Reverse Mortgage Loan Blog

Imagine for a moment buying a home in the Bay Area with a large cash down payment – say 40 percent or so – and never having to make another mortgage payment.

That in essence is what Robert and Sara Bone are doing with their purchase of a $250,000 condominium at Rossmoor, the big 55-plus retirement community in Walnut Creek. This month, they plunked down about $100,000 – from the sale last year of their home in Hawaii – to buy a 2-bedroom, 2-bath condominium.

After that, they will never make another mortgage payment for the rest of their lives, assuming that they remain in the condo.

The Bones are taking advantage of a new reverse mortgage program, one of several financial incentives and other goodies that were part of the 2008 Housing and Economic Recovery Act passed by Congress in response to the tanking U.S. economy in the waning days of the Bush administration.

The Federal Housing Administration program has some catches: Buyers need to be at least 62; the property being purchased must be a principal residence and owner-occupied; the program covers homes appraised at up to $625,500; and the down payment is substantial, often more than twice that of the traditional 20 percent required of most conventional financing packages.

In addition, reverse mortgage costs and fees are substantially higher than for conventional loans. Because it is an FHA program, buyers must pay 2 percent of the property’s appraised value – up to the maximum value of $625,500 – as a premium for federal mortgage insurance. That fee is on top of the normal closing costs.

Nevertheless, the new program offers some creative options to home buyers and homeowners, even if they are not yet 62.

“It’s a lifesaver,” said Robert Bone, 76, a former Honolulu newspaper reporter turned travel writer who lived on Oahu for more than 30 years before moving to the Bay Area late last year. “Without this program, there is no way that Sara and I could have bought this place.”

The Bones, according to Kristine Marr, a broker with Metro Cities Mortgage who helped them secure their loan, “are pioneers in this program.” Checks with several other lenders around the country revealed that few if any have yet closed a loan under the new program. But once word gets out, that is likely to change, several said.

Joseph DeMarkey, regional director for the reverse mortgage unit of MetLife Bank, said his institution is offering the new loans. “We haven’t closed any loans yet,” he said. “But the program has only been in place for a couple of weeks.”

Shelly Joe, a Bank of America spokeswoman in Sacramento, said the bank is putting the program in place. “We think it’s a great program for seniors,” she said.

Wells Fargo started offering the new mortgages at the end of February, according to spokeswoman Debora Blume.

New twist

Reverse mortgages have been around for two decades, but they’ve had limited appeal, according to Marr and other brokers. For one reason, they only worked for those who owned their properties outright or had substantial equity; for another, over time, the borrower gave up equity in return for regular cash payments.

This reduces the value of what is often the largest single asset in a person’s estate, their home.

Historically, reverse mortgages paid borrowers cash each month in exchange for an increasing share of the equity in their homes, hence the name “reverse.” “It is a financing tool for seniors to age in place” without the worry of a monthly mortgage payment, DeMarkey said.

When the owner or owners died or moved, the home would be sold and the lender recouped the money paid out, plus substantial interest. If anything was left over, it went to the homeowners, if they were still alive, or their heirs.

HECM stands for Home Equity Conversion Mortgage, the FHA term for a reverse mortgage.

The new program, known as HECM for Purchase, allows those who qualify to make a large cash down payment on a home or condo and use the reverse mortgage as permanent financing for the rest of the home price. The size of the down payment varies depending on the age of the buyer and the interest rate of the loan.

The older the borrower, the greater the amount of the home price that can be financed. Between the ages of 62 and 65, for example, borrowers can qualify for about 52 percent of the purchase price at current mortgage rates, Marr said. So on a $300,000 property, the one-time down payment would be $144,000 plus closing costs.

Likewise, if interest rates fall, buyers of the same age would be able to finance a larger portion of the purchase price, reducing their cash outlay.

After that, the owner or owners would only need to pay property taxes, insurance and maintenance costs for as long as they live in the home.

Like the older type of reverse mortgage, no taxes are levied on the proceeds of the HECM for Purchase loan.

Creative Options

Using a reverse mortgage to purchase a home offers eligible buyers a number of new and creative ways to buy a principal residence, Marr said.

One of the most common scenarios involving reverse mortgages is that of a couple who reaches retirement age – usually empty nesters – who wish to downsize and eliminate mortgage payments. The HECM for Purchase program provides an opportunity for them to sell their existing home and use the equity to make the cash down payment on a smaller one.

The purchase program, in effect, doubles the purchasing power of eligible buyers, several brokers said. Under the program, a couple with a $1,800 monthly payment on a home in which they have $250,000 in equity could sell the house, use $150,000 of their equity to buy a $300,000 condo and never make another mortgage payment.

They would then have $100,000 in cash that could be used for any purpose, such as supplementing their retirement savings or pension income.

Marr offered another example of an eligible couple who owns a home outright and decides to refinance using an HECM for Purchase mortgage, pulling $400,000 out in a lump sum, which then can be used for an all-cash purchase of a vacation home at Lake Tahoe. The couple ends up owning both homes and makes no payments on either for the rest of their lives.

The program also offers opportunities for homeowners who aren’t old enough to qualify for a reverse mortgage, but have substantial equity in their homes. Marr knows of a couple who currently makes substantial mortgage payments on their home in Marin County and are about eight years shy of the 62-year minimum age limit.

Based on current market values, the couple calculated that they own more than half of what their home is worth. The couple has decided to refinance the current mortgage balance now into an interest-only loan, which will reduce their monthly loan payment by more than half.

Then when they reach age 62, they will refinance again into an HECM for Purchase loan, which will eliminate their house payments from then on, she said. The principal risk in this scenario, several brokers noted, is if home prices in Marin dropped enough over the next eight years to reduce the couple’s equity below 50 percent.

Growth potential

Despite the current desperate state of the financial markets in the United States, many industry experts predict that there is a reverse-mortgage boom just around the corner that will only be accelerated by the new HECM for Purchase twist.

Several noted the program should greatly expand the number of people 62 and older in the Bay Area and across the country who can afford homes at prices that were heretofore unattainable.

A key factor, they say, is getting the word out on the new type of reverse mortgage.

A recent study by Met Life (owner of MetLife Bank which is one of the top five reverse mortgage lenders in the United States) concluded: “out of the nearly 28 million households age 62 and older, some 13.2 million are good candidates for reverse mortgages. And as the 77 million Boomers reach age 62 and beyond – the age of eligibility for reverse mortgages – this number will grow.”

Della Faulkner, a broker with Seniors Reverse Mortgage in Pleasant Hill, is one of those optimists. “We expect lots of seniors to be attracted to this program because it will help them enjoy a better retirement – that’s the important thing these days.”

By the numbers

This table shows the loan fees and closing costs for a $625,500 HECM for Purchase reverse mortgage at ages 62, 70 and 80, and the amount of cash the buyer needs to close the deal. FHA rules limit these mortgages to properties valued up to $625,500. For homes with greater values, the buyer is required to pay the difference in cash.

Found here.

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