Reverse Mortgage Loan Blog

With an estimated 77 million baby boomers about to hit their golden years, the move to reverse mortgages has begun.

Not necessarily by the senior set — less than 2 percent of whom have decided to turn the equity they have in their homes into cash by taking out a mortgage that pays them instead of the other way around. But by a lending community looking for new markets to conquer at a time when many other business channels are running dry.

Reverse mortgages, also known as home-equity conversion loans, enable homeowners age 62 or older to convert their equity into tax-free proceeds. The amount you can receive is based on the age of the youngest owner, the value and location of your home and current interest rates. But generally, the older you are, the more you can get.

The house (mobile homes and cooperatives are not eligible) must be your primary residence and be owned free and clear. If there is any outstanding debt, it must be paid off as part of the closing with proceeds from the loan.

Reverse-mortgage borrowers can take their money in a lump sum, as monthly payments, as a line of credit that can be tapped as needed or in any combination of the three choices. Interest accrues on the borrowed amount, but no payments are necessary until the home is no longer owned. Consequently, the loan does not have to be repaid until you sell, move out or die.

In the past few months, Bank of America and Countrywide Financial, as well as a number of smaller companies, have joined lending giant Wells Fargo in offering reverse mortgages. Seniors can now find loans with fixed rates, for example, whereas before only adjustable rates were available.

Mortgage brokers, the loan pros who originate — but do not fund — about half of all home loans, are also eyeing the reverse-mortgage market.

While all this activity holds the promise of lowering costs and increasing consumer choices, it also raises the possibility that the charlatans who ripped off subprime borrowers might soon be zeroing in on unsuspecting elderly homeowners who need to cash in their equity in order to comfortably live out their remaining years.

Fortunately, reverse mortgages are loaded with consumer protections. One of the most important is a requirement that all borrowers must agree to attend an independent counseling session with a government-approved agency to make sure the product is the right financial tool for their situation. If anyone suggests you don’t need to seek outside advice, or says counseling is available “if you really think you need it,” run to the nearest exit.

“Counseling is very much part of the process,” says Peter Bell, president of the National Reverse Mortgage Lenders Association in Washington, D.C.

Two key loan features also serve as consumer protections:

*Reverse mortgages are nonrecourse loans, meaning you’ll never owe more than the value of the house. You’ll owe the sum of what you borrowed plus the accrued interest. If the house is worth more than you owe when you leave it, you or your heirs will receive the difference. But if it is worth less than what you owe, the difference is not your problem or that of your estate.

*Mortgage insurance guarantees you will continue to receive your money if the lender goes out of business or otherwise defaults on the loan. Insurance also protects you and your estate from any deficiency judgments by paying the lender the balance if the loan amount exceeds the value of your property when you leave.

Insurance is one of the most expensive aspects of reverse mortgages.

The cost is 2 percent of the loan amount, or 2 percent of the home’s appraised value, whichever is less. But it can be financed (rolled into the loan amount), as can most other costs, including the standard 2 percent origination fee.

Found here.

Bookmark It