Reverse Mortgage Loan Blog

The safety net is almost gone, the nest egg is cracking.

Many Americans have recently found themselves changing retirement plans after losing a substantial amount of home equity as the housing market and the overall U.S. economy struggle. These folks face years of living on fixed incomes from pensions, 401Ks or IRAs, and Social Security, but don’t have the time to recover their losses.

Homeowners who’ve tapped their home equity, then spent it like yellow-and-blue Monopoly money, find themselves with no more funds to extract. Some have been laid off, relinquished their home in a foreclosure, or lost pensions after their employers’ business failed. Ideas of a comfy retirement full of relaxation and travel have been abandoned.

The good news is about 30 percent of homeowners have no mortgage at all. So even though their properties are probably worth less now than a few years ago, these people can tap into that equity cushion if necessary.

The bad news, however, is that about one in six with a mortgage now owe the bank more than their homes are worth, according to Moody’s economy.com. Most of these are property owners who purchased their homes within the past few years, or refinanced their properties and siphoned off too much equity.

Knowing that, it’s time for Americans to explore other options other than relying on home equity as a fail-safe, especially if they have no other retirement investments or savings. Options include downsizing their home, selling assets, postponing retirement by working longer, and signing up for a reverse mortgage. These decisions require heavy thought because each has its challenges and risks.

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The tumultuous times in the financial markets have impacted everyone.

Many of my senior clients, who thought they were financially secure to enjoy retirement, are being forced to uncover alternative sources of funds.

One of the increasingly popular tools being used today by seniors who own their primary residences is the reverse mortgage.

The reverse mortgage is a special type of home loan that lets homeowners convert a portion of their equity into cash. The size of a reverse mortgage is determined by a borrower’s age, the interest rate, and home’s value. A borrower can take the proceeds from the loan in a lump sum, on a monthly basis, or as a home equity line of credit. The borrower retains title to the property, and homeowners are still responsible for taxes, insurance, and upkeep.

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Dear Debt Adviser,

Would my 82-year-old mother be better off filing Chapter 13 bankruptcy for $60,000 in credit card debt or doing a reverse mortgage to pay it off?

She already has a home equity line for $60,000 that she used to pay down previous debt.

If she declares bankruptcy, can she later do a reverse mortgage if she can’t live on what is left over?

Dad always took care of their bills, and she has made some bad mistakes financially since he died. I live across the country and didn’t realize how bad it was until it all started catching up to her as she ran out of money in savings.

Thank you very much for any help.

- Jana

Dear Jana,

My mother will be 87 this year, so I understand your concern and desire to help.

Just be sure that your assistance does not include any direct financial help from you unless you can afford to make it a gift, not a loan or an advance on a possible legacy.

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Older Americans who banked on selling their homes to finance care in assisted-living facilities and retirement communities have seen their dreams go up in smoke amid the housing-market bust. At the same time, their investment portfolios have nose-dived.

In these rough economic times, funding long-term care poses a challenge for seniors and their families. There are a range of strategies you can pursue.

Financial hit

For people without long-term care insurance, which is the majority, the financial hit can be hard if care is needed. The average cost of a private room at a nursing home runs $76,500 per person annually, while a one-year stay in a one-bedroom unit in an assisted-living facility costs $36,000, and periodic care from a home health assistant costs $18,000 or more per year.

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This excerpt from the Minneapolis Star Tribune titled New strings attached: A look at changes buyers will see in the mortgage market for 2009 does a decent job at summing up the new reverse mortgage rules and limits:

NEW REVERSE MORTGAGES

Late this year, the FHA-insured Home Equity Conversion Mortgage (HECM) program was changed to allow people older than 62 to use the equity in an existing house to get a reverse mortgage — a mortgage that pays you out of your home’s equity — that can be used to buy a different house. This enables you to avoid taking on a mortgage payment as part of the transaction. In other words, you can use the proceeds from the sale of your existing house and combine them with the funds from a reverse mortgage to buy another house.

In addition, effective Nov. 6, the Department of Housing and Urban Development (HUD) set its national loan limit for HECM reverse mortgages at $417,000 — same as the conventional loan limit — except in high-cost areas. To be eligible for the HECM purchase program, your house must be paid off or you must have a low loan balance that can be paid off with proceeds from the reverse mortgage. A reverse mortgage is available regardless of your income. The amount you can borrow depends on your age, the current interest rate and the value of your home or the FHA mortgage limits for your area.

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Dear Harry: I am 63 and on disability. My wife works, but with the present state of the economy, we’re scraping to get by just like a lot of others. We have used up most of our savings just to make ends meet. We own our own home free and clear. It’s worth about $200,000 today. We are thinking of getting a reverse mortgage to do some needed repairs and to establish an emergency fund. We don’t want to have a home-equity loan because the monthly payments would be killers. Is this the way to go?

What Harry says:

A reverse mortgage will do the trick, but let’s examine your situation more closely. The big trouble with reverse mortgages is the very hefty costs to get one going. Lenders often tie them to annuities, long-term-care insurance or other products. The initial fees are stiff, too. You can go the home-equity-loan route with some modification of the repayment requirements. There are loans out there that require only that interest be paid currently. I recently heard of a deal that is a bit of a hybrid. The interest was added to the loan so that no current payments were due. This could be just your ticket, but it may require a bit of searching to get it. You are a prime borrower with all that home equity and your history of frugality. Do not go for any deal until you have had a lawyer review it. There are too many places where you can be bamboozled by the fine print. Another approach would be to consider downsizing to a smaller home or apartment. This would especially be the case if you’re empty-nesters.

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Beginning Jan. 1, home buyers 62 and older will be able to buy a house using a reverse mortgage, as long as it’s their primary residence.

Traditionally, people obtained reverse mortgages to take equity out of their existing homes to help them meet expenses, pay off the mortgage or pay the property taxes.

But staff members at the Federal Housing Administration noticed an increasing number of seniors selling their homes, buying new homes and then getting a reverse mortgage to pay off the new home, said Meg Burns, director, FHA office of single-family program development.

“They were going through two mortgage transactions and paying all those fees,” she said. “Seniors need to keep their money in their pocket.”

When the FHA staff members looked further, they found that the traditional reverse mortgage program designed to keep seniors in their home wasn’t helping those who wanted to downsize, move to a house without stairs, move closer to their kids or move into active adult housing.

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For seniors, the idea of a reverse mortgage seems appealing: Turn your home equity into a steady stream of income, and stay in your home as you age.

Especially given the stock market’s free fall and the onerous mortgages some folks are looking to escape, these loans may sound better than ever.

What’s more, HUD last month instituted new rules for Home Equity Conversion Mortgages, or HECMs, the federally insured loans that make up virtually all reverse mortgages. The new law may make reverse mortgages more attractive by raising the limit on qualifying home values, capping origination fees and, starting in 2009, allowing seniors to use a reverse mortgage to buy a new home in a single closing.

Still, these loans remain expensive, and can be risky. Here’s what you need to know:

Reverse mortgages 101: Reverse mortgages allow homeowners age 62 or older to borrow money based on their home equity, with the principal and interest repaid when they die or move out for a year or more. Cash is available in a lump sum, monthly payments, a line of credit (which typically grows 5% to 5.5% annually) or a combination. These loans are available from major financial institutions, including Wells Fargo, Bank of America (which acquired Countrywide), M&T Bank, MetLife and Genworth.

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A reverse mortgage is a special type of loan used by older Americans to convert the equity in their homes into cash. There are three common payment methods: You can be paid all at once, by means of a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you pass away, sell your home, or permanently move out of your home.

To better understand how a Reverse Mortgage works, let’s compare it to a regular mortgage. Both types of mortgages create debt against your home and both affect how much equity or ownership value you have in your home. They do so in opposite ways.

“Debt” is the amount of money you owe a lender. It includes cash advances made to you or for your benefit, plus interest. “Home equity” means the value of your home (what it would sell for), minus any debt against it.

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Since the economy has taken a downturn, more and more people are looking for ways to cut costs and save money.

One option that financial experts say is becoming popular is the reverse mortgage, which gives people on a fixed income extra money to help pay the bills.

A reverse mortgage basically allows a homeowner who is over the age of 62 to convert their home equity into income without ever moving or selling their property.

Homeowner Carol Whitton is paying a lot to have her property “maintenance free” for when she gets too old to work.

“When I came up here, I was trying to find a job. There was no jobs because I was in the mortgage business for ten years. Nobody was paying. You know, the mortgage business was going down,” said homeowner, Carol Whitton.

Like many seniors, Whitton decided to sign up for a reverse mortgage so, she wouldn’t have to worry about not making her monthly payments.

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