Reverse Mortgage Loan Blog

Once considered a last resort to help cash-strapped seniors, reverse mortgages now are being used as a financial planning tool to bankroll travel, home improvements and investments.

Reverse mortgages allow people 62 and older to convert part of the equity in their homes into income. But experts warn that seniors should proceed with caution because fees and interest cause loans to grow, leaving them with fewer assets.

George and Loretta Mesa recently did something many Columbia senior citizens might not realize is an option: They used a reverse mortgage to tap into the equity in their $132,000 home in west Columbia.

“We only make so much on Social Security, and we needed a little money to keep us going,” George Mesa said.

The Mesas moved to Columbia 1½ years ago from California in search of a less hectic lifestyle, but Social Security wasn’t enough to pay for the few extras they wanted, such as home improvements and travel.

Determined to improve their standard of living, 67-year-old George, a retired property caretaker for movie stars such as Michael Douglas, and 69-year-old Loretta, a retired real estate agent, approached a loan specialist with Allied Mortgage Group for a reverse mortgage in August. Kyle Turner helped the couple take out a federally-insured reverse mortgage, known as Home Equity Conversion Mortgage, on their three-bedroom home.

After a few weeks, the Mesas received a lump sum payment of about 65 percent of their home’s value from Countrywide Home Loans. They invested it in an annuity, and now they can periodically draw out on their investment to pay for the things their Social Security income doesn’t cover. The couple plans to use the money to pay for home improvements and to travel to Arizona and California to visit family, among other things.

“We are pretty sure this mortgage will improve the quality of our lives,” Loretta Mesa said. “We have a lot of money in the bank invested, and we can do pretty much anything we want.”

The Mesas are not alone. Once considered a last resort to help cash-strapped seniors, reverse mortgages now are being used by a growing number of American seniors as a financial planning tool to bankroll all sorts of pursuits.

In April, the National Reverse Mortgage Lenders Association, which tracks the reverse mortgage market, found that reverse mortgage issuance shot up 54 percent from last October to April compared to the same period the previous year. Since September 2001, a total of 296,800 Home Equity Conversion Mortgages have originated in the United States. More than 2,300 of those loans were endorsed in Missouri. That represents 0.8 percent of the national reverse mortgage market.

The lenders association reports that older adults now hold $4.3 trillion in home equity in the United States. It predicts that by 2030, when the youngest baby boomers retire, Americans 62 and older will have $37 trillion locked up in their homes.

To qualify for a reverse mortgage, borrowers need to be at least 62 and either own their home free and clear or be able to pay it off with proceeds from the loan. The owner keeps the title, and the loan becomes due when the borrower sells the house, moves out of the house for more than a year or dies. There are no monthly payments.

Despite the predicted boom in the reverse mortgage market, demand for the product is not red-hot in Columbia. Only a handful of institutions — such as Allied Mortgage, Countrywide Home Loan and Flat Branch Mortgage — are offering it.

John Webb, a Lake of the Ozarks-based reverse mortgage specialist with the industry’s biggest player, Financial Freedom Senior Funding Corp., said the product has not appealed to many seniors locally because of the perception that it is for desperate seniors. “If understood properly,” reverse mortgages “can have a wide appeal,” he said. “This would range from people needing money to meet immediate living expenses to individuals with considerable assets who may see a reverse mortgage as a financial planning tool.”

Jim Yankee, president of Columbia-based Flat Branch Mortgage, said there are signs that reverse mortgages will gain popularity in Columbia. According to the latest Census figures, 8.6 percent of the city’s population is 65 and older. Flat Branch recently did two reverse mortgages for $144,000 and $71,400. Yankee said Columbia has a growing number of elderly citizens who are asset rich but cash poor and can’t survive on their meager retirement income.

For such seniors, Yankee said, reverse mortgages can help them cover in-home health care, pay off a current mortgage or home improvement loan, finance house repairs or supplement Social Security or pension income. “In the past, most people had little choice but to sell their houses to get cash, forcing them to move, or ask their children for financial assistance,” he said. “But with a reverse mortgage, the house can be a savior.”

Lenders typically send monthly checks to homeowners, and they only get their money back — with accrued interest — when the house is sold or when the borrowers die or move out. “In most cases, the income from a reverse mortgage is tax-free and doesn’t affect the borrowers’ Social Security or Medicare benefits,” Yankee said.

Homeowners interested in reverse mortgages have three options:

PSingle-purpose reverse mortgages, which are offered by some state and local government agencies and not-for-profits, generally have low costs, but they are not available everywhere and must be used for a specified purpose, such as paying for home repairs or property taxes.

PHome Equity Conversion Mortgages are backed by the U.S. Department of Housing and Urban Development and have a limit of $200,160 for a single-family home in Boone County.

PProprietary reverse mortgages, which are not federally insured and have no limits on the loan amount, are backed by the companies that offer them.

A Home Equity Conversion Mortgage is the most popular kind of reverse mortgage and requires seniors to get counseling first from a government-approved agency before closing on the loan. Homeowners who take out these types of loans typically pay an origination fee of 2 percent of the home’s value, plus a mortgage insurance premium of 2 percent.

Once title searches, appraisals and other expenses are included, closing costs can exceed 5 percent of the home’s value. The federal government will pay the lender if the proceeds from the sale of the house do not cover the loan and accrued interests and costs. These loans also guarantee homeowners access to the loan funds even if the company managing the account goes out of business.

The loan amount depends on a customer’s age, the home’s appraised value and the interest rate. Yankee said the older a customer is, the more equity he or she can pull out. For example, a 65-year-old who lives in a house in Columbia valued at $200,000 could get a Home Equity Conversion Mortgage for $110,000 while an 80-year-old would be eligible for $140,000.

“A general rule of thumb for HECM reverse mortgages is a person’s age minus 10 equals the percent of the home’s value that is available,” Yankee said. “So, a 65-year-old person could pull out 55 percent of the home’s value while an 80-year-old could pull out 70 percent. These numbers are much lower, however, for proprietary reverse mortgages.”

Homeowners have the option of taking their payments via a lump sum, as fixed monthly payments, as a new line of credit or a combination of the three. The interest rates on reverse mortgages can either be fixed or variable and can adjust either monthly or annually, depending on the type of loan. The interest is not tax-deductible until the loan is paid off.

“The amount you owe on a reverse mortgage grows over time because interest is charged on the outstanding balance and added each month to the amount owed,” said Brenda Procter, a University of Missouri-Columbia financial educator. “Variable rates are tied to a financial index, which should be disclosed up front.”

Procter said reverse mortgages can be a tool of unscrupulous lenders. She recommended seniors speak with a financial adviser before taking out the loan to make sure that they fully understand their options and are aware of what they are getting into.

“If you have a financial adviser or trusted professional who understands the financial markets, it might pay to confer with him or her before making a decision,” Procter said. “If a lender hesitates when you ask for full disclosure of all costs, fees and terms, checking with someone else is even more important. Hesitancy to provide full disclosure about any financial transaction is a red flag. … If a lender is selling a product to you and suggests that a reverse mortgage can finance it, be sure you identify all costs of the mortgage and the other financial product.”

Procter said reverse mortgages also have disadvantages and seniors should use them with adequate precautions.

“Reverse mortgages can deplete some or all of the equity in your house, leaving fewer assets for you and your heirs,” she said. “Because you keep the title to your home, you still have to pay property taxes, insurance, utilities, fuel, maintenance and other expenses. If you fail to pay any of the expenses, the lender can make the loan due and payable until the loan is paid off in part or in full.”

For seniors worried about eliminating the inheritance to their children, Turner recommends taking out a single premium life insurance policy. For example, a 62-year-old homeowner who has just received $100,000 from a reverse mortgage on his or her home can choose to place $70,000 of that amount into a single premium life insurance policy. Whenever he or she dies, the beneficiaries will receive a death benefit of $250,000, which will be more than enough to pay off the reverse mortgage, Turner said.

If the homeowner lives to be 82 and decides he or she wants cash, Turner said, the policy would have accumulated to $147,987 — more than twice the original $70,000. “It’s a good investment to use if one of your concerns is to make sure that your children receive the house paid for free and clear whenever you want to cash it in,” he said.

Found here.

Bookmark It