$ MoneySmart / Personal Finance
More seniors opt for reverse mortgages
Homes provide source of funds in tough times
Like many retirees, Marlene Laffoon, 73, watches in dismay as both her home’s value and her investments slide southward. And yet everyday costs for this former bookkeeper aren’t falling correspondingly.
So Laffoon’s spirits rose last month on an unexpected windfall of good news: Loan amounts on reverse mortgages have been increased, and the fees decreased.
“I really don’t want to touch anything in my investments now, and yet I can’t wait 10 years to have something to draw on,” said Laffoon, of Snohomish County, Wash.
A reverse mortgage, which allows homeowners to cash out some of their home’s equity, is available to those 62 and older who own and occupy a single-family house, a condominium, town house, co-op, manufactured home or two-to four-unit building. (Some limitations may apply.)
Reverse mortgages have been growing in popularity for some years now, with more than 100,000 homeowners nationally taking them out so far this year. They’ve been offered by private lenders, by quasi-governmental mortgage backer Fannie Mae and by the Federal Housing Administration.
Following the turmoil in the mortgage industry, both private-lender and Fannie Mae reverse mortgages have either ceased or cut back substantially, says Darryl Hicks, associate director of the National Reverse Mortgage Lenders Association in Washington.
That leaves the FHA as the biggest player on the block. It recently announced the new across-the-board national $417,000 limit for its reverse, called Home Equity Conversion Mortgage, or HECM for short.
A borrower’s age and home equity determine the amount of money available. There are no income or credit score requirements, and a homeowner who’s already had a reverse mortgage can get another.
The older the borrower, and the more equity they have, the more money they can pocket. They can take it in monthly payments, in a lump sum or as a line of credit to be drawn on as needed. The amount of a reverse mortgage has to be paid back once the homeowners move out of the house — even if the house isn’t sold.
Consider hypothetical numbers for an owner whose home, worth $400,000, is paid off. At age 62, $228,581 would be available. By age 80, the amount would climb to $290,186. The money is tax-free.
The typical borrower is in his or her 70s. Getting a reverse doesn’t affect the borrower’s ability to get Social Security or Medicare.
A home needn’t be paid off for its owner to get a HECM reverse. However the owner must pay off the outstanding mortgage balance as part of the process.
So for example if the same owner of that hypothetical $400,000 house owed $100,000, at age 62 that owner would still qualify for $228,581, but would have to spend $100,000 of it to retire the outstanding mortgage. So they’d walk away with $128,581.
The FHA requires counseling for those considering a reverse so they clearly understand the pros and cons.
The Urban League of Metropolitan Seattle is one of the approved counseling agencies. A. Linda Taylor, its housing director, says there are a lot of misconceptions about reverse mortgages, which counseling clears up.
A common fallacy: Homeowners who get a reverse are signing their house over to the government or a loan company. That’s incorrect; they still own it.
Another one: Owners will have monthly mortgage payments. That’s not true, nor can the seller (or the seller’s estate) ever owe more than the total loan amount (including interest, which can be either variable or fixed).
However, Taylor suggests that homeowners and their families consider the reverse issue carefully because getting one isn’t always the best answer.
The loan, which requires all the normal closing costs plus mortgage insurance, can be expensive relative to the amount borrowers get, particularly if they’re near the minimum limit of age 62 or they have little equity in their home.
Consumer Reports magazine suggests homeowners educate themselves by visiting these Web sites:
• AARP, at www.aarp.org/money/revmort , has thorough information about reverse mortgages, plus a calculator that allows homeowners to estimate how much money might be available to them. • The National Reverse Mortgage Lenders Association, at www.nrmla.org , has mortgage information, plus a list of approved lenders who subscribe to its code of ethics. • Housing and Urban Development, at www.hud.gov , has information plus a list of HUD approved housing counseling agencies. • Federal Trade Commission has information on its site, www.ftc.gov , as do some banks’ sites. As for Marlene Laffoon, she doesn’t have a pressing need for cash right now, so she’s taking a line of credit.
“There’s always the old washer and dryer,” she said. “You don’t know when they’ll go.”
Getting a reverse mortgage “was a win-win as far as I was concerned.”
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