Monthly Features:
Ask Forward-Thinking Questions About
Reverse Mortgages
By GAYLA MILLS
Reverse mortgages for seniors continue to grow in popularity.
According to the U.S. Dept. of Housing and Urban Development, or HUD,
the number of reverse mortgages has steadily increased from a few
hundred in 1990 to over 107,000 in 2007. With an increase in house
foreclosures and a sinking stock market on which some seniors depend,
more people are considering this new credit option.
Like any other major financial decision, taking out a loan on your house
is best undertaken after you learn fully whether it’s right for you.
What are reverse mortgages?
Over 90 percent are loans offered by the Federal Housing Administration
known as “Home Equity Conversion Mortgages.” An HECM:
• allows you to draw on the principal you’ve accumulated in your home
while still living in it;
• is more heavily regulated than a traditional loan, including a
requirement that you undergo counseling from a FHA-approved housing
counselor before applying;
• does not require monthly repayments to the mortgage company as long as
you live in the house;
• is only for homeowners age 62 or older.
Why would someone take out such a loan?
Those who find themselves facing unexpected medical or other expenses
may find an HECM an attractive means of getting funds. Consider their
cash alternatives: They could borrow or accept gifts from relatives.
They could return to work (if able). They could face a lower standard of
living, possibly an unhealthy one. They could take out a line of credit,
or home equity loan, on their house. Or they could obtain a reverse
mortgage.
Another group who clearly benefits from reverse mortgages are home
owners facing foreclosure, says Dianna Herndon of the Southside
Community Development and Housing Authority. If they have equity built
up in their house but are unable to make their monthly payments, taking
out a reverse mortgage may enable them to keep a roof over their heads.
Why not use another type of loan?
A home equity loan or line of credit is easy and inexpensive, so why not
take out one of those? Even though an HECM and a home equity loan both
depend on drawing capital from your house, there are significant
differences between the two. With a home equity loan, you receive a lump
sum of money up front and must then repay it each month, just as you
would a traditional mortgage.
By contrast, with an HECM you can chose between a lump sum, a monthly
cash payment, or both. In any case, your obligation to repay the loan is
deferred until you sell the house, vacate it or pass away. No matter how
long you live, the bank can’t take your house away from you and doesn’t
own the house. After your death, your heirs can either keep the house by
paying off the loan through savings or refinancing, or can sell the
house and pay off the loan from the proceeds.
What are the risks?
If you share your home with a relative who doesn’t have other housing
options, you should proceed cautiously, according to Herndon. If you
have to leave the home, through illness, disability or death, your
relative will need to either refinance the home (thereby paying off the
HECM) or find another place to live. If he or she can’t afford to do so
because of poor credit or unemployment, then a reverse mortgage may be a
poor choice.
What are the costs?
As with any mortgage, you will be incurring closing costs, deducted from
the value of the loan. If, for example, you take out a reverse mortgage
of $100,000 and incur $8,000 in closing costs, you will receive a lump
sum of $92,000 or the equivalent in monthly payments.
HECM closing costs are generally higher than other mortgages. In
particular, HECMs require borrowers to pay a Mortgage Insurance Premium
equal to 2 percent of the value of the home or the FHA lending limit.
This can add thousands of dollars in costs on higher dollar loans.
Reverse mortgages are being marketed aggressively because, simply
speaking, they are another way for financial institutions to make money.
As with any loan, some lenders will charge more fees than others, so it
is up to consumers to look carefully at the terms and compare different
lenders.
How can I make an informed decision?
First, get information from an unbiased source. HUD is a good place to
start. Call the Richmond office at 804-771-2100 or go online to
www.hud.gov and type “reverse mortgage” in the search box.
Through HUD you can find mortgage calculators and contact information
for housing counselors. (There are several in the Richmond area,
including Housing Opportunities Made Equal, Southside Community
Development and Housing, and the Urban League of Greater Richmond.)
Second, take full advantage of these counselors, who can give you free
advice on whether a reverse mortgage is best for you. Because they are
independent of your mortgage company or bank (whose primary goal is to
profit from its loans) they can give you the confidence, support and
objective information you need to make the right decision.
Before you commit yourself to a reverse mortgage, become informed,
compare terms and examine the fine print. Whether an HECM is a blessing
or a curse depends, ultimately, on you.
Gayla Mills teaches at Randolph-Macon College.
