If you’re in your golden years and the stock market plunge has left a black hole in your bank account, a reverse mortgage might help.
New rules passed by Congress this summer and set to take effect Nov. 1 have beefed up the federally insured reverse-mortgage program, raising loan limits and lowering origination fees. Called Home Equity Conversion Mortgages (HECM), these loans let seniors age 62 or older tap into the value of their home to get tax-free cash.
To be sure, the timing of the rule changes comes amid a maelstrom in the overall mortgage and housing markets. But industry experts say that lenders are still providing HECMs, which are insured by the Federal Housing Administration (FHA).
In contrast, reverse mortgages built and backed by private lenders are in short supply. According to those who work in the reverse mortgage industry, HECMs account for more than 90 percent of the reverse-mortgage market and currently represent about 99 percent of reverse mortgages being made.
Until a recent slowdown in their growth, HECMs’ popularity had been soaring, especially during the mid-decade years. Yet, their market penetration remains only about 1 percent of those eligible to receive them.
Reverse mortgage loans are based on a person’s home as collateral, not on their income or creditworthiness. The loan can be obtained as a lump sum, line of credit, monthly payments, or a combination of these ways. The money is not repaid until after the homeowner dies or otherwise permanently leaves the house. After that, the borrower or his heirs repay the loan, plus compounded interest on it. But the size of the repayment cannot exceed the home’s value.
The actual size of a reverse-mortgage loan depends on the age of the borrower, the value of the home, closing costs, and current interest rates. Generally, the older the borrower, the more valuable the home, the lower the interest rate, the more money a reverse mortgage can provide.
Experts say the new rules more closely align HECMs with today’s home values while boosting safeguards for elder borrowers. Among the key provisions:
•Loan limits will be raised to $417,000 nationally, versus the prior limit, set on a county-by-county basis, ranging from $200,160 to $362,790.
•Origination fees will be capped at 2 percent on the first $200,000 and 1 percent on any amount above that, with a inflation-adjustable limit of $6,000. The prior cap was 2 percent of any loan amount.
•HECMs can be used to contribute to the purchase of a new residence – an option that may be popular with seniors who want to downsize their living space.
•HECMs can be obtained on co-operative properties. Previously, reverse mortgages were limited to single-family houses, townhouses, and condominiums.
•Beefed up consumer protections. Some seniors have complained about being urged to use their loan money to buy other financial products – annuities, life insurance, long-term care insurance – that were either inappropriate or they didn’t need. To address such abuses, reverse-mortgage lenders will be barred from selling other financial products to its customers.
Most aspects of the latter three changes will take affect in the coming months.
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.