Reverse Mortgages are Less Costly

If you are 62 or older and interested in a reverse mortgage you now have more choices as upfront fees have come down substantially and some lenders are eliminating them totally and even offering to pay some of the mortgage insurance premium fees up front.

A reverse mortgage allows homeowners to use the home’s equity while still living in their home.  The amount available of course depends on the age of the borrower and the appraised value of the house.  The money can come in a lump sum or installments, or you can establish an home equity line of credit.

The reason for this drop in cost is that investors are looking for securities backed by those mortgages.  The securities backed by Ginnie Mae and based on a reverse mortgage backed by the FHA make for an attractive package, and investors are willing to pay a premium.  Lenders are passing on those premiums to borrowers in the form of lower fees.

Borrowers need to shop carefully for these mortgages and wade through all the offers being presented.

With the declining value of homes these kinds of mortgages are not as popular.  Those that took out reverse mortgages when home prices were at their peak will not see changes to their loans.  There are people who have higher balances than the home is worth, but won’t be on the hook if they or their heirs have to sell.  Because of the FHA insurance they will never have to pay more than the home is worth.

However, because of falling home prices the H.U.D. imposed a 10% reducing in borrowing limits for FHA-insured reverse mortgages.

In the past seniors have taken out reverse mortgages in order to make ends meet and pay off bills, but now people who normally would have sold their home are taking out these mortgages in order to be able to stay in their home until they can sell because they can’t sell now and the money will  eliminate their mortgage payments.

Distressed homeowners are looking at reverse mortgages especially those facing foreclosure.  For them they are a lifesaver.

This type of financing is only for people looking at staying in their homes for a long time.

Check out the HUD Website for more information on taking out a reverse mortgage.

Equity in your home is a big part of your overall portfolio. If you are married, this is approximately 70% of your non-liquid assets per a 2009 Society of Actuaries (SOA) Report. The report also states the median value of financial assets is less than 1.5% of the median middle class income, which is $75,000, and three times the median upper income households which is around $132,000.

The report did exclude the value of Social Security and pension benefits which would reduce the home equity percentage as a part of total assets. The report is also based on a 2004 Study of Consumer Finances, which of course is far removed from today’s figures.

However, the figures are relevant because home equity and how it is financed is a large part of retirement planning.

The author of the SOA report, Anna Rappaport, states that housing costs account for approximately 35% of a homeowner’s budget before they retire which is high.

As high as home equity is, many Americans don’t take this into consideration in the retirement planning, and the usual methods people to accomplish their goals, don’t factor this into the equation.

So, what should be done with the 70% of assets tied up in your home?

There is no real agreement on this and there are so many variables to consider, but a template could be the following:

• Pay off your mortgage and reduce expenses
• Downsize, and take the cash for investment
• Sell your home, rent and invest the cash
• Take out a reverse mortgage which is going to give you an income
• Rent out rooms
• If you can get enough rent you could rent the house and find a less expensive rental for yourself, keeping the extra cash for investment

Some of these options may work and some, like reverse mortgages, can be risky.

The home equity model is complicated and work needs to be done to fine-tune it to work for most Americans.

What is a reverse mortgage:
A reverse mortgage is a loan given to seniors on the equity in their home.  It can be in one lump sum or several payments. In a conventional loan, amortized payments are made to the lender on a monthly basis with the equity increasing as payments continue.  At the end of the payment term the property has been paid off and the lender releases the home to the owner.  In a reverse mortgage, the lender is either making no payments on the home, in which case the interest is added to the property lien, or if the lender is paying the homeowner, the equity decreases on the property.

How old do I have to be?
You need to be 62.

When do I have to pay it back?
The loan gets paid back upon your death, or if you sell the home.

How do I qualify for a reverse mortgage?

The lender will look at your age, your mortgage obligation and the equity in your home.

Are all reverse mortgages the same?
No. You need to shop around as you would for a regular mortgage.  Each lender’s programs are different. Make sure you are getting the best deal.