(Reverse Mortgages Pros & Cons from The AARP Bulletin)
Making Your House Work
Many older Americans want to remain at home.
They may need money for expenses.
Is a reverse mortgage really the best solution?
By Cathie Gandel
Helen Jean Burn came from a family of pioneers, so self-sufficiency was ingrained in her character. But at 82, the former television writer spent sleepless nights in her condo wondering how she would make ends meet. Like a lot of older Americans, Burn is property-rich and pocketbook-poor. She owned the condo in Pikesville, Md., free and clear but had no savings, and she depended on Social Security to meet escalating living costs. Then she saw an ad suggesting she could use her home as collateral for "loans you don't have to repay." Despite her skepticism ("I thought, 'Yeah, right. Give me a break.' "), she checked it out and a few weeks later took out a Home Equity Conversion Mortgage (HECM), a federally insured reverse mortgage.
Now she has a line of credit she can draw on to pay her bills. The reverse mortgage allowed her to tap the equity in her home without having to sell or take out another type of loan. Instead, the lender is paying her. And she'll never have to pay back that debt as long as she remains in her home. When she dies, it will fall to her children to repay the loan—principal plus interest, most likely by selling the property.
Burn is not alone. The HECM program had insured 345,762 loans by the end of fiscal 2007, and jumped by more than 107,000 in the last year alone, according to the Department of Housing and Urban Development, with loans going increasingly to couples in their 70s with higher-priced homes. And an AARP Public Policy Institute study, released in December, found that consumer awareness of reverse mortgages has increased from 51 percent to 70 percent and that borrowers are younger—the median age declined from 76 to 73.
The market is expected to swell as the first boomers reach the age of eligibility, 62, this year. Moreover, the House of Representatives and the Senate have recently passed legislation for updating the 20-year-old HECM program, which could make reverse mortgages more accessible.
"Reverse mortgages will perform better and cost less in the future, just as flat-screen TVs have improved and prices have dropped since they first came out," says Ken Scholen, of Burnsville, Minn., who is a consultant to AARP's Reverse Mortgage Education Project. "In two years you may not recognize the market—you could have more choices and much lower costs."
So far, it's not clear how the 2007 collapse of the subprime market will affect reverse mortgages, except that borrowers may get less money as house values drop. The coming year may also see fewer new private reverse mortgage products and somewhat higher interest rates if Wall Street investors shy away from reverse mortgages as they have with other mortgage investments.
Consumers turn to a reverse mortgage for a variety of reasons, according to the AARP study, from paying off an existing mortgage to paying for prescription drugs to improving the quality of their lives. For those who have given others power of attorney, paying for home care is the top reason.
"My father had had a stroke and did not want to go to a nursing home," explains an Asbury Park, N.J., resident who acted on behalf of his parents, both of whom are in their 70s. "We looked at every other option to allow them to stay in their house. The reverse mortgage was a lifesaver."
A reverse mortgage is not for everyone; some call it the loan of last resort. It may make sense for someone in their 70s or 80s—the older you are, the more you'll get. But it might not be such a good idea for 60-somethings who could outlive their resources in their later years and have nothing to fall back on. "Cash will have to come from somewhere else. You have to eat," says one expert.
Reverse mortgages: the basics
Who's eligible? Reverse mortgages are loans secured by the home that do not need to be repaid until the borrower dies, sells the home or moves out permanently. To get a reverse mortgage, you must be at least 62 years old and own your home, which must be your primary residence. There are no income requirements. It's OK to have an existing mortgage, but you must be able to get enough from the reverse mortgage to pay it off. You remain responsible for home maintenance, taxes and insurance.
What's the process? You need an appraisal and inspection, just as you do for a traditional mortgage. Counseling is mandated for government loans. "It's important to completely understand how the loan is structured," says Linda Altman, president of Customer First Mortgage in Orange Park, Fla.
What are the loan options? There are two basic types of loans: the HECM, which accounts for 90 percent of the market, and private reverse mortgages without federal mortgage insurance. "The HECM is still the gold standard," says Shelley Giordano of Wells Fargo Home Mortgage. "It's the most versatile product and best for most people."
HECM loans are insured by the U.S. government; with a private loan the lenders assume the risk. You can never owe more than the value of the home when it's eventually sold—if the value declines, the shortfall is covered. The main drawback of a HECM is that the Federal Housing Authority caps the appraisal, which affects the loan amount. Currently, the loan limit differs from county to county, from $200,160 to $362,790, but Congress may raise that to a single national limit of $417,000, or even higher.
Borrowers with more expensive houses sometimes turn to private loans, even though the costs may be higher. Ron and Carolann Prast of Scottsdale, Ariz., wanted to get out from under the weight of their monthly mortgage payment. They turned to Bank of America when they were told that a HECM would give them only about 45 percent of their home's $540,000 value. "With Bank of America we got about 65 percent," says Prast, 74, who continues to work part time as an accountant.
How much can you get? That depends on the home's value, location, interest rates and the age of the younger borrower if there are co-owners. You won't get anywhere near the appraised value of your house—expect between 50 and 70 percent. What's more, appraisal and legal fees, origination fees, mortgage insurance premiums and monthly service fees come off the top.
The loan can be taken in a lump sum, as monthly payments, as a line of credit or as a combination of these options. Untapped funds in a line of credit generally increase, allowing homeowners to borrow more money over time.
What's the downside? Reverse mortgages may be tempting, but there's no such thing as free money. The loans are expensive and the amount you owe grows larger every month. AARP's study found that the notoriously high fees—between 8 and 10 percent of the home's value—are the main reason why many potential borrowers decide against a reverse mortgage. "I'd like the extra money, but not at that price," says Junius Moore, 81, of Brandon, Fla. "Reverse mortgages are very expensive."
But for some, like George and Rose Barry of Sag Harbor, N.Y., who are in their 70s, a reverse mortgage turned out to be tailor-made. Four years ago, the couple, whose main income is Social Security, were faced with having to sell their house in order to survive. Now, a monthly payment of $1,839 makes it possible for them to stay in the home they love.
Cathie Gandel lives in New York and writes about personal finance. To order black-and-white reprints of this article, call 1-866-888-3723.”
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