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Reverse mortgages get a boost from Uncle Sam

New rules raise loan limits, lower origination fees.

(Page 2 of 2)

“We think these are very good changes,” sums up David Certner, legislative policy director of AARP.

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To Peter Bell, president of the National Reverse Mortgage Lenders Association, the new rules are destined to “trigger more interest” in reverse mortgages. “My sense is that we’ll see greater penetration and accelerating growth for years to come,” he says.

As long-term growth factors, Mr. Bell and others cite the swelling ranks of seniors living longer, needing more financial resources, and becoming more comfortable with borrowing against the value of their home.

“[I] wouldn’t be surprised to see reverse market growth rates of 25 percent per year over the next five years,” says Eric Bachman, CEO of Golden Gateway Financial, a reverse-mortgage broker in Oakland, Calif.

Mr. Bachman believes today’s shaky real estate market has created a timing consideration. “Seniors’ home values have dropped roughly 20 percent in the past year,” he says, and they’re projected to slide further over the next 12-to-24 months. Thus, he feels that seniors looking for a reverse mortgage should act sooner than later to avoid any further slide in their home values, which could reduce the amount they could get from a reverse mortgage.

But decisions about taking out a reverse mortgage shouldn’t be done in haste, warns Martin Shenkman, a lawyer and financial planner in Paramus, N.J. “Before settling on any one financial tool, including a reverse mortgage, people should undertake a broad financial plan to see how one technique fits into their overall financial needs and goals,” he says.

People who need additional funds should weigh an array of options. Mr. Shenkman says that these can range from “cutting expenses, to selling their home to their kids, to increasing distributions from their retirement account, to selling a life insurance policy that they don’t need.”

Even with the rule changes on HECMs, they still won’t be cheap. In addition to an array of mortgage closing fees, other costs include an upfront insurance premium of 2 percent of the maximum claim amount that can be borrowed plus a 0.5 percent annual premium. Although most fees are typically deducted from the loan’s principal, they do trim the amount that the borrower receives. Such fees will require borrowers to think carefully before tapping what could be their last big financial source.