Mortgages in Reverse

Toni Panetta
California Real Estate
April 2005

Are unexpected medical expenses or other financial hardships causing one of your former clients to struggle to stay in the home you sold him many years ago? If so, a reverse mortgage could provide an attractive solution. Just as the name denotes, through a reverse mortgage, lenders pay money to borrowers, rather than requiring borrowers to make monthly payments to lenders.

According to Sandra Mahon, vice president of Prothos Corp. in San Diego, the biggest benefit of a reverse mortgage is “releasing borrowers from the remainder of mortgage payments that they have while on a limited income or providing them with additional cash flow.” As word spreads about these benefits, reverse mortgages have increased in popularity: In fiscal 2004, nearly 38,000 Home Equity Conversion Mortgages, one of four types of reverse mortgage products, were originated, up from just over 18,079 in fiscal 2003, according to the National Reverse Mortgage Lenders Association (www.reversemortgage.com). Furthermore, demographics could result in thses products becoming even more widespread: a U.S. Census Bureau report found that the oldest of the Boomers – a group that comprises 31 percent of the population – will turn 59 in 2005. And as this demographic group ages, the number of reverse mortgages is expected to increase as homeowners, REALTORS® and lenders learn about the concept.

The Basics
In a nutshell, reverse mortgages allow borrowers to tap into their home’s equity, giving them an additional source of income. Funds can be used for anything: long-term medical expenses, travel, a second home, or costly prescriptions, for example.

To qualify, borrowers must be 62 and have equity in their homes – whether single-family homes, townhomes, or qualified condominiums. However, they do not need to own their homes outright. In addition, no medical or income eligibility requirements exist. Loan amounts vary, based on the borrower’s age, home value, the reverse mortgage product selected, interest rates, and, in some cases, location. In general, the older a borrower is and the more valuable her home, the higher the mortgage.

Borrowers choose how they will receive funds from the loan: either as a lump sum, in monthly payments for life, or via a line of of credit that;s accessible at any time – or any combination thereof. Because the loan is borrowed against the home, the funds are tax-free. In addition, reverse mortgages do not affect borrowers’ Social Security or Medicare benefits. Because there are no monthly payments during the life of the mortgage, the loan is not due until the borrower moves out permanently, sells the home, or dies.

Types of Reverse Mortgages
There are currently four types of reverse mortgage products, each insured and offered through a different provider:

1)Home Equity Conversion Mortgages (HECMs) are insured through the Federal Housing Administration.

2)Home Keeper®, developed by Fannie Mae, addresses the needs of borrowers with higher-valued homes, those who own condominiums, and those who want to purchase a new home but don’t qualify or want to make monthly payments on traditional mortgages.

3)Home Keeper® for Home Purchase enables seniors to obtain a reverse mortgage at the same time they purchase a new home, allowing borrowers to use the proceeds from the sale of a previous home, plus the funds available through a reverse mortgage on the new home, to purchase the new home.

4)Cash Account products, offered through Financial Freedom Senior Corp., an IndyMac Bank subsidiary based in Irvine, act like jumbo reverse mortgages and they provide options for those whose home values exceed the FHA and Fannie Mae loan limits.

The costs incurred for taking out a reverse mortgage are similar to those incurred on other home loans and include an origination fee, appraisal fee, closing costs, and service fees.

Looking forward, lending professionals expect reverse mortgages to increase in popularity. That said, Mahon cautions that they’re not meant for everyone: “A concern I have going forward is the Baby Boomer population. That segment of the senior generation came through a period of time where they weren’t afraid to use debt or maximize the mortgage on their property so they had immediate use of the equity they had built. … and now has too much debt on the property to take advantage of the reverse mortgage.”