By TARA SIEGEL BERNARD
Originally appeared April 16, 2010
Do Price Cuts Make Reverse Mortgages More Attractive?
Reverse mortgages, which allow older homeowners to pull cash out of their homes without making payments, have been around for decades. They are often used by people who want to stay in their homes, but need extra money to pay medical bills, for instance, or to retire other debt.
Reverse mortgages also have a reputation for being expensive, and they are. But if you’ve been thinking about one, it’s worth taking a closer look now because several lenders have cut prices in recent weeks. As with most complex financial products, however, you need to know exactly what you’re getting into.
Bank of America, Wells Fargo, MetLife Bank and Financial Freedom have all waived their origination fees and other charges on certain reverse mortgages they sell as part of the Federal Housing Administration’s Home Equity Conversion program. There’s a reason for the lower prices: Lenders are making profits by packaging the loans as securities and selling them to Wall Street investors. Demand for the securities is high, experts said, because not only are the underlying mortgages backed by the government, but they also tend to be more predictable, with slightly longer lives than traditional mortgages.
Consumers were becoming increasingly reluctant to sign up for reverse mortgages — after all, homeowners could not pull out as much equity as they once could because of the drop in home values. But when the F.H.A. also reduced the amount that people could borrow, even fewer took out loans.
The potential market is huge. More than seven million people over the age of 65 with annual incomes below $30,000 own their homes outright, according to the Census Bureau’s American Housing Survey conducted in 2007, the most recent data available.
But just because the initial price of a reverse mortgage has dropped doesn’t mean the mortgages are necessarily a good deal for everyone. Much of borrowers’ home equity will be erased over time, perhaps more quickly than they realize. As the name implies, these are mortgages in reverse. Because the borrower isn’t making any payments, interest and fees are added to the loan balance.
The upside? Because eligibility is largely based on the property value, borrowers aren’t subject to the income and credit requirements that they would be with a home equity loan or line of credit. And borrowers can remain in the home indefinitely, as long as they can still pay the property taxes and homeowners’ insurance. When borrowers are ready to sell (or when they die), the bank takes its share of the proceeds from the sale, and borrowers or their heirs receive whatever is left.
While a reverse mortgage may seem enticing, you need to consider the long-term costs and consequences. You could, for instance, be disqualified from other federal or state-run aid programs. And mortgages with the seemingly most attractive pricing — namely, fixed-rate reverse mortgages — may not necessarily be the best choice because they require you to immediately withdraw all the equity you are eligible for in a lump sum, and the interest begins accruing on the entire amount right away.
“Is this a good thing? Yes, but with some caveats,” said Barbara Stucki, vice president of home equity initiatives for the National Council on Aging, a nonprofit advocacy organization. “The challenge for people is not to be swayed by the cuts in fees, but to look carefully at the product they are considering.”
So before you — or your relatives — are drawn by the advertisements on television or in their mailbox, be sure to consider the following:
THE BASICS The vast majority of reverse mortgages are made through the F.H.A.’s Home Equity Conversion Mortgage program (known in the business as HECM, pronounced HECK-um), which has several built-in consumer protections, like limits on fees and mandatory counseling for all borrowers. To qualify, you must be at least 62 years old, own the property outright (or have a small mortgage balance) and live in the home.
The amount you’re eligible to receive depends on the age of the youngest borrower, the home’s appraised value and the interest rate (the most you can receive is capped at $625,500 for 2010). The older you are, the higher the home value and the lower the interest rate, the more money you can withdraw. So a 62-year-old who owns a $350,000 home outright would be able to withdraw about $184,000, based on a 5.63 percent interest rate, though the amount would be reduced by the monthly servicing fees and closing costs. A 72-year-old would be eligible for about $211,000, excluding the other costs.
You can choose to receive that money in a variety of ways — a lump sum, installments or a line of credit, which allows you to withdraw the money when you need it, much as you would with a home equity credit line. (This may be the wisest choice for many borrowers.) Fixed rates are more readily available on the lump sum products, while credit lines carry adjustable rates. Borrowers can also combine options and change them at any time for a nominal fee.
THE COSTS Reverse mortgages are expensive. But it’s not unlike paying for a traditional mortgage that requires private mortgage insurance. These are the costs: a lender can charge an origination fee of 2 percent of the first $200,000 of your home’s value, plus another 1 percent for amounts over that, though the total is limited to $6,000. You may also owe a monthly servicing charge of up to $35, which is added to your loan balance each month, as well as traditional closing costs.
Borrowers must also pay an upfront mortgage insurance premium of 2 percent of the home’s value and a monthly insurance premium equal to 0.5 percent of the mortgage balance. The reason for all the insurance? It protects the seller from owing more than the property is worth when it’s sold and ensures that the borrower will still be paid should the lender go under.
Because the HECM program is regulated by the Department of Housing and Urban Development, it’s harder for lenders “to sneak in any extra fees,” said Sue Hunt, reverse mortgage program manager at Consumer Credit Counseling Services in Atlanta. “It’s a pretty straightforward proposition.” How does it all add up? Take a 67-year-old with a $370,000 home who withdraws a lump sum of nearly $200,000 (at a 5.65 percent fixed rate). The initial costs at closing could easily reach $16,563, according to ReverseVision, a reverse mortgage software company. (In addition, another $5,518 in servicing fees — to cover those $35 monthly fees over the estimated life of the loan — would be set aside.) Over time, don’t forget, interest and other costs are accruing on the mortgage. If the borrower dies at age 80, and his home is worth $720,700 at the time, his heirs would be left with just $100,000. And the bank will have pocketed about $364,000 in interest.
What’s happening now, however, is that many firms are waiving the origination and servicing fees on some or all of their products. So the same borrower would receive nearly $11,000 more cash at closing. Most of these costs can generally be wrapped into the financing.
THE CAVEATS Given the upfront costs, a reverse mortgage may not make sense if you plan on moving in a couple of years. And if you stay in the home for a long time (or until you die), your heirs may receive little, if anything. Some experts suggested talking with your children — perhaps they want to help you now to preserve their inheritance later. Or “you may want to do something very different and sell your home and move to a smaller one,” said David Certner, legislative policy director at AARP.
If a married couple is living in the home, both need to be listed on the mortgage. If only one spouse is named, and that one dies, the surviving spouse will be required to sell the home under a reverse mortgage.
You also want to be sure that receiving the lump sum won’t make you ineligible for other programs. The National Association of Area Agencies on Aging, Benefitscheckup.org and Eldercare.gov Web sites can help you find out if you qualify for other aid.
PROVIDERS Some lenders’ advertisements create a misleading sense of urgency. Don’t fall for claims that you must respond by a certain date, and find another provider if you’re pressured to invest your proceeds in another expensive product, like deferred variable annuities.
Start by reading everything you can on the topic. Then call a housing counselor certified by H.U.D. (for a list, call 800-569-4287). The counselors can help analyze your situation in person or over the phone.
Shopping for a provider is important because unscrupulous lenders have misled consumers in the past. Once you’ve located a few lenders, look for complaints on the Web and see if the lenders are on the watch lists of your state attorney general’s office or Better Business Bureau. If you’re not financially savvy, ask a trusted friend or independent adviser for a second opinion.
After all, reverse mortgages are more attractive at these prices, but they shouldn’t necessarily be your first choice.
For more information contact Senior Solutions at (954) 456-8984 or toll free at 1-800-213-3524
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