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.

REVERSE MORTGAGE: USE IT TO PURCHASE OR REFINANCE!

Below, a basic article from the Montana "Missoulian" shows that reverse mortgages are becoming popular all over the USA, and that homeowners in states and counties that used to have smaller FHA Reverse Mortgages (because the loan limits were based on county home prices and economics) are now in excellent positions to obtain more needed cash or credit lines from their homes with the new, higher $417,000 nationwide lending limit.

REVERSE MORTGAGE PURCHASES - WITH NO MONTHLY PAYMENT

As of January 1, 2009, Reverse Mortgages may be used to purchase a new (or a replacement principal residence). The purchase Reverse mortgages works this way, generally.

If you currently own a home that is perhaps too big for you, or is older and needs more repair than you want to put into it, and you would like to buy a newer or smaller home, here are the steps to follow.

1. Estimate how much cash you will have after selling your current home.

2. Estimate the price you'd most likely pay for a new home.

3. Give your Reverse Mortgage Specialist this information, as well as your age(s) and the zip code of the new home.

4. Your Reverse Mortgage Specialist will be able to then tell you, based on the price, your age(s), the interest rate, and zip code, how much of a net (amount after costs) Reverse Mortgage you could get on the new home.

5. Take the value of the new home, deduct the amount of the new net (after costs) Reverse Mortgage, and the balance will be what you'll be required to put down on the new home.

6. At the end of the transaction you will have the new home with no mortgage payments - although you will be responsible for taxes and insurance.

7. In addition, since you won't have to use all of your cash-equity out of your old home to purchase the new home, you'll have extra cash to put into savings to use for future needs.

Here's an example of a senior couple who have been able to do this.

1. They sold their current large home for $550,000 and after paying off their current loan and all closing costs, ended up with $285,000 in cash.

2. They moved to another area in their state where housing prices were lower, and where they could live closer to their grandchildren.

3. They were 69 and 67 years of age and selected a home that cost $350,000. Because of the interest rate, their age and the value of the property, they were able to qualify for a net Reverse Mortgage of $210,831 at a monthly interest rate of 2.43%.

They then put down $139,169 from the $285,000 they got on their old house. This left them with $145,837 in cash to add to their savings and investments which they could use any way they pleased.

In addition, there were no credit, income, employment or savings requirements for them to qualify for the loan. And, they will have no monthly mortgage payments - making their social security and other retirement income go further.

It is true that over time they will eat into the money they put down on the new house (their new equity) as interest on the Reverse Mortgage accumulates. Over a 10 or 15 year period, if their home appreciates at approximately 4% a year, the equity will last many years. (Or provide cash-out to them if they sold the new home)

If you would like to explore this option with me, please call me at 703/244-8151 and I will be happy to provide you with detailed information on how much you would get on a Reverse Mortgage, the costs, as well as an amortization sheet showing you just how much you would owe annually, and how much equity you could have left in your property at any given year. Most people will be pleasantly surprised.

But also bear in mind, that if you ever use up your equity and want to stay in the home anyway - that is absolutely your right, and it is written into the program. If, by the time you (all borrowers) have passed on or moved out, and for any reason at all you owe more on the loan than the home is worth, FHA will pay that difference to the lender. Neither you, nor your heirs, would be responsible for that difference, and neither the lender nor the FHA can come after any of your other assets (or inheritance) to pay that difference. This is also written into the documents.

Gloria
703-244-8151

Turning home equity into cash
By BETSY COHEN of the Missoulian

Reverse mortgage: It's a term - and a tool - that is becoming increasingly familiar among the ranks of retirees and lenders.

What is it? It's a viable option for people over the age of 62 who want to stay in their homes but have little or no savings, assets or other cash options to pay their bills.

This is how it works: Senior citizens who own their homes can convert the equity in those homes into cash without having to move out or repay the loan each month, explained Greg Harper, Missoula branch director for the Consumer Credit Counseling Service of Montana.

The money paid to the homeowner, which is usually between 65 percent to 75 percent of the assessed equity, is paid back to the lender when the homeowner sells the home, moves into another living situation or dies and the home is then sold.

Increasingly, more and more seniors are turning to this option, said Peter Bell, president of the National Reverse Mortgage Lenders Association, a nonprofit trade association based in Washington, D.C..

“I think people are cash-constrained in a number of different ways,” Bell said. “And this has become an important tool for people to manage their personal finances.

“The reverse mortgage is used to pay off an existing mortgage (so homeowners have more available money to pay for other living expenses) or to maintain living in the house.”

Federally insured Home Equity Conversion Mortgages (HCEMs) are the most popular reverse mortgages offered, and account for 90 percent of all such mortgages in the United States. In 2008, the number of HCEMs grew by 6.4 percent, amounting to 115,176 loans.

Homeowners in Florida and California lead this emerging trend, according to the Federal Department of Housing and Urban Development, but statistics show Montana homeowners are also riding the swell.

On the ground, it means the Consumer Credit Counseling Service of Montana is busy - very busy - these days, said Tim Robbins, director of counseling for the statewide agency.

“We have been doing counseling for reverse mortgages for four years and we have had a 400 percent increase over the last four years,” Robbins said. “Four years ago, we were counseling between four and six homeowners a month. Now we are seeing about 20 to 25 people a month.”

By federal mandate, anyone who is interested in HCEMs must have third-party counsel before a reverse mortgage is approved. The law not only helps seniors make informed decisions with the help of an objective third party, but it helps protect seniors from predatory lending practices, Robbins explained.

In Montana, the bulk of such counseling takes place in the eight offices of Consumer Credit Counseling Service.

“What we are experiencing is pretty typical of the national trend,” Robbins said. “Reverse mortgages nationally have doubled every year for the last three to four years.”

Several factors are helping to push this once-obscure fiscal tool into the limelight, said Bell, whose D.C. organization keeps track of the niche lending sector.

“There is a snowball effect for people,” he said. “Once they know someone who has gone out and got it, the person who has it becomes the convincer to help the reluctant one move ahead.”

Of course, there are more tangible reasons.

In November, housing legislation cut fees on reverse mortgages while raising the amount that homeowners can borrow against.

In Montana, borrowing caps were once determined county by county, and generally the amount people could borrow against their equity was around $200,000, even if there was more equity in the home.

Today, that limit is $417,000 nationwide, Robbins said.“To have a national limit has really changed things,” he said. “It's given people more options.”

Robbins expects reverse mortgages will only get more popular as people live longer in general, and as more baby boomers - many of whom may be financially strapped in their sunset years - hit retirement age.

It's telling that the watchdog of American aging, the AARP, is tracking the trend on its Web site, www.aarp.org, where there are numerous and current articles that explain the world of reverse mortgages.

“Reverse mortgages are a good tool for certain people,” said Mary Harris, a certified public accountant with the Missoula firm Boyle Deveny & Meyer.

In recent years, more of her clients have asked Harris about the lending option.
“It really works if you don't have other assets to work with,” Harris said. “It actually can be something that can be very useful, something that will allow people to have a good quality of life.

“For a lot of people, their home is their single largest asset, and with a reverse mortgage you don't have to have your mortgage paid off to do it.”While the option has its allure, there are several caveats. “People are using it as a last resort,” Harris said. “This is not a good option for people who want to keep their home debt-free because a reverse mortgage is a debt.”

In all his years as a counselor at Credit Counseling Service of Montana, Harper said he's learned to immediately tell people that reverse mortgages are most helpful to homeowners who have no other financial options.“It can be a very expensive loan up front,” Harper explained. “This isn't the best option if it's for a short-term deal.”

The other, perhaps most important caveat? “Talk to your family and heirs about this,” Harper said. “They are going to be a party to this even if they don't think they are. The ownership of the property is something you will them - and they have to deal with that and the debt that comes with it.”

Copyright © 2009 Missoulian

REVERSE MORTGAGES GET BETTER
New rules allow seniors to borrow more and even buy a new home
By Mary Beth Franklin, Kiplinger's, October 29, 2008

Retirees concerned about their decimated savings should take a second look at reverse mortgages. Beginning November 1, 2008, homeowners everywhere may borrow up to $417,000. Previously, the Home Equity Conversion Mortgage program assigned various lending limits, ranging from $200,160 in rural areas to $362,790 in the most expensive housing markets.

Existing reverse-mortgage borrowers may be able to refinance their loans to take advantage of the higher lending limit. Plus, the new rules cap the origination fee, previously set at 2% of the loan value, at $6,000.

And, in a major policy change, retirees will be able to use a reverse mortgage to buy a new home starting in 2009. "This provision could really transform the industry," says Peter Bell, president of the National Reverse Mortgage Lenders Association, in Washington, D.C.

How it works

With a reverse mortgage, homeowners 62 or older can tap the equity in their home in the form of a lump sum, line of credit, monthly payout or a combination of all three. You retain the title to your property and must continue to pay property taxes, insurance premiums and home-maintenance costs.

Payouts are tax-free, but the income you receive may make you ineligible for certain state and federal benefits, including Medicaid, which is a major payer of nursing-home costs.

A reverse mortgage need not be repaid until the last homeowner moves out or dies, at which point the home may be sold to pay off the debt. Interest and fees accrue over the lifetime of the loan and could wipe out any remaining equity. But the loan-repayment amount may never exceed the market value of the home; even if home prices decline, your heirs cannot be held responsible for any shortfall.

Retirement-income solution

John and Phyllis Harper decided to take out a reverse mortgage to tap the equity in their paid-off home near Denver, valued at about $300,000. They're using the money to finance about $60,000 worth of needed improvements and to boost their monthly retirement income. "We can do some extra things now, such as travel," says John, 75, who enjoys working in his home sculpture studio and cruising in his '82 T-top Corvette. "We discussed it with our children and they said, 'It's your money -- enjoy it,'" says Phyllis, 72.

As baby-boomers move into their retirement years with fewer pensions, inadequate savings and increasing health-care costs, reverse mortgages are well positioned to serve as a financial solution, says Brian Montgomery, commissioner of the Federal Housing Administration. Bell agrees. "We expect the growth of reverse mortgages to accelerate as seniors look for additional sources of income," he says, "and because the new provisions of the Homeownership Act of 2008 broaden the market and make them more attractive." ...

Buying a new home

Although the Department of Housing and Urban Development hasn't officially announced the change, new rules allowing a reverse mortgage to be used to buy a home are expected to take effect January 1, 2009. Like traditional reverse mortgages, the maximum loan amount will be based on a combination of the value of the home, the homeowner's age and prevailing interest rates.

Say an elderly couple lives in an old, two-story house. The house needs repairs, and they're having a hard time negotiating the stairs. Instead of having to stay in a house that no longer meets their needs, they could sell the old house and use a reverse mortgage plus cash to buy a new, single-story home.

Here's how it works.

Assume the couple's current home is worth $700,000, and they want to downsize to one that costs $500,000. If they pay cash, which many seniors choose to do, they'll have $200,000 left to live on. But if they use a reverse mortgage to cover some of the purchase price -- say, $200,000 -- and pay the $300,000 balance with proceeds from the sale of their old home, they'll double their cash reserve to $400,000 without ever having to worry about repaying the reverse mortgage while they live in the house.

Beware of scams

But reverse mortgages also have a dark side. In recent years, some unscrupulous lenders have pressured elderly borrowers into using their newfound cash to buy annuities and other financial products that imposed high fees and limited access to their money. The new rules prohibit lenders from requiring reverse-mortgage borrowers to purchase additional products or services as part of the loan agreement.

In a recent investor alert, the Financial Industry Regulatory Authority, or Finra, warned seniors to consider all of their options carefully before committing to a reverse mortgage. "Home equity is often a homeowner's most valuable asset and most precious source of retirement security," the Finra alert states. "Consider all the risks and explore all of your options before taking out a reverse mortgage, and even then, use the loan funds wisely.

COMMENTS:

POSTED BY: wealthone (October 30, 2008 10:41 AM)You nailed this post, we wrote the same thing on reverse-mortgage-information.org, so we're glad that other folks understand. It really is an amazing program that anyone 62 and over interested in purchasing a home needs to know about.

POSTED BY: Ernie Castro (October 31, 2008 01:06 PM)Reverse mortgage for purchase will revolutionize how seniors finance their homes in the future. With no credit and income restrictions, this product will become the smoothest way for people in the last quarter of their lives to finance their homes


"RELATED LINKS

5 Things Retirees Should Do Now
Cut Spending to Stretch a Nest Egg
Tapping Your Portfolio in a Bear Market

This page printed from: kiplinger.com/features/archives/2008/10/reverse_mortgages_get_better.html
All contents © 2008 The Kiplinger Washington Editors

*******************************************************************************************************


Reverse Mortgage: Pop quiz might help calm concerns
Posted by News and Resources about Reverse Mortgages
On November 3rd, 2008

The misconceptions surrounding reverse mortgages continue to be a stumbling block keeping many seniors from taking advantage of this remarkable product. In an effort to help dispel some of the myths about reverse mortgages, I offer the following pop quiz. The answers are simply true and false responses followed with a brief explanation.

Reverse mortgages are only available to seniors older than 70 years of age - false.

The minimum age requirement is that both spouses be at least 62 years of age.
• If I obtain a reverse mortgage I no longer own my home - false.

The key to understanding this concept is the word “mortgage.” A mortgage places a lien against a property and the truth is that in order to obtain a reverse mortgage the property must be in and remain in the name of the borrowers only. The property must be maintained and taxes and insurance must be kept current, but the lender does not own your home.

• A reverse mortgage makes it easier for your home to be sold out from under you - false.

Here again the key word is “mortgage.” Like any other mortgage, a reverse mortgage places a lien on the property and is in the name of the borrowers. Nothing can be done with your property without your knowledge and consent.

• My heirs will be saddled with the loan - false.

A reverse mortgage is a “non-recourse” loan. This means that the lender only can derive repayment from the proceeds of the sale of the property...This is true even if the home’s value has decreased or the borrower lives to an extremely old age...[or the amount of the loan exceeds the value of the home. If this happens, then FHA pays the difference to the lender].

• If I receive a reverse mortgage my home goes to the lender at my death - false.

Any value or equity remaining after the loan is repaid goes to the estate or the heirs of the borrowers. This means that if the home appreciates in value, the value or equity going to the heirs can be significant.

•Bad credit, low income or failing health can keep me from getting a reverse mortgage - false.

A reverse mortgage has no credit, income or health requirements. Since no repayment is made on a reverse mortgage as long as one surviving spouse remains in the home, there are no income or credit requirements.

• I have a current mortgage. Doesn’t that keep me from seeking a reverse mortgage? - No.

You may have a mortgage or other debt against your home and still obtain a reverse mortgage. All existing debt [on the property, only] must be paid off with the proceeds of the reverse mortgage but any remaining funds are yours to access.

• So if I get a reverse mortgage don’t I have to take the money in a lump sum? - No.

There are five options available for you to receive the proceeds of a reverse mortgage.

1) Tenure: Equal monthly payments as long as at least one borrower lives and continues to occupy the property as their primary residence.
2) Term: Equal monthly payments for a predetermined number of months chosen by the borrower.
3) Line of credit: Unscheduled payments or in installments, at times and in the amounts of the borrower’s choosing until the line of credit is exhausted.
4) Modified tenure: A combination of line of credit with monthly payments for as long as the borrower remains in the home.
5) Modified term: Combination of line of credit with monthly payments for a predetermined number of months chosen by the borrower.

• The money I receive from a reverse mortgage can negatively impact my Social Security or Medicare - false.

Reverse mortgage proceeds are not taxable because they are not considered income but are, in fact, a loan.

And since the U.S. government sets Social Security, Medicare, and FHA reverse mortgage rules, they all have been made compatible.

It must be stated, however, that Supplemental Security Income and Medicaid may be affected if you exceed certain liquid asset amounts. Consult your reverse mortgage provider for these figures.