There seems to be a new phenomenon in the mortgage world known as the reverse mortgage. The ads touting how they can improve quality of life are everywhere and if you’re a homeowner, age 62 and over, you receive them in the mail almost daily. Then there are the articles warning that reverse mortgages may be the new mortgage rip off. So what’s the truth about this financing vehicle? Is it a God-send for seniors, or something for which older homeowners need to be wary? It can actually be both, so it pays to understand the loan if you or a loved one are contemplating a reverse mortgage.
Reverse mortgages have been around since 1961 and President Reagan signed the legislation to allow HUD to insure them in 1988 on their Home Equity Conversion Mortgage (HECM). So why the sudden stir and what makes this mortgage so unique? The baby boomer population that we’ve all been hearing that is about to start retiring, begins to do so as of January 1, 2008. What this means is that America will have an unprecedented number of people retiring with many having their main asset being their homes.
Gone are the days of the American worker working to the age of 62, retiring with a pension and social security, then passing by age 70. People are living longer and fewer are retiring with adequate income provided to meet their life needs. The huge appreciation most properties have experienced allows seniors an avenue to augment this growing need for income. A traditional or a forward mortgage, is known as rising equity, falling debt mortgage. The individual pays a payment monthly to pay down the debt thus making the equity higher and the debt lower.
The reverse mortgage operates in reverse of that. In a reverse mortgage, the borrower receives payment(s) from the lender, makes no monthly payments and the debt rises while the equity falls as payments, fees and interest accumulate. The borrowers make no monthly payments and the entire amount is paid in full when the loan is repaid.
Income and credit are not considered in qualification criteria, with the exception of the fact that the borrower cannot be delinquent on a federal obligation. There is no minimum income requirement and there are no minimum credit scores. In fact, many borrowers have been saved from foreclosure with a reverse mortgage. There have been so many myths and misconceptions surrounding reverse mortgages.
Some earlier versions of the product contained provisions for shared appreciation which hurt seniors, but those provisions are not in the HUD HECM loans. All of the government loans are also non-recourse loans, which means that the borrowers or their heirs can never owe more than the property is worth, regardless of how long they live in the home, how much they receive in payments through the years, what future values do or how much interest accumulates.
A reverse mortgage loan can be expensive, so it’s not the best option is you are not planning on using the loan, or do not plan to stay in the property. On the other hand, for some, the reverse mortgage is the only way they are able to stay in their homes. The bottom line is EDUCATION. Find an originator who really knows and understands the product. There are so many programs available now and some private or proprietary products that go down to 60 years of age and lower.
You need to work with an expert, not just a loan officer from a brokerage or a bank who was doing sub-prime loans last month and is doing reverse mortgages this month. Unlike forward mortgages, fees and rates are regulated by HUD so everyone is on an even playing field, and companies like All Reverse Mortgage Company often have many more programs available to us as we are not limited only to just the few products that just one bank has to offer. Lastly, talk to your family.
You’re spending the equity that would normally be the inheritance left to other family members and this can be an area of concern more often to the senior homeowner than to the family members themselves. Most family members we’ve talked to don’t have the means to take care of their own family expenses as well as those of their parents and senior relatives, so they are extremely happy that their loved ones have a way to age in place and dignity.