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Monday, February 18 , 2019, 7:57 pm | Fair 50º


Elaine Abercrombie: Look Before Leaping Into Reverse Mortgage

It may sound like a great option, but there are drawbacks hidden in the details

Elaine Abercrombie
Elaine Abercrombie (Roe Anne White photo)

Many retirees are facing dwindling incomes from their battered investments, which explains why applications for “reverse mortgages” have risen nearly 50 percent in the past two years.

It sounds like a great option: A lender essentially gives you a cash advance on your home’s equity, which doesn’t have to be paid back until you either move or “move on.”

There are drawbacks hidden in the details, however.

Although recent legislation has raised maximum allowable home values, the formula for determining how much you’ll get includes other factors such as your age and current interest rates. Your current mortgage balance and the loan’s fees are then subtracted from that number.

Although loan origination fees have been capped at $6,000, the monthly mortgage insurance premiums and service charges could push the total cost of the loan up to twice that much. If you think you might move anytime soon, this just doesn’t make sense.

While anyone age 62 or older may qualify, it’s the youngest who run the biggest risk with a reverse mortgage, because you may very well outlive the life of your payments. When that happens, the equity you would have fallen back on has disappeared.

It’s best to seek other alternatives first, with your best option being to make your move now and downsize to a smaller home, pocketing the equity from your sale for the future.

Elaine Abercrombie, a broker with Abercrombie Fine Homes at Village Properties, is president of the Santa Barbara Association of Realtors. She can be contacted at .(JavaScript must be enabled to view this email address).

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