balance. Over time, that growing balance can reduce the equity remaining in the home.
Mortgage Interest
Interest is charged on the outstanding reverse mortgage balance according to the rate and terms of the mortgage.
Accumulating Interest
If regular payments are not made, interest can be added to the mortgage balance, increasing the amount owing over time.
Appraisal Cost
A current appraisal is generally required to establish the property value used by the reverse mortgage lender.
Legal Costs
Legal work is required to complete the mortgage and register the lender's security against the property.
Lender or Setup Costs
Depending on the lender and product, additional setup, administration or lender-related charges may apply.
Existing Mortgage Payout Costs
If an existing mortgage is being paid out, discharge costs, interest adjustments or prepayment charges may also affect the transaction.
Time Has a Major Effect on What the Reverse Mortgage Ultimately Costs.
A reverse mortgage can remain outstanding for many years. When interest is added to the balance rather than paid, future interest is charged on a larger mortgage balance.
That is why the length of time you expect to keep the reverse mortgage matters when evaluating the overall cost and the amount of equity that may remain later.
The amount initially borrowed forms the base on which interest begins to accrue.
The mortgage rate directly affects how quickly the outstanding balance can grow.
The longer the mortgage remains in place, the more opportunity there is for interest to accumulate.
Where permitted, voluntary payments may reduce interest accumulation and help preserve more equity.
That Depends on What the Reverse Mortgage Allows You to Accomplish.
Looking only at the interest rate does not tell you whether a reverse mortgage is a good or bad financial decision. The cost should be compared with the financial problem the mortgage is solving.
Eliminate a Monthly Mortgage Payment
Removing a required monthly mortgage payment can materially improve retirement cash flow for some homeowners.
Pay Off High-Cost Debt
Using home equity to eliminate expensive credit cards or other debt may reduce monthly financial pressure.
Create Retirement Cash Flow
Accessing equity can provide funds for living expenses, home improvements or other retirement needs without selling the home.
Avoid Selling Too Soon
For some homeowners, the financing may provide the flexibility to remain in the home rather than selling because of cash-flow pressure.
Preserve Accessible Savings
A reverse mortgage may allow a homeowner to use some home equity rather than relying entirely on liquid savings or investments.
Compare the Alternatives
The right analysis compares the reverse mortgage with other realistic options, including conventional financing, a HELOC, selling or using other assets.
Understand the Cost — Then Decide Whether the Benefit Justifies It.
A reverse mortgage is generally more expensive than conventional mortgage financing, particularly when interest accumulates for many years. The decision should be based on the total cost, the impact on future equity and what the financing allows you to accomplish in return.
Let's Talk →