Issues/Politics Facing the mortgage crisis Beacon-omics 101: What are reverse mortgages - and are they good for seniors? | Beacon-omics 101: What are reverse mortgages - and are they good for seniors? |
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| By Mary Delach Leonard, Beacon staff | |
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Posted 11:28 a.m. Mon., Jan. 12 - After watching commercials of actors Robert Wagner and James Garner and former local TV personality Clif St. James touting the benefits of reverse mortgages, the question is: What's not to like about this financial option for older Americans? The answer is: Maybe nothing -- and maybe everything. It all depends on an individual's circumstances, say financial counselors who advise seniors on the innovative loan products. definitionReverse mortgage: A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan. Source: Investopedia.com, a Forbes digital company Reverse mortgages are loans that allow homeowners 62 or older to cash in and use the equity in their homes while they continue to live in them. The loans come due only after the borrower's death, or if he or she moves out or sells the home. Although private lenders have started offering their own products, the lion's share of reverse mortgages -- about 90 percent -- are federally insured Home Equity Conversion Mortgages. Known as HECMs, these loans are administered by the U.S. Department of Housing and Development and insured through the Federal Housing Administration. Private lenders originate HECMs, which are then purchased by Fannie Mae. In 2008, the deeply troubled U.S. mortgage industry found reverse mortgages a niche of continued growth, closing a record 112,154 HECMs, according to statistics from the National Reverse Mortgage Association. Last year's figures surpassed the 2007 total, also a record year. By comparison, 43,131 HECMs were closed in 2005. The benefits of reverse mortgages can be invaluable to some seniors who want to stay in their homes but need extra cash to pay for maintenance, taxes or even living expenses and health care. "What you are really doing is getting the use of the equity while you're living in the home as opposed to passing it on to your heirs or having it available for you to use after you move away from this home. That's the tradeoff you're making," said Buz Zeman, director of the St. Louis nonprofit agency Housing Options Provided for the Elderly. But Zeman also adds an important caveat: "Don't borrow money unless you need to." Reverse mortgages are complicated Counselors warn that using home equity today to maintain a carefree lifestyle or to take a Caribbean cruise, as some commercials suggest, can be problematic tomorrow. Reverse mortgages are not only expensive, but spending too much too soon in retirement could leave an empty pot for rainier days to come. $$$Q. How much does a reverse mortgage cost? A. Total costs vary for reverse mortgages, depending on a variety of factors, including interest rates and duration of the loan. Upfront costs, such as origination fees and other closing costs are immediately added to the loan. Monthly insurance, servicing fees and interest are added to the principal over the lifetime of the loan. The following example, provided by AARP, calculates the cost of a reverse mortgage taken by a borrower at age 75 who owns a $250,000 home. According to HUD's formula for Home Equity Conversion Mortgages, the borrower would qualify for a credit line of about $135,484. If the homeowner took just one-half of that amount ($67,742) as a lump sum at closing, he or she would immediately owe that amount, plus about $12,000 in upfront costs, for a total of $89,742. Based on a life expectancy of age 87 and assuming an interest rate of 7 percent, the amount of interest added to the loan over the course of 12 years would be $111,056. Projected costs of 12-year reverse mortgage for a 75-year-old borrower in a $250,000 home Amount borrowed: $67,742 Total loan costs: $136,029 Total amount owed at 12 years: $203,771 Loan costs: Upfront (origination fees, closing costs, etc.) - $12,000 Source: AARP Reverse mortgages work best for people who intend to stay in their houses for a long time, said Bronwyn Belling of the AARP Foundation, which researches reverse mortgages and has produced an extensive 42-page consumer guide available at www.aarp.org/revmort . "The loans are very expensive up front and almost all of the fees are paid at closing. If you have to take a reverse mortgage and are only in the house a year or two it is a very, very, very expensive way to borrow money," Belling said. "We are also urging people to exercise caution because you don't want to borrow the equity out of your house now when you might need it later for something that is much more important." Belling said the good news about reverse mortgages is that they give homeowners a great deal of flexibility. The bad news is that predatory lenders or fraudulent con artists can always find ways to talk people into making inappropriate decisions. "These are very complicated, sophisticated financial transactions," Belling said. "They work well for some people and not so well for others." The amount of money that can be borrowed in a HECM is limited by a formula that takes into account home value, current equity and the homeowner's age. Basically, the older the homeowner, the more equity he or she can access. In November, the HECM limit on home value was raised to $417,000 nationally. Loans for homes appraised at more than that amount are still based on $417,000. On the plus side, a HECM borrower will never owe more than the home is worth at time of repayment because of the cap on the borrowed amount - and because the homeowner is required to buy mortgage insurance. Homeowners can take their loans in a lump sum, as a monthly cash advance or as a credit line, or as a combination of the options - and can change their choices during the lifetime of the loan. No loan repayment is required until the borrower dies, sells the home or moves out. On the down side, counselors warn that reverse mortgages can be expensive because of the upfront costs, such as origination fees and closing costs, which quickly add up to thousands of dollars and are due at closing, no matter the length of the loan. Origination fees on HECMs, for example, are limited to $2,500 on a home worth less than $125,000 and to $4,500 on a $250,000 home. Though HUD limits the origination fees, they can vary by lender, so counselors advise shopping around. But the largest cost of the loan will be the interest, which is added on a monthly basis. No right answer for everyone Homeowners interested in a HECM are required to talk to a HUD-approved counselor employed by a nonprofit or public agency. Such counseling, which is limited to a fee of $125 paid by the homeowner, can be face-to-face at a local agency or over the phone through a network of counselors certified by HUD. "The advice I would hope to get across is that people need a good counseling agency to help them think through all the pros and cons relative to their personal situation," Zeman said. Zeman, who cautions that the quality of counseling varies, is not a fan of phone counseling provided by the national network because he believes it can fail to delve deeply enough into a homeowner's personal situation. And, he points out, local counselors may be aware of state, county or municipal programs that could be better than reverse mortgages for area homeowners who need help for home improvements or taxes. more information* The AARP Foundation has compiled extensive research and information on reverse mortgages and HUD Home Equity Conversion Mortgages. A free consumer guide is being updated and will be available in February by calling 1-800-209-8085; ask for stock number D15601. The new guide is already available online at: www.aarp.org/money/personal/reverse_mortgages/ An additional AARP site: http://hecmresources.org/ * The St. Louis Federal Reserve recently published an informative consumer article, available at: www.stlouisfed.org/publications/br/2008/a/pages/1-article.html "If counseling takes less than an hour, it's very likely that the counseling is inadequate," Zeman said. He also advises homeowners to seek a counselor directly through HUD, rather than relying on a list provided by lenders. Belling urges consumers to read the AARP's guide carefully before talking to any counselor - and to think beyond the television advertising that promotes reverse mortgages. "They do tend to not tell the whole story," she said. "They're in the business of making loans, and that's where I think our work is different. We are encouraging people to shop all resources and alternatives and transactions and costs." Good counseling not only helps a homeowner understand the ramifications of a reverse mortgage but is also intended to limit potential fraud - a concern voiced in a recent report by economist Heidi Kaplan of the St. Louis Federal Reserve. Kaplan warned that some lenders attempt to find ways of bundling the loans with some type of investment - such as an annuity or insurance - that is financially unsound. Some lenders who are unable to sell "forward" mortgages in today's tough market have "jumped over to reverse mortgages," Zeman said, adding, "There are good agents -- it really runs the gamut." In general, Zeman said, homeowners should avoid dealing with anyone who is trying to talk them into buying something and using a reverse mortgage to pay for it. Proponents say that reverse mortgages give older Americans across a wide economic spectrum the opportunity to have more of a say about how and where they will live. Even borrowers who still owe on their homes might find some financial relief by replacing a conventional or "forward" mortgage with a reverse mortgage. On the other hand, counselors say, some borrowers would be better served by tapping into other investments first - or selling homes they can no longer afford. "It's hard to talk in generalities. Everybody's different," Zeman said. A major concern is that a borrower who uses home equity may have nothing left to pay for good nursing home care, should he or she eventually have to leave the home, he said. On the other hand, homeowners eligible for public assistance could lose that income source if they sell their homes. The average age for people seeking reverse mortgages is now around 73, Belling said. Research has found that even people who intended to keep their homes for a long time often terminate the loans sooner because their situations have changed. "The older you are, the more you can borrow," Belling said. "If you don't need it right away, you may wait a year or two or five. Of course, we don't know what will happen to interest rates in the future or to property values. All of those factors drive the reality of how much people can borrow from these loans." For previous Beacon articles on mortgage problems, click here . Contact Beacon staff writer Mary Delach Leonard.
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