Are Advised to Learn and Use Caution
To my readers:
Basically I think this is a good article, with many good points. However, like many articles there is an anti-reverse mortgage slant to it, because it makes you feel, not neutral when you are through reading it, but slightly negative or anxious. The reverse mortgage product offers many senior citizens a safe, insured, way to obtain tax-free cash to use for everyday expenditures, which are now soaring higher and higher - blowing the careful budgeting many seniors have lived by.
As you read it you will see some numbers in parenthesis which correspond to notes I have made at the end of the article, which I hope will clarify some statements.
Gloria
Reverse Mortgages Promise Seniors Cash, Advisers Urge Caution
By Alexis Leondis, from Bloomberg, June 13, 2008 (Excerpts)
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... 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 (1)* 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. (2)*
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,'' (3)* said Tom Orecchio, chairman of the National Association of Personal Financial Advisors in Arlington Heights, Illinois. ..
...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. (2)* 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.
Linked to Libor (4)*
For a 70-year-old homeowner in New York with a house worth $500,000, (a lender)...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. (5)*
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. (6)*
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. (7)*
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.''
To contact the reporter on this story: Alexis Leondis at aleondis@bloomberg.net. Last Updated: June 13, 2008 00:01 EDT
Notes:
1. The fees, in my experience, are high and run from 5-6% of the home value. 4% is for the 2% FHA Insurance Premium plus the 2% Origination fee for the lender. The rest of the fees are for closing costs such as title insurance, settlement fees, recording fees, any finance taxes your local jurisdiction charges, appraisal and a few other small fees. When the new rules are finally passed (they were originally passed by Congress in 12/07, as the FHA Modernization Bill, with only a Joint Committee workout to do.
However, since then the Reverse Mortgage changes have been made a part of the whole FHA Homeowner Rescue Plan bill, which is highly complicated and controversial and dragging it's way through Congress with the President threatening a veto. The veto has nothing to do with the Reverse Mortgage changes; but those changes, which will be very beneficial to borrowers , are being delayed. One of the new benefits is that the Lender fee is reduced to 1.5% with an overall cap of $6,000, no matter the value of the home or loan.
2. I see in many many articles on Reverse Mortgagest the statement that when the last borrower moves out of the home or dies, that the house is sold to pay off the Reverse Mortgage. However, my own work with Reverse Mortgages and the amortizattion schedules that are produced normally show that there is significant equity left after the loan is paid off, and that equity goes to the heirs.
Basically I think this is a good article, with many good points. However, like many articles there is an anti-reverse mortgage slant to it, because it makes you feel, not neutral when you are through reading it, but slightly negative or anxious. The reverse mortgage product offers many senior citizens a safe, insured, way to obtain tax-free cash to use for everyday expenditures, which are now soaring higher and higher - blowing the careful budgeting many seniors have lived by.
As you read it you will see some numbers in parenthesis which correspond to notes I have made at the end of the article, which I hope will clarify some statements.
Gloria
Reverse Mortgages Promise Seniors Cash, Advisers Urge Caution
By Alexis Leondis, from Bloomberg, June 13, 2008 (Excerpts)
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... 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 (1)* 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. (2)*
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,'' (3)* said Tom Orecchio, chairman of the National Association of Personal Financial Advisors in Arlington Heights, Illinois. ..
...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. (2)* 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.
Linked to Libor (4)*
For a 70-year-old homeowner in New York with a house worth $500,000, (a lender)...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. (5)*
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. (6)*
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. (7)*
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.''
To contact the reporter on this story: Alexis Leondis at aleondis@bloomberg.net. Last Updated: June 13, 2008 00:01 EDT
Notes:
1. The fees, in my experience, are high and run from 5-6% of the home value. 4% is for the 2% FHA Insurance Premium plus the 2% Origination fee for the lender. The rest of the fees are for closing costs such as title insurance, settlement fees, recording fees, any finance taxes your local jurisdiction charges, appraisal and a few other small fees. When the new rules are finally passed (they were originally passed by Congress in 12/07, as the FHA Modernization Bill, with only a Joint Committee workout to do.
However, since then the Reverse Mortgage changes have been made a part of the whole FHA Homeowner Rescue Plan bill, which is highly complicated and controversial and dragging it's way through Congress with the President threatening a veto. The veto has nothing to do with the Reverse Mortgage changes; but those changes, which will be very beneficial to borrowers , are being delayed. One of the new benefits is that the Lender fee is reduced to 1.5% with an overall cap of $6,000, no matter the value of the home or loan.
2. I see in many many articles on Reverse Mortgagest the statement that when the last borrower moves out of the home or dies, that the house is sold to pay off the Reverse Mortgage. However, my own work with Reverse Mortgages and the amortizattion schedules that are produced normally show that there is significant equity left after the loan is paid off, and that equity goes to the heirs.
If the borrower lives to an exceptional old age, there may be no equty at all. With house prices stalled or falling, there may be less for the heirs, but they still have the choice of selling the house or refinancing it to pay back the Reverse Mortgage, and keeping the house. And, in unusual cases where the loan is as much as or more than the value of the house, FHA will pay the difference to the lender, and none of the borrower's other assets can be touched for any repayment. Also, FHA gives the heirs an allowance of up to 7% of the sales price to cover the selling costs.
3. The matter of getting a home line of credit or an equity loan (what the industry generally calls a 2nd mortgage) is one that needs to be considered carefully. The fees are negligible in many cases, and low in others; and often satisfies the borrower's needs.
However, the danger here is twofold. 1. As the loan is used the borrower will have another monthly mortgage payment added to the payment for the first mortgage, property taxes, home insurance and other debt and utility payments. There are no monthly payments with a reverse mortgage - since all the fees, principal and accrued interest are paid at the end of the loan. Also the more of the equity line that is used, the higher those payments become.
2. The second problem is that an equity loan will add to the money owed, raising the loan-to-value of the home to the loans. Since Reverse Mortgages, depending on the borrowers age, current interest rate and home value, normally only lend 55%-89% loan to value. And to get the high end loan to value the borrower must be in their late 80's or early 90's. So, if a time comes when the borrower can no longer make their mortgage payments, they may well have exceeded the limit that a reverse mortgage would lend. At that point they would have to bring in cash to make up the difference. Cash they may not have.
So before getting the equity loan they should study the reverse mortgage and see if simply paying off their current mortgage and not having anymore mortgage payments, and possibly extra funds to set up a credit line, would bring them the relief they seek.
4. Currently the LIBOR index is lower than the 1 Year Treasury Bill index used for the HECM (Home Equity Conversion Mortgage). But over time the Libor has been a more volitile index than the Treasury index.
This means that there more of a chance of the interest rate on the Reverse Mortgage moving up and down quickly, instead of slowly as the Treasury Bill index. Be sure to compare the history of these indexes before making a decision on which index you want your loan tied to. If you would like a copy of this history, please contact me at 703/244-8151.
5. This is basically a true statement. However, if you are 62, 65, 68 and obtain a Reverse Mortgage and then move, say, 5 years later under normal circumstances if you have any funds in a HECM Line of Credit all the funds you do not use revert to home equity upon a sale. In addition, the moneyin the HECM Line of Credit grows annually at a rate of 1/2% over any corresponding interest rate you are being charged. This growth is not interest being earned, but the allowance by the FHA for you to have more equity available for your use. This has been based on the fact that over time (this current downturn, notwithstanding) homes do appreciate.
It is a good rule of thumb not to get a Reverse Mortgage unless you wish to remain in your home at least 4-5 or more years in order to spread out the cost of the loan. Of course, if you are in danger of losing your home, even though you have equity, you would want to see what a Revere Mortgage could do for you.
6. If your Reverse Mortgage lender tries to sell you (even through another company division) any annuities, long term care insurance, life insurance or other financial investment, or requires that you purchase another financial investment - it is not ethical, may be against the law and- you should pick up your papers and walk out the door.
7. Counseling, by a trained HUD/FHA counselor is required for all Reverse Mortgage borrowers, and up until recently this has been done at no cost to the borrower. Congress has now said it's OK to have the borrower pay for this ($100-$150) and it may be funded through the loan.
While I personally disagree (since I believe government mandated issues should be paid by the government, and the funds could come from FHA's large surplus of mortgage insurance fees from Reverse Mortgage borrowers.) But, this issue was recently agreed upon by Congress, and that fee may now be charged to the borrower - depending on the lender's policy.
3. The matter of getting a home line of credit or an equity loan (what the industry generally calls a 2nd mortgage) is one that needs to be considered carefully. The fees are negligible in many cases, and low in others; and often satisfies the borrower's needs.
However, the danger here is twofold. 1. As the loan is used the borrower will have another monthly mortgage payment added to the payment for the first mortgage, property taxes, home insurance and other debt and utility payments. There are no monthly payments with a reverse mortgage - since all the fees, principal and accrued interest are paid at the end of the loan. Also the more of the equity line that is used, the higher those payments become.
2. The second problem is that an equity loan will add to the money owed, raising the loan-to-value of the home to the loans. Since Reverse Mortgages, depending on the borrowers age, current interest rate and home value, normally only lend 55%-89% loan to value. And to get the high end loan to value the borrower must be in their late 80's or early 90's. So, if a time comes when the borrower can no longer make their mortgage payments, they may well have exceeded the limit that a reverse mortgage would lend. At that point they would have to bring in cash to make up the difference. Cash they may not have.
So before getting the equity loan they should study the reverse mortgage and see if simply paying off their current mortgage and not having anymore mortgage payments, and possibly extra funds to set up a credit line, would bring them the relief they seek.
4. Currently the LIBOR index is lower than the 1 Year Treasury Bill index used for the HECM (Home Equity Conversion Mortgage). But over time the Libor has been a more volitile index than the Treasury index.
This means that there more of a chance of the interest rate on the Reverse Mortgage moving up and down quickly, instead of slowly as the Treasury Bill index. Be sure to compare the history of these indexes before making a decision on which index you want your loan tied to. If you would like a copy of this history, please contact me at 703/244-8151.
5. This is basically a true statement. However, if you are 62, 65, 68 and obtain a Reverse Mortgage and then move, say, 5 years later under normal circumstances if you have any funds in a HECM Line of Credit all the funds you do not use revert to home equity upon a sale. In addition, the moneyin the HECM Line of Credit grows annually at a rate of 1/2% over any corresponding interest rate you are being charged. This growth is not interest being earned, but the allowance by the FHA for you to have more equity available for your use. This has been based on the fact that over time (this current downturn, notwithstanding) homes do appreciate.
It is a good rule of thumb not to get a Reverse Mortgage unless you wish to remain in your home at least 4-5 or more years in order to spread out the cost of the loan. Of course, if you are in danger of losing your home, even though you have equity, you would want to see what a Revere Mortgage could do for you.
6. If your Reverse Mortgage lender tries to sell you (even through another company division) any annuities, long term care insurance, life insurance or other financial investment, or requires that you purchase another financial investment - it is not ethical, may be against the law and- you should pick up your papers and walk out the door.
7. Counseling, by a trained HUD/FHA counselor is required for all Reverse Mortgage borrowers, and up until recently this has been done at no cost to the borrower. Congress has now said it's OK to have the borrower pay for this ($100-$150) and it may be funded through the loan.
While I personally disagree (since I believe government mandated issues should be paid by the government, and the funds could come from FHA's large surplus of mortgage insurance fees from Reverse Mortgage borrowers.) But, this issue was recently agreed upon by Congress, and that fee may now be charged to the borrower - depending on the lender's policy.
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