It’s hard to live on $448 a month.
The Oshkosh Northwestern tells the story of Darlene Branson, 78, who turned to her home equity to help supplement monthly Social Security payments.
How did she do it? By taking out a reverse mortgage.
What is a reverse mortgage? It’s a loan that enables homeowners 62 or older to borrow against the equity in their home without having to sell the home, give up title or take on new monthly mortgage payments.
The reverse home loan proceeds can be used for any purpose. They can be taken out as a lump sum, through fixed monthly payments, a home equity line of credit or a combination of those options.
Branson joins a growing number of cash-strapped senior citizens turning to reverse mortgages. According to the Washington, D.C.-based National Reverse Mortgage Lenders Association, the number of FHA loan-insured reverse mortgages jumped by 77 percent nationally during the past year.
Darryl Hicks, associate director of the National Reverse Mortgage Lenders Association (NRMLA), attributes the increases to several factors:
- Rising household costs.
- Insufficient retirement income. Many people rely on Social Security, which may not cover all of their needs.
- Increased reverse mortgage awareness.
Whatever the reason, many people now see reverse mortgages as a viable financial planning tool. Here’s how a federally insured reverse mortgage works:
- How much you can borrow depends on your age, current interest rates and the value and location of your home.
- The government sets interest rates and fees.
- You are required to undergo mortgage counseling to make sure this option is ideal for you.
- After the reverse mortgage is repaid, the remaining equity is distributed to you or your estate.
The money you borrow can be used for anything and everything you want, including prescriptions, home improvement, travel and food. But that doesn’t mean it’s the right move for you. What you should do is talk to one of our licensed mortgage brokers and consider the pros and cons before you make your move.
From the living room of her home, Jean Ingram enjoys sweeping views of pristine California wetlands and, off in the distance, Catalina Island.
According to Business Week, she and her late husband paid $135,000 for the 2,200-square-foot Huntington Beach, Calif., home in 1978, and it’s valued at about $1.2 million now.
Yet until last year, the 69-year-old widow, awash in home equity but light on monthly income, feared she would have to sell.
Ingram was able to hold on to it by taking out a jumbo reverse mortgage on the property - called “jumbo” because the amount was $388,000. Conventional reverse mortgages would not offer as much on a $1.2 million home.
Either way, these financial deals allow homeowners 62 and older to take the equity out of their houses without having to make monthly payments to the home loan lender.
The balance comes due when the homeowner moves out or dies. Then, the mortgage holder or the heirs have to sell the property or use other funds to pay off the loan if they want to keep it.
Financial Freedom Senior Funding, based in Irvine, Calif., has been the main source of the supersize California mortgage loans since 2000. More providers are entering the field, offering variations on these loans as well as increasing competition.
BNY Mortgage, based in Newburgh, N.Y., plans to offer the first fixed-rate reverse jumbo mortgage in February. It will be available initially in 10 U.S. states and later in other states through collaborating lenders.
Ingram’s mortgage, like most of its kind, is variable, with the interest rate tied to the widely quoted London Interbank Offered Rate (LIBOR). Her rate is currently 8.42 percent and the mortgage rates can adjust every six months, to a maximum of 14.92 percent.
The 8.42 percent rate is about two points higher than a regular adjustable-rate mortgage. What significance is the interest rate if you’re not making monthly payments? A mortgage calculator will tell you it’s the basis for calculating how much Ingram or her heirs will eventually have to repay the lender.
Because she chose to take all the money up front, rather than in a home equity line of credit, the mortgage company waived its regular fees and closing costs. With cash from the reverse mortgage, Ingram paid off her original California home loan, upgraded her roof and patio, and stashed $150,000 in certificates of deposit.
She hopes to buy a condominium that will throw off rental income.
How much do the jumbo mortgages really cost? Suppose you took a $700,000 reverse mortgage on a home valued at $2 million, with a fixed interest rate of 8.85 percent. Depending on how fast you took money out, the debt could balloon to between $915,000 and $1.7 million in 10 years.
The final bill would include accrued interest, service charges of $20 a month, and the original closing costs. If the home appreciated 4 percent a year during the 10 years, it would be worth nearly $2.7 million. You or your heirs could sell it, pay off the home loan, and have a tidy profit.
Plans can go awry if you become ill and need to move out and sell the home immediately. If mortgage rates have skyrocketed and the property value has remained flat, your equity could be wiped out. But at least the amount you owe would never exceed the market value of the home.
Reverse mortgages are a tremendous tool to help elderly homeowners who don’t want to be forced to sell their houses - but they’re not the only such method, according to the Greater Tulsa Reporter.
Cindy Thomason, vice president and the head of mortgage lending for First Pryority Bank in Tulsa, says people anxious to keep their homes have other options at their command.
“Now we are just one of 100 test banks that Countrywide Mortgage uses for reverse mortgages. This year they will be coming out with their own plan,” she said. “I hope the visibility of that plan will help us increase the awareness of our reverse mortgage business.”
What a reverse mortgage does is allow a homeowner to take money out of a house and never have to make a monthly payment. Neither the homeowner or any heirs will ever owe more than the home’s appraised market value at the maturity of the loan, which is when the homeowner dies or sells the property.
“But people have to realize that doesn’t mean a $200,000 house will bring in an instant $200,000 cash,” she said, urging caution. “Typically, a person who gets a reverse mortgage at the age of 62 can borrow 50 percent of the appraised value of their house, with that amount increasing as they get older.”
People who seek a reverse mortgage will have to attend a counseling session to help them set up a budget in most cases. There are some fees involved with getting a reverse mortgage, so a person considering them needs to do some research to see if this is their best option.
“Other plans, such as standard mortgages, might be more advantageous for an individual’s personal situation,” Thomason said. “A cash out refi helps a person get some cash in hand so necessary repairs can be made or living expenses met until the house sells.”
For people struggling with bills, there are services that offer assistance in such areas as medical and utility costs. Often people don’t know where to start looking for help when they’re behind on mortgage loan payments or other bills, but there are usually services in place for just such an occasion.
With interest rates still low, Thomason suggests people on adjustable-rate mortgages or especially interest-only mortgage products should soon consider refinancing to a fixed-rate loan.
“Often people get an adjustable rate mortgage to help them qualify for a low rate for a property they couldn’t otherwise afford. When the initial period runs out and the rate is adjusted it sometimes causes a hardship.”
The U.S. House of Representatives voted Tuesday to waive the existing cap on the number of reverse mortgages a federal housing agency may insure for older Americans who want to turn home equity into cash.
The Federal Housing Administration (FHA), which insures many such mortgages, is in danger of hitting the 275,000 ceiling on the number of such FHA loan transactions that it can handle.
Tuesday’s legislation, if passed by the U.S. Senate, would remove the limit and allow the federal agency to continue underwriting reverse mortgages.
Under the terms of reverse mortgages, a homeowner borrows against his or her own equity and receives regular monthly payments from a mortgage lender, but retains title to the home.
The reverse mortgage is a popular tool for elderly Americans to utilize their home equity late in life. Tuesday’s legislation passed the House unanimously and now goes to the Senate.
Rep. Jim Matheson, Democrat of Utah, sponsored the bill.
“This program was created to serve out seniors who may be ‘cash poor’ but equity rich,’” Matheson said in a statement. “The majority of the mortgage loan recipients are elderly widows, who may use the money on health care, medicine, home repairs, or other needs.”
Matheson, who sponsored legislation raising the reverse mortgage limit in a past year, said that he and other lawmakers expect to permanently remove the cap in new legislation soon.
For homes in need of repairs, many banks will suggest a home equity loan. And why not?
These institutions earn a commission off such products.
But that doesn’t always mean they’re the right plan for you. This is especially the case for retired homeowers that receive limited income from Social Security, stock dividends, and/or a small pension.
A better mortgage fit: See if your local bank probably makes senior-citizen reverse mortgages.
Many elderly borrwers are “house rich, but cash poor.” A reverse mortgage can provide them with the money needed for a new roof and other expenses, without the burden of paying off rates on a home improvement loan or equity loan.
You will have the choice of a lump sum, lifetime monthly income, a credit line (except in the Texas housing market), or any combination. Most seniors choose the credit line and use the available funds as they need them, such as for a new roof, new car or a world cruise.
The big advantage of a reverse mortgage is no repayment is required as long as you reside in your home. Conversely, home equity loans require monthly payments.
Because you may have limited monthly income, adding a monthly payment for a home equity loan to your burden might not be wise.
Syndicated columnist and financial expert Bruce Williams discusses the sometimes useful, often controversial subject of reverse mortgages in his most recent Smart Money report. Here’s his assessment of a reader’s difficult financial situation as it appears in today’s Reading Eagle:
QUESTION: My husband and I are retired, with an annual combined income of $31,500. We own our home, which I inherited from my dad after he passed away.
He was frugal, so in his later years he didn’t put much money into the house, only what was necessary. The house is 89 years old, and I am noticing many things that need to be addressed.
My husband and I like living here, and the property taxes are reasonable. What we worry about is the upkeep of the house. I have $34,000 from my 401(k), which I rolled over to an IRA. We also have $14,000 in a savings account.
I don’t want to use any of this, except for emergencies. My husband is 74 and his health seems to be deteriorating. I am 67 with good health.
I have heard of the reverse mortgage, but you hear all the pros and cons and it gets so confusing, especially at our age. We wouldn’t want to do something we will regret. Retirement homes are pretty expensive, especially in our income bracket. Can you help us out?
ANSWER: You neglected to provide one important detail: how much the house is worth.
The amount of the reverse mortgage is established by the average value of homes in your area. Reverse mortgages are not a bad idea. This type of mortgage is a useful tool, allowing you to use funds that otherwise would be locked up, and not have any obligation to repay them during your lifetime. That’s the good news.
The bad news: At age 67, you could have a 25-year life expectancy.
As a result, the amount of money that can be borrowed on a reverse mortgage will be diminished. You also should know you will have life rights to live there and, even if you exhaust the amount of money loaned, as long as you pay the taxes and the homeowner’s insurance, you can stay in your home.
The mortgage lender doesn’t get his money until both of you have passed away. It very well may be a good idea, but until we can establish how much equity there is, and what your needs are, whether or not this is a good move on your part remains a conundrum.
According to the Tracy Press, Debbie George knew her business could be hurt after hearing about a real estate scam that involved the promise of a reverse mortgage.
George is branch manager of American Pacific Mortgage, one of six loan companies in town authorized by the federal government to offer reverse mortgages.
Like others in the business, she was skeptical of reverse mortgages until the Department of Housing and Urban Development (HUD) instituted stronger regulations on these types of loans in the 1990s.
It’s still a small part of the California home loan business.
“In Tracy, there doesn’t seem to be a large number of people interested. I think it’s mostly out of fear. They worry that the bank wants to take their house, and that’s not it,” she said.
The case that caught the attention of police and the San Joaquin County District Attorney involved the sale of a house, though investigators allege, among other things, that Michael Llamas of Mountain House represented the deal as a reverse mortgage.
The issue at hand is that Llamas’ company, Property Line Investments, is not on the list of HUD-approved reverse mortgage lenders.
California mortgage brokers say reverse mortgages are, essentially, the same as regular mortgages and work in the following way:
- A homeowner takes out one of the loans based on the value of the house, and maintains the title to the house while the mortgage lender holds a lien on the property.
- In a standard mortgage, a lender provides the money up front to buy the house.
- In a reverse mortgage, the amount of the loan grows as the lender makes regular payments to the property owner.
The amount can be up to 55 percent of the value of the property. Monthly payments depend on the borrower’s age. The minimum age is 62, but older borrowers tend to be given larger monthly payments. Then the California mortgage loan is paid off when the borrower dies and the house is sold or refinanced.
Bronwyn Belling, a reverse mortgage specialist at the AARP Foundation in Washington, D.C., said other safeguards are built into federal regulations to make sure lenders are legitimate and borrowers know what they are getting themselves into.
“If it was a federally insured reverse mortgage, they have to give a list of five HUD-approved counseling agencies. There is a piece of paper that has to be signed by a counselor before it could be processed by the lender,” she said.
Belling said AARP’s studies of the housing needs of seniors show that as people grow older, increasingly they want to stay in their homes.
“That’s the beauty of a reverse mortgage, because it gives them money to make home repairs and meet day-to-day needs.”
People often become interested in reverse mortgages when they need cash to pay for repairs on aging houses. But the loan fees, which can be between $15,000-20,000, means people who have pensions or other reliable income should not take on a reverse mortgage just to cover short-term needs.
Janis Rainey, manager of Mission Hill Mortgage in downtown Tracy, said a reverse mortgage is a practical option for elderly people who otherwise wouldn’t have much income.
“My whole thought on reverse mortgage has changed because I helped people get them and they couldn’t be happier. If the house goes to a family member, they can refinance or sell it and pay off the reverse mortgage.”
George added that to become a HUD-certified reverse mortgage broker she had take classes, and both HUD and her parent company also closely scrutinized her first four reverse mortgages.
“Even after that the loans are very strictly monitored by not only the company but by HUD also.”
She added that federal involvement not only regulates mortgage interest rates and fees, it also ensures that people maintain ownership of the house.
The kids are all gone.
The retirement party has been endured.
The house that once sounded like an echo chamber filled with young voices has gone quiet.
And let’s face it, the pension plan doesn’t quite equal the salary it has to replace.
Time to downsize, isn’t it?
As a Realtor, David Jones tells the Greater Tulsa Reporter that he’d love to put the house of a person or couple matching the above description on the market and help find a new one.
But as a person not necessarily wedded to the bottom line, he is compelled to ask if you have ever considered a reverse mortgage?
What is a reverse mortgage? Simply put, if you’ve spent years buying your home and if you and any other co-owner of your house (your spouse, for example) have reached the age of 62, then you might want to consider the idea of having a lending institution buy it from you bit by bit while you continue to live in it as long as you and/or your spouse are alive.
Why stay in your house? You know the neighbors, the area, the shops, and the house itself, which is filled with memories. You might want to just dust the upstairs once in awhile and keep it available to board children and grandchildren who come in from out of town. The rest of the time, you can live happily in the bottom half.
How does it work? Your lender has a formula outlining what you can get with your reverse mortgage. You are guaranteed a monthly payment until you’re 150.
Let’s say you purchased your house free and clear. Depending on what the house is worth, you can either get a lump sum or a monthly stipend that slowly borrows against the worth of the house. Each month the institution has a higher and higher lien on your house that is only settled when the house is sold (just as the institution that holds your current mortgage loan must have that paid off if you sell the house).
Thus, before your heirs can realize any funds from the sale of your house after you die or leave it all debts must be satisfied. But when it comes to encumbering your estate its important to know that the debt is against the house alone, not any other asset you may own.
What are the advantages of a reverse mortgage?
- The principal or interest payments are never due until you move, sell the home or pass away.
- You never give up your property title.
- You can never owe more than the value of the home.
- If you die, the benefits continue until your spouse’s death.
- You can get a reverse mortgage even if you don’t own your house free and clear. The existing home mortgage, of course, be paid off before you can get any monthly benefit but just stopping payment to your mortgage lender may be of inestimable value to your piece of mind.
The following are the basic rules of eligibility to get a reverse mortgage:
- All co-owners of a house (usually husband and wife) must be at least 62.
- The home must either be debt free or have a mortgage that can be paid off by reverse mortgages.
- The property must be single-family or owner-occupied multi-family home. Town homes, detached homes, condominium units and planned unit developments are eligible.
Despite the fact that the U.S. has enjoyed a long period of relatively low inflation, cost of living continues to rise. A growing number of seniors living on limited or fixed incomes now find themselves house rich but cash poor. Confronted with mounting cash-flow problems, many of them have been faced with the unpleasant prospect of having to sell a beloved family home.
One way to address this problem is a reverse mortgage.
This provides funds to seniors, either in a lump sum or over time, using the equity in their homes as collateral. Unlike traditional mortgages or home equity loans, which a borrower is ultimately required to pay back, this borrowing option provides cash up front and requires no monthly repayments.
The total balance, including accumulated interest, is repaid when the home is sold or the last surviving borrower dies.
According to the National Center for Home Equity Conversion, the first known reverse mortgage was issued in 1961 by a Maine mortgage banker.
Reverse mortgages were later used in other areas of the country as well, but it was nearly 20 years before their existence received widespread exposure and government endorsement. Today, there are many types of federally insured reverse mortgage options as well as privately funded programs.
One of the provisions of a reverse mortgage is that the homeowner or his estate will never be liable for more than the home’s value, even in a falling real estate market. However, a family member wishing to keep the home after a parent’s death must pay back or refinance the mortgage, but might have difficulty doing so in such a situation.
Although lenders acknowledge that a reverse mortgage can sometimes be the best solution to alleviate serious problems, there are situations where they were the cause of emotional consequences that did not surface until years afterward. Alternative strategies include the use of fixed-rate interest-only mortgages to provide cash.
There are more features, restrictions and requirements to reverse mortgages (sometimes called a home equity conversion mortgage) than listed here, but resources are available to help people learn more.
The websites of the U.S. Department of Housing and Urban Development (HUD) and the American Association of Retired People (AARP) are good sources of information. Many states also offer assistance for seniors who can’t afford to pay their property taxes, reports New Hampshire’s Portsmouth Herald (the source of this story).
How can a home take care of its owner?
Through reverse mortgages, loans that allow homeowners age 62 and older convert their home’s value into tax-free cash. Repayment is not required until the home is no longer the borrower’s primary residence. There is no interest until the borrower dies, sells the home or permanently moves.
“They can never foreclose on you, because you’re not expected to make a payment. It’s the best thing the government has done for seniors since social security,” said Jennifer Pokorny, a loan officer and author of The Pocket Idiot’s Guide to Reverse Mortgages.
Reverse mortgages have been around since the early 1960s, although most were insurance products back then. In 1987, Congress passed the FHA reverse mortgage insurance proposal, which became law in February 1988. In 2000, Congress approved a limit on origination fees.
Legislators clearly realized the value of reverse mortgages for seniors who are house rich, yet cash poor.
“My customers are generally active and have lived in the area a long time. They want to stay where the live until they die, but they need some extra cash. Maybe there is a major illness or the house needs repairs and they don’t have the money to make them,” Pokorny said.
Aging baby boomers will only fuel the trend. And unlike a 2nd mortgage or a home equity line of credit, another benefit of the reverse mortgage is that it requires no acceptable debt-to-income ratio to qualify.
DO YOU NEED A REVERSE MORTGAGE?
Some borrowers think you must use the money just for medical or housing costs. But that depends more on the source of the loan. With the standard home equity conversion mortgage, also known as HCEM, you can use the funds for any purpose.
Nevertheless, reconsider if you’re planning to put the cash into risky investments or a “Mongolian gold mine,” says Andrew Housser, co-CEO of Bills.com, a free website that focuses on personal finance issues.
After all, if the stock goes bust, you lose both the cash and your home equity.
Reverse mortgages are not for everyone, as closing costs are often higher than traditional mortgages and home equity lines of credit. If you’re looking to sell in a few years, the program may not be for you. You won’t even recoup the payout from the closing costs. Depending on your health and finances, you may fare better selling your home and buying or even renting another.
Reverse mortgages are also unwise if you’re determined to leave the home to your children. Typically the sale of the home pays off the loan. Moreover, reverse mortgages are often more complicated to understand than traditional mortgages, which is why many states require third-party counseling prior to obtaining one.
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