You’re watching television when a pleasant-looking male celebrity appears on the screen. He’s older and looks kind, even concerned. Suddenly, he’s taking you on an odyssey to the magical, mystical world of reverse mortgages.
But before grabbing the phone, wait. Getting information from an advertiser may be useful but it’s just the beginning.
Some people may believe a reverse mortgage is the perfect solution and perhaps it is. Others may ponder that the cost for television advertising isn’t cheap so they must be very profitable to the lenders.
Yes, the lender will make money and it might be a good solution for someone, but first, let’s get into the weeds.
A reverse mortgage is a loan that pays the homeowner part of the equity in their home while they continue to own and reside there.
The genesis for these loans began over 40 years ago when concern for seniors losing their homes led to their creation. While not perfect, they have, in many cases, saved people from being cashed-strapped in their most vulnerable years.
The basic requirements are that generally, you must be 62 or older and anyone listed on the title must fill this age requirement. If there is a current mortgage, the reverse mortgage is first used to pay the balance. The same applies to any significant repairs that exist.
According to the State of New York banking website, “when considering whether to apply for a reverse mortgage, you need to determine two important things: first, are you healthy enough to remain in your home and, second, do you wish to remain in your home? Are alternatives such as selling and purchasing a smaller, less expensive home better for you and will you get enough money from the mortgage to enable you to live in your home?”
Another option to consider in electing to choose a reverse mortgage, as explained by Jeff Butofsky, the branch manager for Vanguard Funding in Center Moriches, is “it’s not always about keeping the home. Some people use it as an investment or a tool for income if they have equity in the home. That way, instead of taking the equity in a lump sum, they can withdraw payments monthly for a source of income.”
By far, the most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which was developed by the Department of Housing and Urban Development (HUD) Federal Housing Administration (FHA).
The FHA doesn’t actually loan out money; it insures the mortgages, which makes them very attractive to lenders. HUD requires that anyone seeking an HECM loan first speak to a counselor who can’t make recommendations, but will explain costs and other options. A list of approved counselors, who may charge a fee up to $125, is on the HUD website and the telephone number is 1-800-569-4287. The website also lists FHA approved lenders.
Fees associated with reverse mortgages are similar to costs when purchasing a home. They include charges for the title search, appraisal, survey, inspection, credit check, and, in addition: origination fees (may be waived or reduced) servicing fees, mortgage insurance coverage, in the case of an FHA loan, and other fees including interest.
The prevailing opinion is to wait as long as possible before applying because the older you are, the more money you’ll receive. However, less money will be approved for the mortgage if the interest rates are higher when you submit your application.
The New York State Department of Financial Services website: dfs.ny.gov/consumer/reversemorgage.htm states “the interest on a reverse mortgage loan is compounded. This means that you’re paying interest on both principal and the interest, which has already accrued each month. Compounded interest causes the outstanding amount to grow at an increasingly fast rate.” The good news is “the lender can only charge interest on advances of funds actually made from the reserve account.”
According to the FTC, “although some reverse mortgages have fixed rates, most have variable rates that are tied to a financial index: they are likely to change with market conditions.” These rates can change monthly.
During the life of the loan, homeowners must keep their taxes and hazard insurance current and as long as both spouses sign for the loan, when one person dies or enters a nursing home, the remaining spouse may continue to live there. When a single owner lives in a nursing home for more then 12 months, the house is sold.
Not everyone who obtains a loan is able to absorb unexpected medical and other expenses. The website for the American Association of Retired Persons (AARP) contains lots of information about reverse mortgages including, “as of late last year about 58,000 reverse mortgages—nearly one in 10—were in default.”
To address this, Congress passed the Reverse Mortgage Stabilization Act of 2013 to reduce the liability FHA incurs when loans default and to assist seniors.
Some of these protections, originally scheduled for January, 2014 have been delayed until March. According to Congressman Mike Fitzpatrick of Pennsylvania, one of the bill’s sponsors, “the Act makes way for the following reforms:
Performs a financial assessment of borrowers as a basis for loan approval and determining the suitability of various HECM products to protect consumers from acquiring loans not fit for them.
Establishes a tax and insurance set-aside where necessary to pay taxes and insurance on the mortgaged property to avoid defaults…
Limits the draw at origination to mandatory obligations (closing costs, mortgage liens and federal debt), providing greater flexibility in addressing the individual needs of borrowers…while still protecting the Fund” (FHA’s Mutual Mortgage Insurance Fund) “from losses on loans where the maximum loan amount is drawn up-front.”
And mortgage insurance premiums for FHA/HECM loans are expected to increase.
To quote New York State Department of Financial Services website, “Do your homework. You should be as well informed as possible…and decide if the benefits outweigh the risks” for you.