Aug 28, 2008, 4:59 PM
Post #1 of 1
"Reverse Mortgages: Stay Home, Make Money"
March 23, 2006
(MONEY Magazine) - As real estate prices in large parts of the country have more than doubled during the past five years, homeowners have found plenty of ways to cash in on their new riches.
Many are trading up to an even bigger house or borrowing against their bloated equity to remodel the kitchen, buy a vacation home or consolidate debts.
But for one group, these paper riches are just that. If you're retired with no plans to downsize and no desire to add loan payments to your budget, how can you benefit from your real estate wealth?
Enter the reverse mortgage -- a loan that lets homeowners age 62 and older take money out of their home and never have to move out or worry about paying it back.
Think of a reverse mortgage as the mirror image of a traditional mortgage. When you borrow to buy a house, your monthly payments whittle away at your debt and build up your equity over time.
With a reverse mortgage, you gradually take that equity out and increase your home's debt. The bank doesn't collect the principal and interest until you or your heirs sell.
Although reverse mortgages still represent only a small fraction of home loans, demand for these once obscure financial products has grown exponentially. Last year more than 43,000 homeowners took out a reverse mortgage. In 1990 about 150 did.
"We used to joke that more stories were written about reverse mortgages than loans originated," says Bronwyn Belling, a reverse mortgage specialist for the AARP Foundation.
Today real-estate-rich retirees are taking out reverse mortgages to pump up their income, fund home improvements or refinance debts. Still, these loans are not without serious drawbacks -- complexity and high costs among them.
You can find lots of reasons to take out a reverse mortgage, and many others to walk away. Here's how to sort out your choices.
Why Go in Reverse?
With a reverse mortgage, it's possible to withdraw roughly half the value of your home.
A 70-year-old owner of a $200,000 house, for example, could take out $113,000 at today's rates or opt for a $700 monthly payment for life. You don't need good credit, a high income or ample savings to qualify.
How much you can borrow comes down to four factors: the value of your house, where you live, current interest rates and your age. (Younger homeowners qualify for smaller loans because a longer life span means more years for interest to accrue -- and more risk that the bank will lose money.) For an estimate of what size loan you could qualify for, go to reversevision.com.
Consider the loan for these three goals.
MONTHLY INCOME - A reverse mortgage means a regular check to supplement your pension, investments or Social Security -- a small one for life or a bigger one for just a few years. When Lee and Mary Foreman, now 65 and 64, retired to Coppell, Texas six years ago, they paid cash for their house and planned to live off their stock and bond portfolio. "Then the economy tanked and our projections for our retirement savings didn't pan out as we thought," says Lee, who worked in commercial real estate before retiring.
Rather than sell their depressed investments, the couple took out a reverse mortgage that pays them a fixed monthly sum for five years and left their portfolio alone to recover. They'll begin tapping their individual retirement accounts only when they have to, after age 70. "We look at our reverse mortgage as a financial planning tool," says Lee. Similarly, you might consider drawing down your home equity early in retirement so that you can put off taking a pension or Social Security and collect richer payments when you do.
A CREDIT LINE - The most popular and potentially least expensive way to take out a reverse mortgage is through a line of credit. You pay interest only on the money you withdraw, and the amount you can tap in the future keeps growing as you age.
Retired college football coach DeWayne King and his wife Peggy own their house in Waukesha, Wis. outright but needed help paying for some home improvement projects. In September they closed on a reverse mortgage, which they access via a line of credit. So far they've put in a lift to help Peggy, 77, get up and down stairs, and they've replaced their carpeting. "We have every intention of staying put in this house," says DeWayne, 80.
DEBT MANAGEMENT - If you bought a home late in life or had to dip into home equity to fund big expenses like college tuition, you could very well find yourself still paying off a mortgage deep into retirement. Refinancing into a reverse mortgage can erase that monthly payment.
When Barbara and Frederick Mele found they were struggling to make their $900 monthly mortgage payments--as well as pay the rest of their bills--with their pensions and Social Security, they considered selling their three-bedroom Lawrence, Mass. house.
But as Barbara, 70, notes, "We've lived in the house for 35 years, and it's just perfect." Instead, Frederick, 73, and Barbara got a $260,000 reverse mortgage, using $130,000 to pay off their existing mortgage and $20,000 to pay off their credit cards. They'll keep the remaining $110,000 as a line of credit.
Why Think Twice?
While there are many benefits to putting your mortgage in reverse, there are two big reasons not to.
THE PRICE TAG - You could be charged as much as $10,000 to take out a $200,000 reverse mortgage after you cover the 2% lender's origination fee, 2% mandatory mortgage insurance and miscellaneous costs such as title insurance, an appraisal and even repairs. You'll also owe 0.5% of the loan balance in mortgage insurance premiums every year.
When Henry Clark, 86, learned that he'd have to pay $8,000 for a $50,000 reverse mortgage on his Haw River, N.C. house, he decided to skip the loan. "I had an idea of buying a new car and traveling with my wife," he says, "but now I guess I'll keep my 2000 Buick LeSabre and travel less."
You may consider these fees a small price to pay for the ability to hold on to your home and preserve your standard of living. (And the costs may not seem so bad compared with the 5% to 6% brokerage commission you'd have to pay if you sold your house.)
But if you think you may downsize in a couple of years anyway or will need to move to an assisted-living facility, a reverse mortgage probably isn't your best option for cash, says Barbara Stucki, project manager of the National Council on the Aging's reverse mortgage initiative.
"Because these loans have sizable up-front costs," she says, "your time frame is critical." Instead, consider a cash-out refinancing or home-equity loan to tide you over until you sell.
THE FUTURE - Someday your mortgage has to be paid off, either in cash or when the house is sold. Although mortgage insurance ensures that you or your heirs won't owe more than your house is worth, it's entirely possible to drain your home's equity, leaving your children with little or nothing.
One reason is that when the loan comes due, the bill is for what you borrowed plus fees and interest, and rates on reverse mortgages are not fixed. The annual rate, recently 8.3%, is the rate on a one-year Treasury bill plus 3.1 percentage points and 0.5 points for insurance. Over the life of the loan, your rate can't rise more than five points. At today's rate, a homeowner who borrows $100,000 would owe $222,000 in interest and principal in 10 years.
If leaving your home or money to the next generation is important, think twice. "I recommend talking to your children before your go through with a reverse mortgage," says Patricia Houlihan, a certified financial planner in Reston, Va. Another option for cash is to sell the house to your children and rent it back.
How to Shop for a Loan
If you decide a reverse mortgage is right for you, you have still more decisions to make, including what loan program to use. The U.S. Department of Housing and Urban Development's home-equity conversion mortgage (HECM) is the only reverse mortgage insured by the federal government, but loan values are capped based on typical home prices in your area. If you own a valuable house, you may be better off with a loan from Fannie Mae or from a private lender.
When you shop, you have one thing going for you: Because reverse mortgages are so confusing, you have to meet with a counselor before you can apply. That person will spell out the pros and cons, as well as the alternatives.
To find a counselor and learn more about these loans, contact the AARP Foundation's Reverse Mortgage Education Project (800-209-8085; aarp.org/revmort). When choosing a lender, stick with specialists affiliated with the National Reverse Mortgage Lenders Association (reversemortgage.org).
Counseling means that closing on your reverse mortgage could take up to three months, but considering that this loan could provide financial security for a lifetime, it's worth the wait.
If your children want to keep your home after you die, they'll have to fork over money to the bank.
(From the April 1, 2006 issue)
From Homes & Communities (News Release)
March 23, 2006
MORE THAN 300,000 SENIORS BENEFITING FROM HUD REVERSE MORTGAGES
Tenfold increase in HECMs over the last 6 years
WASHINGTON - More seniors than ever before are reaping the benefits of reverse mortgages to enjoy their golden years. New data from HUD reveals that more than 300,000 seniors have used the federally-insured Home Equity Conversion Mortgage (HECM) loan program to convert the equity in their home into cash without having to move.
"For some senior citizens on fixed incomes, reverse mortgages are a great way to cash in on their home equity to make needed repairs, pay unexpected medical bills or just to supplement their retirement. Seniors shouldn't have to choose between taking out a loan to fix up their home and putting food on the table. With a reverse mortgage, this difficult decision is a thing of the past," U.S. Housing and Urban Development Secretary Alphonso Jackson said.
Insured by HUD's Federal Housing Administration (FHA), HUD's reverse mortgage loans require that the borrower be a homeowner, 62 years of age or older; own one's home outright, or have a low mortgage balance, and must live in the home. Reverse mortgage recipients are also required to participate in HUD-approved housing counseling programs before obtaining the loan.
Since 1990, more than 308,000 senior homeowners have used HUD's reverse mortgage program, which covers almost 90 percent of the reverse mortgage market, to borrow against the equity in their homes, making cash readily available to cover necessary expenses. There has been a 10-fold increase in the number of reverse mortgage loans backed the FHA between 2000 and 2006. More than 76,000 seniors obtained a reverse mortgage through HUD in 2006, compared to just 6,637 people in 2000. The number of HECM's insured by the FHA has steadily increased over the past 17 years, with the largest increases coming over the past six years. The FHA insured 18,084 loans in 2003 and more than doubled that amount to 37,789 in 2004. In 2007, the FHA has already backed 69,833 loans, putting the HECM program on pace to surpass its 2006 total this summer.
Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower no longer maintains the home as their principal residence. If the homeowner has an existing mortgage on the home, it will be paid off with proceeds from the reverse mortgages. The remaining equity can be distributed as a lump sum, on a monthly basis, or on an occasional basis as a line of credit.
Reverse mortgage are the bright spot in today's housing market, and their significance will only increase as more baby boomers reach retirement. Today, more than 34 million Americans are over age 65, according to the Census Bureau. By 2030, Americans 65 and older are expect to number almost 70 million and to represent 20 percent of the population.
To help more seniors take advantage of reverse mortgages, HUD's Government National Mortgage Association (Ginnie Mae) is also creating a HECM mortgage-backed security that will allow FHA-insured reverse mortgages to be used as collateral to back Ginnie Mae securities. This change will expand the reverse mortgage business and should provide seniors with lower rates by allowing mortgage lenders to obtain a better price for their loans in the secondary market.
"As retiring baby boomers become eligible, reverse mortgages will continue to gain in popularity. Seniors are looking for financial independence and security late in life, and reverse mortgages continue to be their best bet," Jackson added.
# # #
HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development, and enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov. For more information about FHA products, please visit www.fha.gov.
Urban Financial Group was created in the fall of 2002 and is now recognized as one of the top ten Reverse Mortgage lenders in the country. With a background in traditional mortgage lending, Urban Financial Group took a chance on the emerging Reverse Mortgage market when few others did.
Beginning as a correspondent with Financial Freedom in 2003 and Seattle Mortgage in 2005, Urban Financial Group quickly became a large producer for each and instantly gained a reputation for strong knowledge and marketability of the Reverse Mortgage product. It was decided in 2006 that Urban Financial Group would move forward to achieve Lender status, which would allow all functions of the loan process to be handled internally. Therefore, in 2006 Urban Financial Group received its Direct Endorsement from the Department of Housing and Urban Development, giving themselves the ability to underwrite their own file while eliminating the need to outsource to Seattle Mortgage. In the summer of 2006, Urban Financial Group was called upon by Fannie Mae to become a direct seller of Reverse Mortgage loans, and to this day, less than ten lenders in the Reverse Mortgage industry have the privilege of selling directly to Fannie Mae.
Now, with all the back end operations in place, Urban Financial Group began their focus on retail operations. Approved to do loans in 37 states, Urban Financial Group has 20 retail locations and over 150 employees. In late 2007, the company expanded its reach even further and announced the opening of its Wholesale division by the name of ReverseIt!. Since then, Urban Financial Group has hired Rue McClanahan from the Golden Girls hit television show to act as their spokesperson.
Urban Financial Group continues to be one of the fastest growing lenders in the industry and plans to move forward with expansion and leadership for the future.
(This post was edited by StephenWinbaum on Sep 2, 2008, 2:18 PM)