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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.
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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." To estimate the potential payouts and costs of a reverse mortgage -- which can be substantial -- and compare actual offers from several lenders, use the Reverse Mortgage Cash Calculator at Golden Gateway Financial (www.goldengateway.com).
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."
POSTED BY: barbk (December 30, 2008 10:55 AM)
I've not seen any examples anywhere of how the origination fees and interest can serve as tax deductions/expenses when a loan is paid back. My parents paid $18,000 in fees plus $6000 interest for a loan that was paid off less than 12 months after being created due to the unexpected death of one parent. The loan began in 2007 and was paid off in 2008. How much of a deduction can the survivng spouse receive?
POSTED BY: RM Expert (January 08, 2009 01:31 PM)
Assuming they use $200,000 of the proceeds of the RM to purchase a new house, after closing costs, they would end up with a reverse mortgage line of credit of $77,000 in addition to the $400,000 they banked from the transaction. Assuming interest rates remained relatively the same at the end of seven years (at a 2% rate of appreciation on their property) they would have retained equity of about $280,000 if they chose to sell the house.
However, they would have ample funds to pay for assistance and stay in their own home, because they would have roughly $412,000 in cash (at a modest 3% investment rate), and assuming they didn't use the line of credit, the available credit would have grown to $103,500, all of which would be available to pay for in-home care....
POSTED BY: Susan (February 19, 2009 03:25 PM)
This is one of the best articles I've read about the HECM for purchase program. These loans are a valauble financial option for many older Americans who are house rich and cash poor. The government's new "for purchase" program offers so many different possibilities. For example, you could sell your house and purchase a 2-4 unit condo with a reverse mortgage, live in one unit and rent out the others (perhaps to your kids, who have been foreclosed out of their homes). You make no mortgage payments and you increase your cash flow with rental income. The point is that government insured reverse mortgages can be a useful financial tool for seniors, especially in situations where traditonal financing isn't available.
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