Reverse mortgages are gaining ground
Advertising for reverse mortgages featuring well known actors like James Garner and Robert Wagner and aimed at the over-62 viewer is publicizing a product that as yet has achieved only 1 percent market penetration, according to a report in the Philadelphia Enquirer, but analysts suggest that this product may become a major source of money for retirees in the coming years. Home equity wealth currently stands at $4.3 trillion, according to the National Reverse Mortgage Lenders Association, and could reach $37 trillion by 2030 when the Baby Boomers have retired.
Only 300,000 reverse mortgages have been originated in the past five years, but both lenders and groups who advocate for seniors think that as Baby Boomers who are used to borrowing money become eligible for these loans, reverse mortgages will become more popular.
"The idea of using home equity to finance retirement is becoming increasingly mainstream, even among the current generation of seniors, who have been traditionally debt-averse," said Peter Beill, president of the lenders group.
AARP, in cooperation with the Department of Housing and Urban Development (HUD), has set up a Web site which provides detailed information about how a reverse mortgage works. The National Council on Aging has launched "Use You Home to Stay at Home", a project that steers seniors toward using reverse mortgages to cover in-home health care; and Congress is considering a law that would increase the maximum appraised value of a home eligible for a Federal Housing Administration insured loan.
"Reverse mortgages offer seniors the financial freedom they deserve, and this legislation could help 2 million more older Americans turn their homes into retirement nest eggs," said Alphonso Jackson, secretary of HUD, in the Enquirer.
A reverse mortgage allows individuals 62 or over take out loans based on a percentage of the value of their homes. The loan amount can be received in a lump sum, a line of credit, or regular monthly payments. Interest is added to the principal of the loan each month. The loan balance does not have to be paid until the borrower dies, sells the house, or moves out of the house for more than 12 months, according to a report in the San Francisco Chronicle.
All reverse mortgages are issued by private lenders and most are insured by the FHA. The FHA-insured mortgages are called Home Equity Conversion Mortgages. A reverse mortgage must be the first and only mortgage on the home, but the borrower may use the reverse mortgage to refinance a conventional mortgage, according to the Chronicle report.
The Chronicle report also states that some seniors are taking out reverse mortgages to avoid paying capital gains on sales of investments. The reverse mortgage provides income and their heirs receive the stock without a capital gains liability.
Reverse mortgages can be expensive relative to other options seniors might have for financing retirement. Origination fees and mortgage insurance of 4 percent for an FHA-insured loan are based on a percentage of the lesser of the appraised value of the home or the maximum lending amount on the FHA loans, not the loan itself. All FHA-insured reverse mortgages carry variable interest rates that are pegged to the one-year Treasury bill. Borrowers must also pay standard closing costs.
The amount an individual can borrow is based on age, the interest rate and the appraised value of the house.
Seniors who are applying for insured reverse mortgages are required to obtain HUD-approved counseling because the mortgages are so complex.
Borrowers like the flexibility of reverse mortgages, says Scott Norman president of the Texas Association of Reverse Mortgage Lenders. "You can draw on it when you need it. Plus, you don't pay interest on any more money than you actually use."
A reverse mortgage "is a good idea for some people and not for others," says Bronwyn Belling, reverse mortgage specialist with the AARP Foundation, according to the Chronicle. "There is so much change, so many new products in the pipeline, if someone doesn't have an urgent pressing need, it might be worthwhile to wait. We expect in two years there will be better products, more options, lower fees."
Other options for tapping into home equity include a selling the home and downsizing or renting, and taking out a regular mortgage or home equity loan.