Watch enough TV and you’re sure to catch an infomercial on how to turn your home into cash for retirement. And you won’t have to sell to do it.
It’s the magic of a reverse mortgage — a government-backed loan for homeowners 62 and older, but with no monthly mortgage payments. You need no income to qualify because the loan need not be repaid until you move or die. If you choose a monthly income rather than a lump-sum payment, it will continue no matter how long you live, and no matter how much you receive you’ll never owe more than the home’s eventual sales price. The lender will not be able to go after your other assets or your kids’ inheritance, either.
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It sounds almost too good to be true, and a reverse mortgage can indeed be a lifesaver for people with lots of home equity but not much else to live on. Yet reverse mortgages have never really taken off. Most years, only 2 to 3 percent of eligible homeowners get them — and with outstanding loan balances of $140 billion in 2012, reverse mortgages represent a trifling share of the $14 trillion in outstanding mortgage debt in the U.S.
With mortgage rates unusually low and home values rising after the financial crisis, reverse mortgages are an especially good deal today, experts say. You can get more money out of your home than when rates are higher and prices lower. So why aren’t homeowners flocking to reverse mortgages? Only 58,000 were approved last year, down from a peak of nearly 115,000 in 2009.
Fees may be one reason, along with a mistaken belief the process means giving up ownership of the home. Many homeowners may resist the idea of undermining their children’s inheritance, since the debt plus interest — and interest on interest too — must be paid someday, typically by selling the home.
Some potential borrowers may not understand that they can get a reverse mortgage even if they still have a balance on an existing mortgage, using the new loan to pay off the old one to get free of monthly payments and generate some cash. Some homeowners may lose interest when they learn they could lose the home after all if they fall behind on property taxes or homeowners’ insurance premiums, or allow the property to deteriorate.
“Reverse mortgages: great product, not for everybody,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage.”
“When used improperly, reverse mortgages can be an expensive albatross around a homeowner’s neck. But used in the right circumstances, they can help certain seniors stay in their home, and allow them to continue to build equity that would be lost if they had to sell too soon,” Fleming says.
Like ordinary mortgages, reverse loans come from mortgage lenders, but the lender is protected from loss by the federal government. Most of these loans are home equity conversion mortgages, a program run by the Federal Housing Administration. Since the borrower makes no payments, no income is required to qualify. The home must be appraised to determine the maximum loan that can be approved.
Older applicants can get larger loans than younger ones, since there’s less chance an older borrower will have a loan long enough for debt to grow bigger than the home’s value.
A 62-year-old with a $400,000 home might get $1,000 a month for life, while a 75-year-old with the same equity could get $1,400, according to a calculator on The Mortgage Professor website. That assumes an adjustable-rate mortgage starting at 3.6 percent. A loan origination fee, mortgage insurance premium and other closing costs would total a hefty $7,220, while an applicant for an ordinary mortgage might pay only a few hundred dollars. Note, that the 62-year-old would receive $456,000 through monthly payments if he lived to 100, more than the home was worth when the loan was taken out.
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Though it sounds like a reverse mortgage can turn a home into a gold mine, homeowners are wise to do some math on the alternatives.
Those with steady income should look into a second mortgage or home equity loan. The fees might be lower, especially on a home equity line of credit carrying a variable rate, though the borrower would have to make monthly payments.
“A home equity line of credit is harder to get right now,” says Ed Hoffman, president of Wholesale Capital Corp., a mortgage firm in southern California. “Plus, you have to qualify for it — and many seniors don’t, because they don’t have the income. If you can quality for a home equity line, there’s still not much greater benefit because it’s only good for 10 years to draw money out. A reverse mortgage is something you can draw out of for life.”
Hoffman says the interest rates for reverse mortgages are better than the interest rates for second mortgages. “And again, you don’t have to have an income to qualify. You only need income for your taxes and insurance.”
Another option is to downsize — sell the home and either rent or buy a less expensive one, using any leftover sales proceeds for ordinary expenses. With downsizing, there are no monthly payments nor any need to eventually sell the home to pay off a loan.
In addition to the lump-sum payment and monthly income stream, the reverse mortgage borrower has the option of receiving a line of credit to use only when the need arises. The lump sum is best for those trying to get free of other obligations like an existing mortgage, Fleming says. Monthly income suits those trying to keep ahead of ordinary bills, while the credit line is the best choice for those who want a safety net for emergencies or unexpected expenses, since unused credit does not incur interest charges or erode the homeowner’s equity.
Some experts recommend getting a credit line when conditions are good, as they are today, and holding it for a rainy day. Over time, the line will grow, as the home’s value is assumed to rise, while some loan terms will be locked in when the loan is approved.
Debbie Worley, president of Lone Star Reverse Mortgage in Horseshoe Bay, Texas, says the vast majority of her reverse mortgage customers choose the lump sum or credit line, and opt for an adjustable-rate loan over a fixed-rate deal. Many, she says, take part of their withdrawal as a lump sum and leave the rest as a credit line.
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“Their (credit line) grows and means more funds they can borrow over time — thus, a nest egg!” she says.
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Reverse Mortgages Aren’t For Everyone originally appeared on usnews.com
