Using Reverse Mortgages to Augment Lost Savings

Seniors using reverse mortgages to repair diminished nest eggs
Thursday, 25 June 2009 10:43
BY GERALD J. ROBINSON
NEWJERSEYNEWSROOM.COM

Seniors' portfolios hammered by the stock market decline are getting a boost from reverse mortgages. Such mortgages allow seniors to get monthly payments based on the equity value in their homes – the amount that the value of the home exceeds any mortgage on the home.

It's reported that in recent months the number of reverse mortgages backed by the government jumped nearly 20 percent from the same period last year. And it's not just the stock market decline that's at work: a tough housing market has made it more difficult for seniors to sell their homes and downsize.

Especially for older individuals who intend to remain in their homes for the rest of their lives, the reverse mortgage may be the ideal way to deal with a cash shortfall. It's especially attractive because it can provide monthly payments to the homeowner for life and does not have to be paid off until the owner's death or when the home is sold.

The amount of cash flow that a homeowner can get out of a reverse mortgage mainly depends on four factors:
1. The homeowner's age
2. The amount of equity in the homeowner's home available to support the loan
3. The interest rate on the reverse mortgage
4. And closing costs.

Aging has its compensations, at least in figuring a reverse mortgage payout. The older the homeowner, the better, because the payout increases with the homeowner's age on the date the mortgage begins...

...If there's no mortgage on the home the cash flow from a reverse mortgage will be higher than if there's a mortgage. This is because the equity in the home is 100 percent of its market value. But even if there is a mortgage on the home a reverse mortgage can be attractive, depending on the amount of the mortgage and the value of the home.

A rough idea of the amount of monthly payments that can be obtained from a reverse mortgage can be gleaned from online calculators. Take, for example, the calculator at the AARP website. It shows that a 71-year old Sarasota, Florida homeowner can get a monthly cash flow of $851 if his mortgage-free home is worth $250,000.

Reverse mortgages are not simple. A good source for learning more about them isFannie Mae's Money from Home: A Consumer's Guide to Reverse Mortgage Options. It can be found at fanniemae.com. Fannie Mae's consumer's guide is required reading for anyone seriously thinking about a reverse mortgage.

Gerald J. Robinson, Esq., a former tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition. © Gerald J. Robinson

HECM: THE ONLY GAME IN TOWN??

HECM Reverse Mortgages Are Almost The Only Choice Left
Monday, June 22, 2009 by Admin. at Let Your Home Pay You

Reverse mortgages have been in existence for more than twenty years. During that time there have been quite a few incarnations of this equity release mortgage designed for senior homeowners as a way to supplement retirement incomes and lifestyle.

There have been reverse mortgages offered by individual financial institutions and insurance companies, usually referred to as proprietary loans because the institutions would custom design them and usually retain them for their own investment portfolios.

There have been "single purpose" reverse mortgage home loans, usually offered through communities or non-profits. FNMA had a reverse mortgage called "The Home Keeper,"but discontinued offering it last year. There were equity share products, like Equity Key and Rex, which participated in future home appreciation at the end of the loan term.

Now The Only Game In Town

However, since the meltdown on Wall Street and the frozen credit markets, there are virtually no reverse mortgage loan products currently being offered other than HECM* reverse mortgages, which are insured by FHA and backed by HUD. HECM reverse mortgages historically captured the lion's share of this market anyway, but now it is almost the only viable choice left standing during this economic crisis.

Fortunately, enhancements to the government reverse mortgage were included as part of President Obama's Economic Stimulus Plan back in February. The lending limit was increased from a national loan limit of $417,000. to $625,500. This increase offers senior homeowners with higher value homes the opportunity to access a much larger portion of home equity than they would have been able to with the lower limit.

The one caveat to this enhancement is that it is temporary and will only be available through the end of this year, unless Congress decides to extend it. With property values declining throughout the country, it might be a wise decision for those folks with property values greater than $400,000. to take a serious look at HECM reverse mortgages BEFORE the end of the year.

If you (have a higher value home and) do not do it before the end of 2009 and Congress does not extend the higher loan limit, you could find yourself shut out of a government reverse mortgage all together. And who knows, if and when, alternative products will be available again.

*HECM stands for Home Equity Conversion Mortgage

REVERSE MORTGAGES GAIN POPULARITY

June 22, 2009
More seniors turning to reverse mortgages

INDY-STAR

By Nicole Blake

When Judy Kralik and her husband, Andrew, downsized and moved to Valparaiso in 2005, she thought life would be easier. But when her husband of 47 years died from esophageal cancer less than a year later, things got tough: her income did not comfortably cover her mortgage and other living expenses.

"Our income just really went down, and I was on Social Security," Kralik said.

Kralik, 69, turned to a reverse mortgage to get the extra money she needed. She now receives a check each month for about $435 that will continue for the rest of her life.

Like Kralik, more seniors are using reverse mortgages to tap into their home equity and pay off debt. Reverse mortgages allow the borrower to receive income in monthly installments, a lump-sum payment or a line of credit from which the borrower can make periodic withdrawals.

The loan becomes due only when the property is sold or the youngest borrower on the mortgage dies, and the house is used as collateral for the government-insured loan and interest.

Mortgage brokers such as Bob Allen say reverse mortgages have become part of a "normal retirement plan."

"The reasons people take them out are as varied as people's lives," said Allen, who also has a reverse mortgage.

Statewide, the number of reverse mortgages rose 20 percent from 669 in 2008 to 803 this year. And nationally, reverse mortgages -- known as Home Equity Conversion Mortgages -- jumped 5 percent from 73,875 to 77,908 during the same period.

When Allen saw his 401(k) plummeting, he knew something had to be done. Upon retiring at 65, Allen and his wife, Zeta, got a reverse mortgage on their five-bedroom Hobart home and are now receiving $518 a month to supplement their retirement income.

Loan amounts are largely based on the borrower's age, home value and current interest rates, and the home must be the primary residence. There are no income requirements, and Congress increased the maximum home value that is considered from $417,000 to $625,500, making reverse mortgages available to more homeowners

The loan amount must be great enough to cover an existing mortgage, said Tom Hedderich, owner of Mortgage Network Inc. He saw a spike in reverse mortgages about four years ago when the number of loans his office handled ballooned from only 10 a year to 100.

Borrowers must complete a face-to-face or telephone counseling session as part of the loan process, and credit counselors such as Cynthia Pratt say you should consider all options before deciding on a reverse mortgage because there are costs. Steep loan origination fees and an impact on estate planning are two of them.

While many seniors like their adult children to help with the decision-making, "some will come with their minds already made up," said Pratt, director of counseling and customer service for Momentive Consumer Credit Counseling Services.

"They need to understand what can happen," and that "you are committing the home to a reverse mortgage."

Because the loans are government-insured, they often cost more than regular mortgages. Costs include an origination fee, servicing fee and a mortgage insurance premium, which can be paid using proceeds from the loan. This will decrease the take-home amount.

Borrowers have six months to pay the loan when it becomes due, but they can apply for a six-month extension, said Bob Garczewski, an account executive for MetLife Bank, which has seen its volume of reverse mortgages double in the past three to six months. Heirs are not responsible for paying the loan.

If the only means of paying the loan is selling the home, and the home cannot be sold, the lender would be required to initiate foreclosure proceedings, said Craig Corn, vice president of MetLife Bank.

For Kralik, the benefits of the loan outweigh the costs. The additional income allows her to cover everyday expenses and buy gifts for her grandkids. "It's not a ton of money, but it sure helps me," she said.

Additional Facts ABOUT REVERSE MORTGAGES

What is a reverse mortgage
A loan insured by the Federal Housing Administration that allows borrowers to draw cash from the equity in their home without making monthly payments.

Who qualifies?

You must be at least 62 years old and use the home as your primary residence. Mortgage amounts could range from 50 percent to 85 percent of the home's appraised value. The older you are and the more equity your home has, the more money you are eligible to receive.

What are the benefits of a reverse mortgage?

There are no monthly payments.» Your heirs will not inherit any debt.

What are the costs?

Reverse mortgages can be costly.Generally, your debt increases and your equity decreases. It will reduce the value of your estate.

Common reasons for getting a reverse mortgage:

Eliminate debt or pay off an existing mortgage. Home repairs. Supplement retirement income.