Making Your Money Last
Reverse Mortgages to the Rescue
New reverse-mortgage rules let you squeeze more cash from your house and even buy a new home.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, August 2009
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Reverse mortgages have been around for nearly 20 years, but it wasn’t until the current financial crisis that they caught on. Seniors are turning to these loans to tap the equity in their homes and generate tax-free income to help them ride out hard times.
For Frank and Carol Rider, a reverse mortgage is providing a cushion, giving their investments time to recover from the bear market. The Riders, both in their early seventies, borrowed about $200,000 against their home in New Mexico. They used the money to pay off their traditional mortgage and to take $1,500 a month for the next 20 years to supplement their pensions and Social Security benefits. “We’re trying to maintain our lifestyle,” says Frank, noting that he and Carol travel extensively year-round.
For Luther and Peggy Combs, their reverse mortgage is a lifeline that saved their home from foreclosure. The Combses, both in their early sixties, had high hopes for a comfortable life when they moved from Chicago to central Florida a few years ago. But Luther lost his job when the economy soured, and the couple found themselves deeply in debt. Although they had to use every penny of their home equity to pay off their bills, the reverse mortgage wiped out their monthly house payments and made it easier for them to sleep at night.
You can take it with you
A reverse mortgage can be a good option for people who want to relocate or move to a smaller home but who don’t want to sink all their cash into a new house or who may not qualify for a traditional mortgage. In the past, the only way they could take out a reverse mortgage was to stay put. But new rules that took effect in January allow seniors to use a reverse mortgage to buy a new home. Say you own a house in Massachusetts worth $500,000 and you want to buy a $400,000 house in Florida. If you were to sell your house and pay cash for your new home, you’d have just $100,000 left to add to your savings. But now you can take out a reverse mortgage on the new home. For example, if you took a $100,000 reverse mortgage on the Florida house, you’d have twice the amount left--$200,000—to add to your savings.
How it works
You must be at least age 62 to take out a reverse mortgage. Plus, your house (current or future) must be your primary residence, and your mortgage must be either paid off or have a small balance. Unlike a traditional loan, there are no income or credit-score requirements, and you may use the money as you wish. The older you are, the higher the appraised value of your home (up to the maximum federal loan limit) and the lower the interest rate, the greater the amount you can borrow. As part of the economic-stimulus package, Congress raised the reverse-mortgage loan limit to $625,500 through the end of 2009. After that, the lending limit reverts to $417,000, unless Congress intervenes. As a rough rule of thumb, a 65-year-old might be able to borrow up to 35% of a home’s value, says Eric Bachman, founder of Golden Gateway Financial, a reverse-mortgage lender in Oakland, Cal. The percentage rises to 45% for a 75-year-old, and 55% for an 85-year-old. (To get a personalized estimate of how much you can borrow, go to www.goldengateway.com.)
You can take your payment as a lump sum, a monthly cash payout, a line of credit held in reserve or a combination of all three. No repayment is due until the last homeowner moves out or dies, at which point the home can be sold to pay off the debt. The loan repayment can never exceed the home’s market value (even if it declines), absolving your heirs of any liability.
High fees
Your personal “bailout plan” won’t come cheap. You’ll pay the usual closing costs, plus loan-servicing fees, an origination fee of up to $6,000 and interest over the life of the loan. But what makes a reverse mortgage really costly is an initial insurance premium equal to 2% of the home’s value (up to the reverse-mortgage loan limit) plus 0.5% per month of the mortgage balance. (The Federal Housing Administration insurance protects you and the lender if your home value declines and ensures that you won’t owe money if the loan balance exceeds the home’s value.)
On a $200,000 loan, the upfront costs could exceed $20,000, says Jeff Lewis, chairman of Generation Mortgage, in Atlanta. So a reverse mortgage makes sense only if you plan to stay in your house for several years. But if you do, now could be a golden opportunity for owners of high-priced homes. Interest rates are at historic lows and loan limits may never be as generous, boosting potential payouts. And, says Lewis, “Once you lock in a reverse mortgage, declining home values don’t matter.”
Reader Comments (9)
Posted by: G. Brown at 07/08/2009 05:57:08 PM
Stating that upfront costs could exceed $20,000 on a $200,000 loan is not accurate. Even in Florida, one of the most costly states for a HECM, the upfront cost would be approximately $12,000 on a $200,000 loan for a 62 year old borrower. Hopefully, Mr. Lewis was misquoted....
Posted by: Beth at 07/08/2009 11:38:49 PM
I believe Mr. Lewis was misquoted regarding the closing costs. In MN closing costs on a $200,000 property would be approximately $10,100. As a clarification on the fees, the origination fee is what the originating lender receives to cover the loan officer’s salary, overhead to run the business, i.e. staff salaries, administration costs, computers, electricity, office supplies, marketing expense, gas mileage, health insurance of employees, etc.. The origination fee also includes the processing and underwriting costs which are generally separate and charged to the borrower on forward loans. HUD regulates the reverse mortgage origination fee to be 2% of the 1st $200,000; 1% thereafter with a cap of $6,000. The reverse mortgage fees are based on the full home value because over time borrowers can access more than the home value at the time of origination. Because the interest rate is lower on reverse mortgages generally in the big picture the reverse mortgage costs less than a conventional mortgage. In the article the percentages...are also misleading - it depends on many variables such as the program chosen and the Expected Interest Rate during any given week. For example on the LIBOR Adjustable Rate, this week an 85 year old in MN would be able to access approximately 64% after closing costs.
Posted by: Beth at 07/09/2009 10:21:10 PM
I believe Jeff Lewis was misquoted about the upfront closing costs. On a $200,000 home in MN the closing costs would be approximately $10,125. Note: the reverse mortgage fees are based on the full home value because over time borrowers can access more than the home value at the time of origination. In the big picture the cost of the reverse mortgage is less than a forward mortgage over time because the interest rate is lower on the reverse mortgage. I also believe the percentages for how much can be borrowed are misquoted. The amount available are variable based on many factors including the program, the Expected Interest Rate and (when) one is receiving the quote.
Posted by: bobl at 07/10/2009 10:55:52 AM
I think you people are missing one thing. The article states that the new home is worth $400K. I think that may be what his closing costs were based on, which would make them over $20K.
Posted by: Mary Beth Franklin at 07/10/2009 11:42:14 AM
Hi, Mary Beth Franklin here, author of this article. Just to clarify: Mr. Lewis was not misquoted. His $20,000+ estimate was based on the $400,000 home value. Private mortgage insurance of 2% of value equals $8,000, plus $6,000 in origination fees plus usual closing costs of $5,000 or more. Hope this helps.
Posted by: Beth at 07/11/2009 01:25:08 PM
...Mary Beth Franklin, thank you for the clarification on the home value. The "$200,000 loan" is what confused us in the industry. On a $400,000 home value in Minnesota the other "usual" closing fees would be approximately $2,600 for a total of $16,600. I want to reiterate that over time the loan balance can exceed the initial loan amount ($200,000 in this example) or even the current home value ($400,000 in this example). This is because borrowers aren't required to make payments so over time the loan balance is rising on the reverse mortgage. Therefore the amount loaned is every increasing and the gross amount of the loan is typically not realized until the end of the loan which could be many years into the future.
Posted by: Ginnie Chapman at 08/05/2009 03:38:22 PM
As a reverse mortgage specialist, I was surprised to see the low loan to value ratios quoted by Mr. Bachmann. I have to wonder if he was referring to a proprietary product. I typically see 65 year olds getting about 65% of their value before fees. And a 95 year old can get as much as 90%. Of course the percentage available is determined by their age and the expect interest rate of the loan, but those percentages seemed very low and the high investment required might discourage prospective buyers.
Posted by: Bruce at 08/06/2009 09:17:00 PM
I recommended a reverse mortgage to my father-in-law just over 2 years ago. After researching the products, he and my mother in law took out a RM. 6 weeks after closing, my father-in-law passed away. Since he worked part time, and was collecting SS, my mother-in-law lost nearly $2000 a month in income (which was not covered with life insurance proceeds). Because of the RM, my mother-in-law has been able to keep her home. She would not be able to afford a house payment at this point in time. Thank goodness for reverse mortgages!
Posted by: Song Hutchins at 08/09/2009 12:42:13 PM
I am at least glad to see more articles on Reverse Mortgages and explain how it works even though often we find lots of misinformation out there just as this article; Eligible loan amounts (under estimated in huge %) and closing cost (over estimated) quotes. I love the title of "Reverse Mortgages to the Rescue". That is exactly what the reverse mortgage does a lot these days. I've just saved 4 senior homeowners from losing their homes in Foreclosures in July only. I would like to read more about in media how this reverse mortgages could play in Foreclosure Prevention options. It's been too long ignored. Our senior homeowners have the right to learn about this an awesome program with correct information and that it is available to them without fear.