De-Mystifying REVERSE MORTGAGES - Any Benefit Here? Risk?
REVERSE LOANS ALLOW EQUITY DRAW WITHOUT IMMEDIATE PAYBACK - BUT AT A COST!
Option ARM Loans! Short-Term Adjustables! Growth Equity Mortgages! Interest-Only! Interest-Rate Buy-Downs! Piggyback Home Loans!
Many of these loans seemed like very cutting-edge options when introduced during better years of the housing market. But each has been subsequently discredited in today's environment, where appreciation is low or negative, and leverage remains high or over market value.
The same is said by many about Reverse Mortgages!
Detractors say these loans prey upon the elderly and the poor, and may remove years of accumulated equity which would go to the owner's estate after he or she passes on. That they cost too much. Or that they actually encourage irresponsible borrowing behavior.
Indeed, all of these negatives are possible. However, new Reverse Mortgage products available today do offer some specific advantages.
Take the case of an 82-year-old widow living in the Western Suburbs of Chicago. She has owned the house free-and-clear of the burden of a mortgage for many years. As you can imagine, the house has appreciated considerably since her and her late husband purchased it many years ago.
But the house needs considerable deferred maintenance, and her fixed income and savings won't cover the cost of a new roof, or other costly mechanical items and repair.
One option she has is a Home Equity Conversion Mortgage (HECM) - a government-insured reverse loan only available to homeowners over the age of 62. Such a mortgage can provide immediate funds to make needed, costly repairs, plus provide an equity line for other unanticipated expenses.
A reverse mortgage need not be repaid until the borrower sells, permanently moves out, or dies. Loan proceeds can either be distributed, without tax, all at once when the loan closes, in monthly payments, or as a credit line.
Although Reverse Mortgages have been around for nearly 20 years, only recently have they begun to rise in popularity. Earlier this year, the maximum Reverse Mortgage loan insurable by the U.S Department of Housing and Urban Development (HUD) increased to $417,000 - up from the previous Chicago-area limit of $275,200. Now, homeowners with high-end homes can derive more financial benefit from the HECM.
The qualifying loan amount varies by person, but the limit is typically higher for older individuals. The homes appraised value is also taken into account, as is the market rate of interest. Of course, any existing mortgage balance is deducted from the funds available.
HECM Loans are non-recourse; when the home is sold, a borrower or his or her heirs are not liable to make up any short loan proceeds if the home is sold at a loss.
According to Kris Voyles, Regional Reverse Program Manager for Wells Fargo Home Loans, "We do have a lot of people who were set for retirement, and that because of the stock market, are not as set as they were last year."
Any downside to a Reverse Mortgage? As you may have guessed - YES!
"The downside is you are spending down the equity of the home and some percentage of the value of the home is going to accrue interest," says Peter Bell, Executive Director of the National Reverse Mortgage Lenders Association.
Also, up-front fees are steep - up to 10% of the loan amount, although these fees can be rolled into the Reverse Mortgage. Most experts agree that a HECM is not for those planning to stay in their home only a few more years after the loan or line of credit is taken.
The number of seniors taking the Reverse Mortgage loan rose 5% as of September 30th, and the volume of issued loans is expected to continue to rise with the increased loan limit.
Many seniors, however, will still resist any product that attaches a new mortgage to their home.
Voyles from Wells Fargo continued, "The generation we're working with, they don't want a mortgage, they don't want any debt and they want to leave something for their kids. But the kids are saying 'Mom and Dad, I don't want you to struggle.' "
For more, read Mary Ellen Podmolik's story in last Friday's Chicago Tribune.
DEAN MOSS & DEAN'S TEAM CHICAGO
