Reverse Mortgage Loan Blog

Reverse mortgages have long been a way for seniors to turn the equity in their homes into extra cash in their pockets. Now, a higher lending limit is making it possible for some seniors to get more money out of a reverse mortgage than before.

The new $417,000 lending limit for reverse mortgages insured by the Federal Housing Administration was rolled out nationwide (except for parts of Hawaii, which have higher limits) on Nov. 6. To qualify for the lending limit, a home has to be appraised at $417,000 or higher. The actual amount of the reverse mortgage would be a percentage of the $417,000 lending limit or appraised value of the home, whichever is lower.

The higher limit made it possible for Oakland resident Michael Goldsmith to receive a reverse mortgage that was $50,000 larger than he would have under the old loan limit of $362,790 that applied in the Bay Area and other high-cost regions.

“It made a difference of about $50,000 … It’s pretty significant,” said Goldsmith, the 74-year-old owner of a transportation management business.

Goldsmith and his wife, Dorothy, took out a reverse mortgage with Bank of America so they would have funds available to remodel their Oakland condo.

The Goldsmiths were able to qualify for a reverse mortgage loan of about $275,000 on their $450,000 condo. After using most of the proceeds to pay off an existing $180,000 home equity line of credit, they were left with a $95,000 line of credit to draw from when they choose to use the money.

“We’ll still have some money left over in case we need it sometime in the future,” Michael Goldsmith said. “I don’t have to use it all but it’s sitting there anytime I want it.”

Seniors who are 62 years or older and have a good chunk of equity in their home or have paid off their mortgage can apply for a reverse mortgage, which amounts to a loan made by a lender to the homeowner that has to be paid back eventually along with interest payments and other fees that are tacked on.

The homeowner retains title to the house while the loan is active. Interest rates on federally-insured reverse mortgages are adjustable and linked to an index based on one-year yields derived from a basket of various Treasuries. And while the adjustable-rate interest has a built-in cap, the product does not provide the certainty of a fixed-rate loan. The actual cost of repaying the loan will vary depending on whether the proceeds are taken out as monthly payments, a lump sum, or a line of credit. Also, the homeowner has to keep on paying homeowner’s insurance and property taxes.

Since the higher loan limit was announced in October, Bank of America has seen a 40 percent increase in reverse mortgage loan applications compared to October 2007, said Steve Boland, a Bank of America reverse mortgage executive based in Thousand Oaks.

“We really see this as an instant ability to help people who need the additional access to equity,” Boland said. “A number of people see their retirement assets declining and they are finding they are less prepared to meet their cost of living in retirement. A reverse mortgage can really play a big role in supplementing that.”

Even people with homes appraised below the $417,000 loan limit can benefit from the reduced loan origination fees, he said. For example, a borrower with a $335,000 home would get $1,350 more in net proceeds due to being charged $1,350 less for the loan origination fee.

While a reverse mortgage can provide tax-free income for some seniors, it is not always the right product. Reverse mortgages are complicated.

There are substantial costs for financing and mortgage insurance that can run into thousands of dollars that have to be paid on top of principal and interest. Also, the interest that’s due on the loan can erode the equity in a home. Taking out the loan while in your 60s can result in getting a lower amount and owing more on the loan when it is repaid than if you waited until your 70s. Heirs who inherit the home can end up with a substantial loan to pay off if they want to keep the property.

More than 90 percent of reverse mortgages are FHA-insured products known as Home Equity Conversion Mortgages (HECM) loans. That number is bound to get higher given that the market for so-called jumbo reverse mortgages, which are above the FHA limit of $417,000 and not insured, had dried up in response to the ongoing credit crunch.

The higher loan limit for federally insured reverse mortgages was made possible by the passage in July of the Housing and Economic Recovery Act, which among other things included provisions to help struggling homeowners of all ages avoid foreclosure. The legislation also lowered lender origination fees for reverse mortgages while setting a $6,000 cap on origination fees.

The higher lending limit comes at a time when some seniors are using reverse mortgages to help avoid foreclosure in addition to the more traditional reasons such as tapping a home’s equity, said Ray Fry, an East Bay certified senior advisor and a specialist in reverse mortgages who goes by the name “Mr. Reverse.”

Some seniors who been caught up in negative amortization loans – which is when a loan’s outstanding balance gets bigger while monthly payments stay the same – are turning to reverse mortgages to pay off the balance, he said. (A reverse mortgage requires that it be the only home loan on a property so existing mortgages are automatically paid off from the proceeds).

“The key thing right now is that the (falling) value of the home is preventing people from refinancing existing mortgages,” said Fry, adding that some seniors then turn to reverse mortgages.

There are many factors that go into figuring out whether a reverse mortgage is the right move. How long a homeowner intends to stay in the home is a key factor as is the age of the borrower.

“You are really talking about individuals who want to age in place, they want to remain in their home. If someone was thinking of moving in a few years, a reverse mortgage is not the right product,” Boland said.

The borrower’s age, current interest rates and equity held in the home are used to determine the size of the loan.

“Age is the real determining factor. The older person qualifies for more than the younger person and the interest rate is the second factor. A lower rate means you qualify for more money,” Fry said.

“It is true you get more money when you are older and you have less of a period of time your loan is going up in value, that is in accrued interest,” said Judy Schwartz, a principal at San Carlos-based Reverse Mortgages Only.

Still, Fry and Schwartz point out that age should not be the only consideration.

“It’s really borrower specific,” she said. “You really have to look at the amount of money you are trying to get access to in exchange for the (reverse mortgage) costs.”

A consumer might also want to consider a reverse mortgage now instead of later since home values are falling and the proceeds available from a reverse mortgage would be lower, she said.

Another reason to consider taking out a reverse mortgage now is that interest rates are very low – starting in the 3 percent range when mortgage insurance is included – at a time when the stock market is falling, she said.

“It may make sense to tap the equity in your home rather than deplete an already decimated portfolio,” Schwartz said.

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