Reverse Mortgages: Smart?

rmgsTo many retired or soon-to-retire couples, a reverse mortgage may sound like a fairy-tale ending to a lifetime of hard work. Reverse mortgages allow homeowners to use their house as collateral in order to establish a credit line to draw against as needed or to collect monthly payments of a few hundred dollars to more than $1,000. This cash, when added to pensions and Social Security disbursements, can make life more comfortable and more secure for people in their golden years. Yet while they may have the flavor of “icing on the cake,” reverse mortgages are legally binding financial arrangements – not magic – and they are not for everyone.

Available from an increasing number of sources, but not from every type of lender and not in every state, a reverse mortgage is a way for older homeowners to access the accumulated equity in their homes. Homeowners 62 years old and older can opt to borrow, in cash, a portion of their house’s equity on a periodic basis. With that cash, they can pay bills, buy clothes and personal items for themselves or their children or grandchildren, or apply it to the purchase of something special.

Explore Your Options

If we sign up for a reverse mortgage, will any equity be left in our home for our children?

This is the first question many homeowners considering this financial arrangement ask. The answer, of course, depends on how much of the equity is tapped and how long the homeowners remain in the home. The reverse mortgage loan balance grows over time. As long as at least one borrower continues to maintain the home as his or her primary residence, reverse mortgages don’t have to be repaid.

Half of the reverse mortgage inquiries fielded by Wendover Financial Services Corp., in Greensboro, N.C., do not come from retirees themselves, but from their adult children. Often referred to as the “sandwich generation” in reference to their dual financial commitments to put their own kids through school while simultaneously providing help for their aging parents, these men and women are looking for a solution that will meet everyone’s needs.

Michael A. Hyman, senior vice president for Wendover, a secondary market buyer of Federal Housing Administration and other reverse mortgages, explains, “Young families don’t want their parents to worry about moving from their home of many years for the lack of funds to pay ordinary expenses.”

What are the up-front costs? Since reverse mortgages work like any other type of loan, there are significant up-front costs involved. In most cases, however, interest charges and loan fees are deducted directly from equity in the house by rolling them into the loan rather than paying them out of pocket. Once the reverse mortgage is approved, homeowners begin receiving periodic cash advances – either from a credit line or monthly advances or a combination of the two.

News about reverse mortgages hasn’t always been laudatory. A Wall Street Journal article in November 1996 was headlined “REVERSE MORTGAGES REVERSE THE FOR’ TUNES OF SENIORS.” The reporter cited one case in which heirs accused a lender of having charged their then-deceased parent an effective 63-percent interest rate (including all loan costs). Such extreme cases are rare today, but many reverse mortgages remain quite costly if the homeowners decide to stay in the home only for a year or two, since most of the fees involved in reverse mortgages are paid at loan closing. The growth of reverse mortgage lending has expanded substantially, and competition has tended to make the cost more reasonable. This is especially true since the Federal Housing Administration entered the arena with reverse mortgages that offer greater cash at lower costs in most cases.

Are all reverse mortgages the same? “Several types of reverse mortgages are now available everywhere but in Texas,” reports Bronwyn Belling, formerly reverse mortgage specialist for the American Assn. of Retired Persons Foundation, in Washington, D.C. “And other proprietary reverse mortgages are found primarily in the most populous states.”

But in no way does this mean that reverse mortgage rates are virtually identical. Before you or your elderly parents sign up for any plan, public or private, insist on receiving from the lender an estimate of all charges during the life of the reverse mortgage, as is required by law.

Where can I turn for more information? The facts on each lender’s plans are free from that lender, but you or your parents will need to do some legwork to compare all the plans. Free and low-cost information is available through local Housing and Urban Development offices or by calling (888) 466-3487 and through local Fannie Mae offices or by calling (800) 7-FANNIE. According to the AARP, another way to learn more about other financial, housing, and social service alternatives to reverse mortgages is to call your local Area Agency on Aging. To locate the agency nearest you, check first with the National Eldercare Locator at (800) 677-1116.

Four Frequent Questions

Must the borrower own the house free and clear of a mortgage? No, but a reverse mortgage must be the first mortgage on a property. For example, if five percent of a mortgage remains unpaid (the house is 95 percent paid), a reverse mortgage could be worked out whereby the unpaid amount is absorbed by equity before the reverse mortgage goes into effect. But what if a mortgage is 45 percent unpaid? “The balance of such a mortgage must be paid off in a lump sum by using some of the reverse mortgage proceeds, freeing elderly owners of making monthly mortgage payments,” explains Ms. Belling. “Their retained cash can then be used to pay expenses other than the mortgage.” Some homeowners’ existing mortgage balances can be paid off using the reverse mortgage, Ms. Belling reports, but it all depends on the property’s value, the area limits, the borrowers’ ages, and the interest rates for the available reverse mortgages.

What are reverse mortgage loan limits? Generally the older the homeowner is and the greater the property value, the more one can borrow. Equity limits for an FHA Home Equity Conversion Mortgage, one of the more popular proprietary reverse mortgages, range from $86,317 to $170,362. The higher limits are generally offered in areas where home prices are elevated, such as in high-cost urban areas, according to Ms. Belling. Eligible homeowners can borrow a percentage of this limit (or of the home’s appraised value if it’s lower than the limit) that is based on the youngest borrower’s age and the prevailing interest rate and other loan costs.

Fannie Mae’s national equity limit for its Home Keeper reverse mortgage rose to $227,150 from $214,150 on January 1, 1998, reports Mercy Jimenez, vice president for senior products at Fannie Mae (formerly known as the Federal National Mortgage Assn.). This limit rises or falls each year, Ms. Jimenez says, according to an annual analysis of median home prices throughout the country.

If your parents own a home worth $300,000 or more, “then they really should consider one of the other proprietary reverse mortgage plans because they’ll be able to extract more money,” Ms. Belling advises. “But do pay close attention to all of the costs and what will be left over when you or your parents sell the home to pay off the loan in the future.”

Are homeowners over 80 able to draw more than the 62-65 group, given the same house value? Generally yes, but everyone’s circumstances will be a little different, Ms. Belling advises, so it’s doubly wise to check all plans available in your area before deciding on a plan or opting not to sign up for a plan at all.

What happens once equity is depleted? Do payments on all reverse mortgage plans stop? No, explains Mercy Jimenez. Both FHA and Fannie Mae’s Home Keeper reverse mortgage have a plan named Tenure for which monthly payments continue until the owners die or move from the house even if the equity runs out, she says. If the selling price for the house doesn’t completely cover all cash advances plus interest, Ms Jimenez adds, the homeowner or the estate is never obligated to pay more than the proceeds of the sale of the home, even if the total of the monthly payments over the life of the mortgage exceeds the selling price of the home.

Monthly payments under a Tenure plan, however, may turn out to be somewhat smaller than those for other plans. That’s all the more reason to explore every reverse mortgage possibility before putting your signature – and your home – on the line.

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