Seniors Drawn to Mortgages That Give Back

Seniors Drawn to Mortgages That Give Back


Here's one segment of the mortgage market that's still hot: federally insured reverse mortgages, which enable senior citizens to take money out of their homes.

In March and April, the number of reverse mortgages backed by the government jumped nearly 20% from the same period last year. In April alone, the government insured 11,660 reverse mortgages, the highest monthly total since the government-backed program began in 1990. By contrast, the number of new home-equity loans, which similarly allow homeowners to tap the equity in their homes, fell around 70% in the first quarter from the prior-year period, according to Inside Mortgage Finance.

Reverse mortgages are turning out to be a viable solution for many reasons. More seniors are turning to reverse mortgages to supplement their retirement savings, which in some cases have been decimated by stock-market losses. At the same time, more seniors now qualify for a reverse mortgage since Congress in February raised the maximum home value that seniors can borrow against to $625,500 from $417,000. The bill also capped reverse-mortgage origination fees at 2% on the first $200,000 and 1% on any amount over that, with fees not to exceed $6,000. Other upfront costs include an insurance premium and closing costs. More seniors qualify after Congress raised the maximum home value that can be borrowed against.
In a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. To qualify for such a mortgage, a senior must be at least 62 years old and have a lot of equity in the home.

The way it works is this: Say a senior owns a house worth $500,000 that has a $50,000 mortgage. The senior might get a $250,000 reverse mortgage to pay off the existing loan and then have $200,000 left over. The homeowner could get that as a lump sum or a line of credit, and wouldn't have to pay it back until he moved or died and the house was sold. The bank is repaid, including interest, from proceeds of the sale.

The Appeal for Seniors
· With retirement savings taking a stock-market beating, some aim to supplement their income.
· Seniors are now able to purchase a home with a reverse mortgage so to move closer to their children seniors are using the proceeds of a sales and paying 1/4 to 1/3 the value of the home with a reverse mortgage, to enjoy no payments and a significantly bolstering of their savings at the same time.
· Divorcing seniors or gay couples can now finance going their separate ways with a reverse mortgage giving one person the original home with no payments and the other the money and possible new home with no payments.
· When one senior is concerned about their mate having a place to live and adequate funds to live on, couples have actually paid down their mortgage to qualify to execute a reverse mortgage, allowing the spouse never to find themselves having to vacate the home because they couldn’t afford the mortgage payment.
· Retiring with a mortgage payment is a serious crimp on ones lifestyle. True piece of mind and actual decisions to retire immediately are the result of accessing the benefits of a reverse mortgage, which mean no more payments and tax free moneys.
· Financially secure seniors are seeing the value of using the proceeds of a reverse mortgage to give an earlier inheritance and sustaining their children and grandchildren with tax free gifts generally increasing the lifestyle standards for all concerned

For lenders, the risk is that when it is time to sell the home, it will be worth less than the amount lent. As housing prices have plummeted, concern has grown that losses from these loans have mounted. Nearly all private offerings of reverse mortgages have disappeared, leaving the Federal Housing Administration as the only game in town. The FHA doesn't make any loans, but it insures lenders against any losses on federally-insured loans, called Home Equity Conversion Mortgages.

Congress's decision to raise the loan limits allowed Suzanne Huntington, 64, to get a $285,000 reverse mortgage on her $480,000 home in Laguna Nigel, Calif., last month. She used the proceeds to pay off the existing mortgages on the house, which totaled $282,000. Now she no longer has to make monthly payments.
As a result, the recently retired accountant says her husband, a heavy-equipment operator, will be able to retire this month. While they would have had enough in savings and pensions to pay their mortgage after retiring, "we wouldn't have a lot left over," says Ms. Huntington, who says her 401(k) retirement savings took a hit in the stock-market downturn.
While reverse mortgages are more popular than ever, more borrowers are finding that their homes are worth much less than they believed, and they may be unable to qualify. Around one-third of borrowers who might have closed reverse mortgages two years ago no longer have enough equity in their homes to qualify, says Jeff Lewis, chairman of Generation Mortgage Co., an Atlanta brokerage. Around 85% of his reverse-mortgage customers are retiring their existing mortgages.
Indeed, brokers point to retirement savings gutted by stock-market declines as a big reason for renewed interest in reverse mortgages. "People are trying to recover or buy some time before their retirement holdings need to be liquidated," says Eric Bachman, chief executive of Golden Gateway Financial, an Oakland, Calif., brokerage.
After he heard about friends having their lines of credit pulled by their lenders, Lou Grushen, 77, in April used his reverse mortgage to secure a new line of credit on his Fullerton, Calif., home. The new line, worth $320,000, extinguished $122,000 in debt on an existing line of credit. He had been using that credit line to pay taxes that resulted from withdrawing from his retirement account, which had fallen around 30% in value. "When the stock market went down, I was really in trouble," says Mr. Grushen.
Another reason for the growing demand: A tough housing market has made it harder for seniors to sell their homes and downsize. Brokers also say seniors are increasingly using reverse mortgages to pay off loans that have reset to higher payments. "There's definitely an increased cognizance of its value as...a bailout option," says Peter Bell, president of the National Reverse Mortgage Lenders Association.
Actuarial tables determine how much money borrowers can withdraw from their home. While a 62-year-old borrower might qualify for a loan worth 57% of the home's value, a 94-year-old borrower could receive as much as 85% of the property's value, says Michael Branson, chief executive of All Reverse Mortgage Co. in Garden Grove, Calif.
Also, fees for the mortgages are steep, and restrictions are tightening. Fannie Mae is the predominant buyer of the government-insured mortgages. But the mortgage-finance giant has been trying to encourage private investors to buy reverse mortgages by steadily boosting the amount of money it makes by purchasing the loans, which reduces the size of the reverse mortgage.
But brokers say this has been causing a problem. Sudden pricing changes by Fannie have disrupted transactions because borrowers sometimes qualify for less money at closing than they did when they applied for the loan, they say.
If the size of the loan falls below the amount needed to extinguish a borrower's existing mortgage, then the borrower may be unable to do a reverse mortgage. "It can cause a hardship," says Mr. Bell of the National Reverse Mortgage Lenders Association. "Now it means they need to come up with other cash to cover the shortfall or they can't go ahead and do the reverse mortgage."
"My reverse mortgage saved my life! A tax-free monthly payment has allowed me to remain in Sun City and to continue to enjoy this unique lifestyle for as long as I stay in my home. I still own my home and the deed is still in my name. Most important of all, the reverse mortgage is government insured so there's no worry in this turbulent economic market. My home is now my bank!"

The transfer funds can be used for anything, including:
Pay off an existing mortgage and other debt
Long term healthcare and prescription drugs
Property taxes
Home repairs and renovations
Cash reserves for emergencies

• Enjoy retirement• Tax-free income• Pay off debt• Eliminate mortgage paymentsRichard K Bettinson Security One Lending SCPD Resident (760) 200-2696www.RichLifeInc.com

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