Reverse Mortgage Loan Blog

Maurice Shapiro, a retiree from Miami Beach, Florida, is taking a cruise to Alaska this summer, a trip he says he never would have made without his reverse mortgage.

“I’ll be 81 in two weeks and life doesn’t go on forever,” he said. “I got a reverse mortgage and can do things I was never able to, like travel and set up college trusts for my grandnieces and grandnephews.”

Shapiro obtained a reverse mortgage from World Alliance Financial in Melville, New York. Reverse mortgages are for people aged at least 62. The loans, which lenders charge fees equal to as much as 6 percent of a home’s value, allow borrowers to use their home equity to get cash tax free. After the borrowers die, or move, the lenders are repaid when the house is sold.

Pending legislation may spur more senior homeowners to consider reverse mortgages. Those who have enough equity in their homes can qualify for loans up to $362,790 backed by the Federal Housing Administration. A housing bill in Congress includes a proposal to raise the payout to as much as $550,000 and eliminate the current limit of 275,000 reverse mortgages that the Department of Housing and Urban Development can insure.

World Alliance Chief Executive Officer David Peskin said he expects the market for reverse mortgages to grow by 30 percent to 40 percent next year if the current credit crisis eases.

“We’re trying to change the perception of these mortgages as loans of last resort to products that make financial sense for certain senior homeowners,” Peskin said.

High Fees

“Homeowners who have enough cash flow should stay away because there are better alternatives for tapping the asset of their homes, like a home equity line of credit,” said Tom Orecchio, chairman of the National Association of Personal Financial Advisors in Arlington Heights, Illinois.

The high fees are a deterrent and there isn’t enough competition to make the market as efficient as it should be, Orecchio said.

Unlike home equity loans, reverse mortgages generally do not have income requirements or minimum credit scores because the interest is added to the balance and the loan isn’t repaid until the home is sold. Fees are higher than traditional home equity loans and there is a cap on how much can be borrowed.

Borrowers can choose a lump-sum payment, periodic checks, a line of credit, or a combination of the three. Proceeds remaining after the loan is repaid are passed on to the heirs. The FHA ensures that the homeowners will never owe more than the selling price of the house.

Linked to Libor

For a 70-year-old homeowner in New York with a house worth $500,000, World Alliance may loan as much as $240,000, with $17,000 in fees, including mortgage insurance. The interest rate for the loan is tied to the monthly London Interbank Offered Rate, or Libor, plus a margin and starts at 4 percent as of June 5. The rate may go as high as 13.5 percent during the life of the loan, if interest rates rise substantially.

Homeowners considering a reverse mortgage should take into account their age and how long they plan on being in their houses, Orecchio said. The loans are better suited for homeowners over the age of 75, who plan on being in their homes for a minimum of five years, he said. Borrowers under the age of 75 may outlive the equity in their homes and the fees and costs associated with the loan make an early move prohibitive.

Related financial products offered to borrowers may also tie up their cash. A survey by the American Association of Retired Persons’ Public Policy Institute said that 9 percent of borrowers were offered investment products such as annuities and long-term care insurance when they got their loans. Peskin said it is a conflict of interest to sell reverse mortgages along with annuities or long-term care insurance, and won’t deal with brokers who do.

Home Equity

Those weighing a reverse mortgage are required to meet with HUD-approved counselors who explain the procedures and potential fees before the loan can be processed.

Shapiro said he wanted to be able to leave the equity in his apartment to family members, but when they said they didn’t need it, he considered a reverse mortgage.

“People are living longer and with the prices of health care, gas and food all rising, senior citizens have to be very, very careful with their homes, which are their nest eggs,” said Jim Dau, a spokesman for the AARP in Washington. “It’s often the most basic asset they have.”

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