Real Estate Report

January 16, 2012

 Not Just Housing

If you have been reading our economic commentary for the past two months, you might get the impression that the latest segment of the economic recovery is all about housing. While it is true that housing has finally stirred and this sector is now contributing positively to the recovery, we don't want to give you the impression that it is "all about housing." Statistics released by the auto industry in the past few weeks show that car sales rose approximately 13% last year, even stronger than the rise in home sales. Right now car sales annually are approaching 90% of the records set before the recession hit, with more growth expected in 2013. We always expected that the recovery in car sales would precede the housing recovery because cars don't last as long as homes and must be replaced. Home sales are nowhere near 90% of pre-recession levels.

However, what is important here is that the auto industry is reacting to the same fundamentals as the housing industry. Lower jobless rates, increased household formulation and stronger consumer confidence. It is important to understand that a real economic recovery must span over the entire economy, not just one sector or another. For example, the health sector has been stronger than other sectors during the past few years. Adding housing and autos to the recovery makes it broader based and can help move us to a virtuous cycle. More people buy cars and that increases manufacturing jobs. Lower unemployment enables others to purchase cars and houses. Again, regardless of the political troubles Washington seems to be having, the consumer is waking up which is a good sign for 2013.

 Will homes soon be powered and operated all from a smartphone? "There are smarter phones, so why not smarter homes?" Alexander Ljung, SoundCloud CEO, told USA Today. "It's perhaps natural that the phone is a remote control for a lot of things. Touch-screens are replacing buttons." A range of home devices could soon all be controlled by a phone or tablet, from kitchen appliances to washers and dryers, lights, pools, and windows, says tech experts. Major tech companies like Apple, Microsoft, Google, and Samsung are eyeing home technology as a booming business and are introducing a range of products for wired and automated homes. For example in May, Microsoft debuted an operating system for homes, called HomeOS, that connects smartphones, game consoles, wireless routers, home automation devices, tablets, and security cameras, all for easier access, sharing files, and syncing. The attention to wired homes also is causing architects to take a closer look at how they design and build homes so that they can better incorporate the new gadgets, blending them into kitchens, living rooms, and bedrooms, USA Today reports. For example, entertainment centers need sound systems and screens within walls, and architect Tom Kinslow notes that smart windows are larger than traditional windows. A range of products are being developed to outfit these high-tech homes. For example, flexible displays built into kitchen appliances will be able to tell home owners the proper temperature to cook an item at or even whether something has spoiled in the refrigerator. Bossa Nova Robotics is even developing a robot maid that will be able to complete house chores while home owners are away at work. Source: USA Today

Veros Real Estate Solutions has announced that analysis of its data shows compelling evidence that the national real estate market has hit bottom and is now in a full recovery. This is the conclusion of the company’s VeroFORECAST real estate market forecast for the 12-month period ending Dec. 1, 2013, updated quarterly and covering 975 counties, 335 metro areas, and 13,586 zip codes. The forecast update shows significant improvement on a national basis, indicating that on average the top 100 metro areas can expect 1.2 percent appreciation over the next 12 months. This is the second quarter in a row where this index has shown forecast appreciation. Highly notable is the re-emergence of several very strong market forecasts, with Phoenix appearing again as the top market with over 10 percent annual appreciation predicted. This is the first time since 2006 that Veros has forecast double-digit annual appreciation in any market. In addition, the depreciating markets are becoming less severe, with the worst markets in the -2 to -3 percent range, which is a typical level of depreciation of the poorest performing markets even during healthy market periods. For the first time since the recession began, on a national level, two-thirds of all markets are expected to either be flat or appreciating during the coming 12 months. Source: Veros

A big growth in new household formation is expected to drive up housing starts in the new year that will outpace the apartment boom, according to forecasts by Freddie Mac’s Chief Economist Frank Nothaft. Nothaft is forecasting a net growth of 1.2 to 1.25 million new households in 2013 that will provide a big boost to housing starts next year. That expected growth also will likely drive down apartment vacancy rates to 10-year lows and outpace the boom in new apartment construction, Nothaft says. Unemployment is expected to improve slightly in 2013 and the job and income gains will help jump-start more household formation, according to Nothaft. Also, more adult children who took up residence in their parents' homes are expected to move out next year, helping to increase household formation. “The last few months have brought a spate of favorable news on the U.S. housing market with construction up, more home sales, and home-value growth turning positive,” Nothaft says. “This has been a big change from a year ago, when some analysts worried that the looming ‘shadow inventory’ would keep the housing sector mired in economic depression. Instead, the housing market is healing, is contributing positively to GDP and is returning to its traditional role of supporting the economic recovery.” Source: RISMedia

Amid Squeeze on Home Equity, A Revival for Reverse Mortgages

Converting home equity into cash has been a challenge for homeowners since the real-estate downturn, but a growing number of lenders are quietly reviving a loan for seniors that does just that: the reverse mortgage.

Reverse mortgages allow homeowners who are at least 62 years old to draw down on their home's equity in exchange for cash in several ways, including one lump sum, a line of credit or monthly payments.

Compared to a few years ago, the total number of reverse mortgages is small. But lending has been picking up. In 2011, MetLife Bank originated 10,512 reverse mortgages, up 171% from the previous year, according to data firm Reverse Market Insight. The firm tracks reverse mortgages insured by the Department of Housing and Urban Development, or about 95% of total originations. Other lenders also had sharp increases.

This comes in spite of recent moves by HUD to lower the amount homeowners can borrow. The limit is now 62% of a home's value for a 62-year old; an 80-year-old can borrow up to 72% of the home's value.

With falling home values making it difficult for homeowners to refinance or sell—and the stock market not delivering great gains—the loans are understandably attractive to many Americans. But there are good reasons why advisers have historically recommended them only as a last-gasp way to raise cash.

For one, because borrowers are still responsible for property taxes and homeowner's insurance, if they fall behind, lenders can foreclose on the property, says Karin Hill, director of single family program development at HUD.

Also, reverse mortgages carry hefty fees. Origination fees can be up to 2% of a home's value, capped at $6,000, says John Lunde, president of RMI. Closing costs vary but are often about 2% of the loan and there are also mortgage-insurance fees charged by HUD.

Some advisers say a home-equity loan, which allows homeowners to borrow against some of their home equity in one lump sum, is often the safer bet. Closing costs tend to be smaller than on a typical reverse mortgage and in some cases lenders can waive them, says Buz Livingston, a certified financial planner in Santa Rosa Beach, Fla. The downside? Average interest rates on home-equity loans are currently higher.

There are situations where reverse mortgages make sense. Financial planner Mike McGervey of North Canton, Ohio, says he thinks they can be a good solution for people in their 80s, who are usually able to convert more home equity into cash than younger borrowers.

In some cases, homeowners sign up for a reverse mortgage as a lump sum to pay off their mortgage. That is what Joseph Rinaldi, 62, did when he signed up through US Mortgage Corp. three months ago. Now, rather than paying $2,200 a month in mortgage payments, Mr. Rinaldi, who lives in Mamaroneck, N.Y., says he and his wife use that money for everyday living expenses. "This saved mine and my wife's life," he says.

Western Pacific Home Loans

Home Equity Is Putting Gold Into the Golden Years

Prompted by skyrocketing home prices and low interest rates, elderly homeowners in Southern California are among the heaviest users of reverse mortgage loans in the nation, according to the U.S. Department of Housing and Urban Development.

Of the 10 HUD offices reporting the highest reverse mortgage volumes, three are in Southern California: Los Angeles topped the list, with Santa Ana second and San Diego fifth. San Francisco was fourth.

Across the country, reverse mortgage volume was up 112% during the most recent five-month reporting period, which ended in February, according to the National Reverse Mortgage Lenders Assn.. The mortgages allow homeowners who are at least 62 to tap their home equity and don't have to be repaid until the borrower moves out, sells the home or dies.

It can be a good option for seniors who want to supplement their retirement income but don't want to sell their home to get it, experts say.

The lender pays the homeowner a monthly amount or a lump sum upfront, and the money can be used any way the borrower wishes.

"People in California may love their cars, but they love their homes too," said James Mahoney, chief executive of Irvine-based Financial Freedom, one of the largest providers of reverse mortgages in the nation. "They want to stay put."

House-rich elderly Southern California homeowners -- eager to improve their retirement lifestyles a notch or two -- are following that logic with increasing fervor.

Kenneth and Lynne Younger have seen big changes in their Lafayette Square neighborhood, and it's not only in the ever-shifting ethnic mix. The value of their Los Angeles home has gone through the roof in the 46 years the Youngers have lived there. The house that Kenneth Younger, 75, built himself in 1958 for $16,444 is now worth $750,000.

Cashing in on their gold strike, the couple took out a reverse mortgage that will allow them to complete $150,000 of long-delayed renovations. They plan to add a large room and give Lynne Younger a kitchen worthy of the home makeover TV shows she loves.

"It was just sitting there waiting for me to do something with it," Kenneth Younger said of the home's mounting equity. "Because of the market conditions and the rate of interest, it made sense."

Home equity loans in one form or another have been around a long time. Congress in 1988, however, created a federally insured reverse mortgage program to help seniors increase their retirement income and stay at home in their final years.

Federal HUD statistics show the program is becoming more popular as seniors learn about it. And with its high real estate prices and large population, California leads the nation in reverse mortgages.

During the five-month reporting period that ended in February, the Los Angeles HUD office logged 819 loans, compared with 298 for the same period last year; the Santa Ana office had 620 loans, compared with 234; and San Diego reported 395, compared with 138. In San Francisco, there were 457 loans, up from 197.

Other HUD offices in the top 10 include New York at No. 3; Denver, sixth; Detroit, seventh; Boston, eighth; Minneapolis, St. Paul, ninth; and Coral Gables, Fla., 10th.

Nationwide, about 18,000 reverse mortgages were taken out last year, statistics show. Those numbers do not take into account reverse mortgages that are not federally insured, although HUD-backed loans make up 90% of the market, industry experts said.

Seniors typically use the money to make home improvements or to pay rising medical and prescription costs, said Peter H. Bell, president of the National Reverse Mortgage Lenders Assn. But in California, home values are rising so fast that seniors are starting to view their equity as a personal piggy bank.

Bell said he's heard of one grandmother who used the money to buy a sidecar for her husband's Harley-Davidson. An elderly man bought a build-it-yourself airplane kit, he said.

"The lifestyle borrower is the biggest growing group," Bell said. "They are living OK, but they want to add travel, gifts for the family or maybe a new RV."

Peter Paxton fits into that group. Paxton, 75, said he plans to use his extra cash to take a trip to Hawaii with his girlfriend. A confirmed bachelor, Paxton calls himself a "musician-jock" who loves to windsurf, hike in the mountains and play drums in his jazz trio.

Though he's owned his Carmel home for only three years, the value has risen $400,000, Paxton said. The reverse mortgage he took out will give him the freedom to pursue his varied interests, he said.

"It freed up about 20 grand a year, and I like that," he said. "The house's value is going up pretty fast so it felt safe."

Consumer advocates say the loans can make good financial sense -- as long as borrowers learn how they work and read the fine print. Years ago, some of the mortgages contained provisions that allowed the lender to share in the home's equity gains, in addition to standard interest and loan fees.

That led, in one egregious example, to a lender demanding more than $765,000 from the deceased homeowner's family after paying out only $58,000. That New York case and several others were settled last year through a class-action lawsuit brought by the heirs of the deceased homeowners.

Bell said lenders no longer include that provision. All of the lenders in his association sign a code of conduct pledging to abide by guidelines for ethics and fairness, he said.

HUD requires counseling by an independent third party before it will approve a loan. (Call (800) 569-4287 to find the closest HUD counseling office. The service is free.)

Still, seniors should be on the alert whenever they are making major financial decisions, said prosecutor Benjamin Diehl, a fraud specialist in the state attorney general's office. Scam artists view seniors as easy targets because they are often isolated and naive about financial matters, Diehl said.

Though his office has not seen a lot of fraud involving reverse mortgages recently, Diehl said it does not mean there are no unscrupulous operators.

"For some seniors a reverse mortgage can be a salvation," he said. "But it's a complicated transaction. Consumers need to be careful when they shop for them."

Estella Lopez's husband was so leery of reverse mortgages that he initially refused to consider one. Even after one of their sons investigated the loans and urged the Hancock Park couple to proceed, her husband was sure that loan collectors would one day show up and demand to take the house, said Estella, 85.

They finally took out a $26,000 line of credit to make some repairs to their modest, 80-year-old home.

After her husband, a retired upholsterer, died, Lopez took out another $26,000 to paint their three-bedroom home inside and out and replace the plumbing.

Lopez said she has informed her eight children that the loan balance will have to be repaid if they want to keep the family home after she dies. One of her sons has indicated he would like to take on the mortgage and the home, the great-grandmother said.

It was important to her to not to have to sell the home and move into a convalescent home if she grows infirm, Lopez said. The home has for 32 years been the site of large family celebrations, she said.

After upcoming cataract surgery, Lopez plans to take a trip she has put off for too long. It's something she probably would not have considered before building a small cash reserve to supplement her monthly Social Security checks, Lopez said.

"A retirement home?" she said. "That's not me."

Western Pacific Home Loans-Reverse Mortgage

Mortgage Rates and the Bond Market

Mortgage Rates and the Bond Market June 2012 any different factors affect mortgage rates, from stocks to inflation to the Federal Reserve to Americans themselves and their buying and spending habits. But it is bonds and the bond market that are a primary influence on mortgage interest rates. It's a complex relationship that we'll try to simplify here. For more information, please contact me directly to discuss this economic relationship. To put it simply, a bond is a loan that the investor — you — makes to the borrower, which is a private company or a government entity such as the federal or local governments or Fannie Mae or Freddie Mac. The borrower promises to repay the principal along with interest on a specified date, often called the date of maturity. A bond generally matures a year or more from the date of issue. Bonds are considered relatively safe, or stable, investments because the rate of return is fixed. High-risk bonds, like those based on subprime mortgages, have high returns. Mortgage-backed bonds are generally considered medium risk, and Treasury bonds are considered the safest bonds as they are guaranteed by the federal government. Bond prices and interest rates are inversely related: as one goes down, the other goes up. However, bond yield — the interest earned — and interest rates move in the same direction: when one goes up, so does the other. So when a Treasury bond has a high yield, overall interest rates are also higher. In general, bonds are sold before they mature, and their yields can change daily. When the economy is strong and the stock market is a popular investment, less people buy bonds, and their value goes down, as well as their price. But if there is a lot of demand for a bond, it can be sold for a higher price — even above face value — and the interest or yield it pays will decline because the agency it is purchased from will only pay the face value plus the interest rate stated at the time of purchase. So if bond prices drop, that means demand for bonds has also dropped, and then the yields must increase in order for the bond to have the proper payout guaranteed at the time of purchase. When the yields increase, interest rates increase, and your mortgage loans' interest will also increase, meaning your home purchase will be more expensive. That is why when the economy is stable and stocks are doing well, buying a home is costlier. As you can see it is an incredibly complicated relationship. If you have more questions about this or any other aspect of mortgage financing, please contact me for a no-obligation consultation. I'm happy to help you! Steve Rivas- Western Pacific Home Loans

Sharing the Decisions About Reverse Mortgages

Second opinions are usually helpful. Who else should you involve? Perhaps you have a trusted friend or advisor who knows your circumstances, or someone who is generally good at figuring things out or discussing them with you. Perhaps it's your adult children. Perhaps not. Whoever you decide on, consider inviting them to the counseling session that is required for Home Equity Conversion Mortgage (HECM) applicants. They can be an important second set of ears.

And then there's the matter of your heirs. Do you seek their advice before deciding, wait until after closing, or never tell them? Whether or not you discuss this matter with your children or other heirs depends on a lot of personal and family factors. You may value their advice or want to know what they think. Or you may think it best not to discuss it before making your decision and want to wait until after you close the loan before telling them. Or perhaps you don't want to tell them at all.

Whatever you decide, one consideration needs to be the impact of a reverse mortgage on your heirs. A loan with "rising debt and falling equity" means there will be less equity left for your heirs. If you get a lot of cash over many years from the loan, there may be little, if any, left for them. So you need to think through how you want this to become known to your heirs.

Many children of reverse mortgage borrowers are pleased that their parents are able to use their equity and remain living in their homes. Often it is a great relief to these children that their parents are able to take care of their own needs; many even encourage their parents to do so.

Whatever you decide, the important thing is to give some thought to your heirs. If you decide not to discuss the matter with your heirs before or after your decision, you may want to make a note of your decision in your will to avoid misunderstandings.

Being Careful

Be cautious of anyone who seems eager for you to get a reverse mortgage. Be especially alert if that person just happens to have ideas about what you might do with the money you get. Watch out in particular for anyone trying to sell you something or to get your signature on an agreement to pay them for any purpose.

Remember, we call such people "con men" because they are very good at gaining our confidence and trust. It's sad but true that the stranger being so nice to you may be more interested in your equity than your well-being.

Western Pacific Home Loans- Reverse Mortgage

Detailed Reverse Mortgage Information

http://www.reversemortgageinfo.com/all-reverse-mortgage/reverse-mortgage-specifications/

Here is a great article that goes into the specifications of what to expect with a Reverse Mortgage..

Reverse Mortgage Specifications

Loan Amounts

The maximum amount that you can borrow is based on the following factors:

• The age of the youngest homeowner.
• The appraised value of the home.
• The current interest rate.

In general, the more your home is worth and the older you are, the more you’ll be able to borrow. However, FHA sets a limit on the value of the home. On February 18, 2009, President Obama signed into law The Housing and Economic Recovery Act of 2008. Perhaps the most significant piece of housing-related legislation we have seen in recent years, the new bill implemented necessary consumer protections along with several positive changes to the FHA reverse mortgage program.

One of these positive changes included the implementation of a new national limit of $625,500. (Prior to this, the national limit was $417,000). If your home is worth more than the $625,500 national limit, you are still eligible for a HECM loan. But, the amount of money you can get is based on the national FHA limit, not on the home’s actual value. For example, if your home is valued at $700,000, then your available cash from a reverse mortgage is the same as it would be if your home were valued at $625,500.

Costs and Fees.

“Some people will say reverse mortgages are expensive while others will tell you they are the greatest deal on earth. What all the years of talking to seniors about reverse mortgages has taught me is that you can show somebody what something costs, but you cannot tell them what it’s worth to them,’’ said Ken Scholen, founder of the nonprofit National Center for Home Equity Conversion.
It’s important to note that all fees associated with obtaining a Reverse Mortgage are regulated by HUD and most of the fees can be financed into the loan. These costs include:

• ORIGINATION FEE: One critical item of the new housing bill is a reduction in the amount of origination fees lenders can charge on the country’s most popular reverse-mortgage program. The new calculation reduces the origination fee to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of your home’s value or the FHA limit, whichever is lower. This pays the lender for preparing the paperwork and processing the loan.

• THIRD PARTY FEES: Completing your Reverse Mortgage requires a variety of services preformed by companies other than your lender. These people are called “Third Parties”. These services include, but are not limited to, the appraisal, title insurance, mobile notary fees, recording fees, escrow fees, etc. Third party closing costs on a Reverse Mortgage vary with the value of the home and from one county to another, but tend to range from $1500-$2500.

• FHA MORTGAGE INSURANCE PREMIUM: Considered by many to be the most important feature of the loan, the FHA mortgage insurance serves two significant purposes. 1) From the borrower’s perspective, it guarantees that no matter what might happen to the lender or the home’s value, the borrower will receive every penny of their money, directly from the U.S. Government, if necessary. 2) From the lender’s perspective, the FHA insurance guarantees that if the balance due exceeds the value of the home at loan termination, FHA will cover all or part of the shortfall to the lender on behalf of the borrower. This feature, which eliminates the risk to the lender, enables them to offer a much lower interest rate to be charged on HECMs in comparison to other types of reverse and conventional mortgages. (This could save the senior homeowner tens of thousands of dollars in accumulated interest over a long period of time.) In addition, because of this lower interest rate, lenders are able to offer a much larger cash benefit on HECM reverse mortgages than on other non-insured reverse mortgages. For this insurance requirement, two percent of the home value, or FHA national limit (whichever is less) is financed into the closing costs. In addition, .5% is added to the interest rate charged on the outstanding loan balance on a monthly basis.

• SERVICING FEES: Servicing happens after your loan has closed and funded. This includes sending you your payments, making or changing loan advances at your request and sending out account statements regularly. The servicing fee is not considered a closing cost and ranges from $30-$40 per month.

Interest Rates

FHA reverse mortgages can be based on either a fixed or adjustable rate loan. Adjustable Rates are linked to the LIBOR plus a margin. For the adjustable rate program, the change in the interest rate has no effect on the amount of or the number of loan advances you can receive, but causes the loan balance to grow at a faster or slower rate. The adjustable rate program does have a 10% cap on the initial interest rate. However, since the programs inception in 1989, the cap has never been reached. (Over the last 25 years, the average interest rate for FHA HECM reverse mortgage is 6.11%).

Loan Repayment

The loan becomes due and payable when the last borrower no longer occupies the property as their primary residence, whether that is by selling or by death. There is no pre-payment penalty. The amount ultimately due is simply the amount you borrowed plus the interest that had accumulated. Just like a traditional mortgage, heirs to your estate have the option of selling the property to payoff the loan balance or they can keep the home and payoff the loan via a conventional mortgage, savings, etc.

Eligibility

To be eligible, you must be 62 or older. If you are 62 and your spouse is not, then as a “couple” you cannot obtain such a loan. (Only under certain circumstances should the younger spouse be removed from the title so the older spouse can obtain the reverse mortgage.)

You must live in a home that is owned free and clear or have a remaining mortgage balance that can be paid off by the reverse mortgage. For example, if you owe $100,000 on a mortgage or home equity loan, you would have to qualify for at least $100,000 and use it to pay off this debt at closing.

A home that is a primary residence can be owned individually, jointly, in trust or with a life estate. If you set up a revocable trust, a reverse mortgage can still be an option provided that you are the beneficiary. Your children can be beneficiaries upon the death. Title to the property must be in the trustees and the trustees do not have to be the borrowers. The trust will be reviewed during loan processing. Therefore, a copy of the trust will need to be provided at application signing.

Important Note: Since you continue to own your home, you are still responsible for property taxes, homeowners insurance and repairs.

Alternatives to the Reverse Mortgage.  One option is to sell your current residence and downsize. AARP, in survey after survey, states that a majority of our elders do not want to move. It is ideal to be able to stay in the environment that contains much of their family and personal history. Usually they want to remain in an area that is familiar. Your home is the story of your life and stores so many of your precious memories. If the home is sold, you then have to find a place to live. Often a smaller home will cost more than the home you just sold, so a sale often becomes financially impractical.

A second option is to go to your neighborhood bank to get a conventional mortgage. Now days, when you apply for a mortgage, income and assets are reviewed. All sorts of financial ratios are determined. Credit scores are carefully analyzed. While some seniors may be able to qualify for a conventional loan, they do not want the headache or the responsibility of paying it back on a monthly basis. Making those monthly payments is something they can do without.
Closing Comments.  A reverse mortgage is the only way you can turn your home equity into cash while staying in the home that you love and while not having to pay a current interest payment on the loan.

A reverse mortgage is nothing short of a life-changing event. The look on the face of the borrower tells the whole story. For some, the weight of the world has been lifted from their backs. They are ready to take on the world again. They get the best of both worlds: their equity is transformed into cash AND they can still stay in their home as the sole owner(s) on title.

Because we are living longer, we must be preparing for the unique challenges that all of us will eventually face. We are past the time for depending on the government to take care of us. It is a time for becoming proactive. Beginning in the year 2012, 10,000 Americans per day will be turning 65. In the ‘good old days’, one would get old, sick and die. That is no longer happening. There is a new paradigm. Now we grow old, get sick and survive….for many years.

A National Council on Aging study shows that reverse mortgages will keep millions of our seniors in their homes. Not only will it free up funds for in-home care but will also allow millions of our elders to make needed improvements to the home. This will enable seniors to stay in the home.

Seniors do not buy long-term care insurance because it is too expensive. Let us not forget that Social Security is the largest source of funds for people over the age of 65. A reverse mortgage will make that which was not affordable very affordable.

There are about 22 million senior households in this country. About 17 million of these households own their home free and clear. The home will continue to represent the biggest untapped source of equity. Many of our elders are literally sitting on a gold mine. By showing our seniors how they can easily and safely extract this gold, convert it into cash and use the proceeds for any purpose while never having to make a mortgage payment, their lives will be changed forever… for the better!


Western Pacific Home Loans- Reverse Mortgages

When is a Reverse Mortgage a Good Idea?

Reverse Mortgages

Western Pacific Home Loans




For senior homeowners needing some extra cash, it’s sometimes better to look backwards instead of forwards – with their mortgage, that is.


Reverse mortgages are not easily understood, and many who could benefit from them shy away, afraid of making a mistake. Journalists who have only a cursory understanding of the product may contribute to this. This post lays out the pros and cons of reverse mortgages, and when you’re finished reading, you should be able to confidently determine if they are right for you or someone you care about.


What exactly is a reverse mortgage?
A reverse mortgage is exactly what it sounds like. With a forward (i.e., regular) mortgage, you start with a principal balance and make payments until the loan is paid off and you own your home outright. With a reverse mortgage, the lender makes payments to you. Repayment on a reverse mortgage is not required until the home is no longer your primary residence. Because you don’t make payments, lenders don’t care about your credit score or your income when you apply for a reverse mortgage.


Types of reverse mortgages
The most common reverse mortgage is the Home Equity Conversion Mortgage, or HECM. The program is administered by HUD, and its fees are regulated. HUD requires seniors to attend sessions with HUD-approved reverse mortgage counselors before they can take out one of these loans. About 90 percent of reverse mortgages are HECMs.


For very low income seniors, Single Purpose reverse mortgages are a low- to no-cost option that can provide funds for home maintenance or property taxes. They are available from local governments and charitable groups.


Proprietary reverse mortgages are funded by private lenders, and these companies make their own rules. You may be able to borrow a lot more money with these loans, but costs are much less regulated. Counseling is not required, but it’s probably a good idea – see below for more details.


How much can you borrow?
The more equity in your home, the more you can borrow. However, this amount also depends on your age (older people can borrow more), your home equity (if you have a mortgage, it must be small enough that the reverse mortgage can pay it off), interest rates and, for Home Equity Conversion Mortgages (HECMs), HUD’s loan limits.


How should you take your proceeds?
You can customize the way you receive your proceeds, depending on your use for the money. Your reverse mortgage counselor can help you with this.


Lump sum payment: This is ideal for thing like paying for catastrophic medical expenses or consolidating debt. An unspent lump sum, however, can jeopardize your eligibility for government benefits tied to assets, like SSI and Medicaid. Reverse mortgage proceeds are not countable as income because they are loans. However, Medicaid and SSI eligibility requires applicants to have no more than $2,000 ($3,000 for a couple) in countable assets each day out of the month. So if you took a lump sum distribution and parked it in something like a high interest savings account, even just for a day or two, you’d be ineligible for these benefits.
Monthly payments: Modified tenure gets you payments for a specified period of time, for example, five or ten years. Traditional tenure gets you payments for life. Although your payments will be considerably smaller, this is a good option for ongoing supplemental income.
Line of credit: This lets you tap your home’s equity only when you need to. It can be the best choice, like credit cards which charge no interest until you use them.
Combinations of the above options are also available, allowing you to customize your distribution; for example, a lump sum to pay off debt and a line of credit for emergencies.


How much does a reverse mortgage cost?
Like all financing, reverse mortgages come with costs. There is mortgage insurance, which is paid upfront and costs one-hundredth of 1 percent (0.0001) of the property value for HECM Saver (which has lower borrowing limits) or 2 percent for HECM Standard. On a $300,000 home, that’s $30 for the Saver and $6,000 for the Standard. Then there are other charges and of course interest. Lenders have to give you a disclosure called the Total Annual Loan Cost (TALC) which lets you compare reverse mortgage costs.


Because the upfront costs can be substantial, reverse mortgages may not be appropriate for those who can qualify for less-costly home equity loans instead. You should also think twice if you are in poor health or are contemplating a move within the next few years.


Don’t skip counseling

If you have decided a reverse mortgage is your best bet, talk to a reverse mortgage counselor so that you can be an informed shopper. Along with local HUD-approved counseling agencies, there are a number of national counseling agencies that can assist you. While HECM loans are regulated, proprietary loans are not, and even HECM lenders do price differently. Whether counseling is required or not, it’s smart to compare reverse loans and be fully informed before committing to a product.