Reverse Mortgages: What You Need To Know About A Reverse Mortgage
This article was written by Erika Safran, CFP®. Erika is a Certified Financial Planner and Principal with Financial Asset Management Corporation (FAM). She is a featured financial advisor in Boomerater's New York financial advisor directory.
Reverse mortgage applications have soared 17% from a year ago and the television ads tell us it's not too good to be true. So why have these mortgages become so popular now? What's changed and how does it affect the 62+ homeowner?
First some basic facts:
A reverse mortgage allows those 62 and older to access the equity in their home without having to pay monthly payments as long as they continue to live in the home. Once they sell the home, move out for 12 consecutive months, or die, the home is either sold, (or most often, refinanced by the heirs) and the loan is paid back to the bank. If the mortgage exceeds the home value, the FHA non recourse insurance will pick up the difference, not the heirs, as long as the property is sold to someone outside of the family members, and the bank appointed appraiser determines the value. If the home value exceeds the mortgage, the heirs receive the proceeds. The amount available increases with property value as well as the age of the borrower. The bank pays the homeowner.
What's different now?
Increasing real estate values and easy credit led many homeowners to access their increased home equity through home equity lines of credit. Though monthly loan payments were required, these loans were cheap and easy to secure. Reverse mortgages took a backseat and were considered a last resort to equity access. In fact, even though home prices were soaring, the home value limit of $417,000 imposed by Department of Housing and Urban Development (HUD) did not take into account increasing home values, and disproportionately limited the loan amount available through reverse mortgages. The limits varied according to geographical area. HUD is the governing agency that writes the guidelines to provide reverse mortgages.
As we all know, home prices, stock and bond markets plummeted, and in the backdrop of the economic downturn, lending came to a near halt. A homeowner who was unable to make monthly payments could not access their home equity by refinancing or securing home equity line of credit and was forced to foreclose on their home. Retirement portfolios also lost a good chunk of their value and suddenly seniors needed additional funds to supplement their income. The stimulus package came to the rescue in February 2009 and raised the maximum lending limit from $417,000 to $625,500. thus increasing the amount available for reverse mortgages becoming even more attractive to strapped homeowners. For the time being this increased amount is available until December 31, 2009.
What properties are eligible?
Last year they included Co-ops, but mortgages for these properties were funded by private lenders who have currently pulled back from this market. The FHA's new program does not currently include co-ops. Eligible properties are one to four family homes, some mixed use properties and condominiums. In order to deter unscrupulous lenders and advisers, borrowers must participate in counseling at a HUD approved agency. Obviously there is value here.
Counseling sessions are based on a financial assessment which might enable the borrower to resist the temptation of get rich schemes and avoid pitches where a reverse mortgage is being combined with an investment product. I would not recommend using a lender who encourages you to buy an investment product to get a better deal on the mortgage. I would certainly review your financial plan to evaluate all your income options first.
What does the IRS say about your new funds?
The proceeds from a reverse mortgage are considered a loan against your equity, so it is not taxable. Of course, any taxable interest, dividends or capital gains will be subject to taxes.
How much can you get from a reverse mortgage?
Your reverse mortgage can be payable to you in a lump sum or in the form of a line of credit at a variable rate, or you can receive fixed monthly payments. How much can you get? I reached out to Annette Fisher, reverse mortgage expert, with First Family Reverse for her input. A 65 year old with a home valued at $625,500 can receive a lump sum or line of credit for $287,682 or a lifetime monthly income of $1,929 or a lump sum of $387,953 with a fixed rate program.
The reverse mortgage becomes due for repayment when the last borrower is no longer living in the home. She urges you to be aware of the consequence of taking a younger persons name off the deed in order to qualify. The younger person may have also given up any rights to the property by removing their name from the deed.
Fees on reverse mortgages
Fees on reverse mortgages are much higher than traditional loans and the example above may cost homeowner as much as $22,500 in upfront fees. Ongoing interest is charged on the borrowed amount, so your debt continues to increase.
Now that rates are lower, you would reason that a reverse mortgage would cost you less. Unfortunately the banks have increased the margins they use in calculating their rates, in order for them to be able to have Fannie Mae purchase the loans. (Although Fannie Mae purchases these loans they are still serviced by the banks and insured by FHA, Federal Housing Administration.) Fixed rates are currently at 5.56%, and adjustable are about 3.75 - 4% depending on which index a bank uses.
Keep in mind that a reverse mortgage only frees you from paying your mortgage payments and possibly provides you with additional funds. You still have to pay real estate taxes and homeowners insurance. If you are a condo owner you will have to continue paying your common charges and association fees.
Are you looking for a financial advisor? Erika Safran, CFP® will provide you with a free initial consultation to discuss your financial needs. Please visit Erika Safran's financial advisor profile to contact her directly. She is a New York financial advisor.