A Reverse Mortgage is a government backed loan option for elderly home owners, 62 years of age or older, who are often “equity rich but cash poor”. Under a reverse mortgage, a homeowner borrows against their equity, either in a lump sum, in monthly payments, a line of credit or a combination of the three options. Frequently, a borrower will acquire some up-front funds with which to fix-up the home and then take the bulk of the available loan proceeds via a monthly income amount or establish a line of credit.
The unique aspect of the loan is that the lender gets repaid only when the house is vacated and/or sold. The homeowner, in the meantime, has the option of remaining in the home until death while continuing to receive monthly payments. In some cases, this results in the lender losing money as the occupant lives longer than expected and has “drawn” more in cash than the actual value of their equity. The borrower or his/her heirs are never liable for any such loss.
While these loans have been available for many years, relatively few seniors have taken advantage of the program. With the aging population growing rapidly there is an anticipation that millions of potential borrowers are eligible for a reverse mortgage. Surprisingly, current estimates are that over 70% of eligible borrowers are unaware of this program. Untrue myths abound regarding this loan resulting in the reverse mortgage being one of the most misunderstood of all loan options.
Recent fairly aggressive promotion from all media sources seems to be increasing both the awareness and the popularity of these loans. There are several sources of Reverse Mortgages but the Home Equity Conversion Mortgage (HECM) program sponsored by FHA is the most widely used of the programs.
The funds made available to a senior borrower are calculated via an analysis of the borrower’s age and the remaining equity in the home (after paying off any current mortgage balance and fees). Since anticipated longevity of the borrower is a main component, the older the borrower is at the time of acquiring the loan results in a greater share of the equity to the borrower. Thus, determining at what age to initiate a reverse mortgage can be a major consideration.
There are several other aspects of reverse mortgages that have to be considered when pursuing such a loan. First, a borrower must remain in residency for the life of the loan. While there is provision for a temporary departure (i.e.; up to one year for medical or other unexpected circumstances) if one vacates the home to enter, for instance, a more permanent care facility, the loan must be paid via either a refinance or sale. Thus, one has to pay attention to the health and or likely length of occupancy of the borrower.
Second, the fees accompanying the reverse mortgage, like an refinance transaction, can be substantial. A borrower who moves out of the home or sells it within a few years of acquiring the reverse mortgage may not have received a compensatory amount via their cash advances or monthly payments.
This is a loan in which the borrower receives income rather than having to pay a monthly mortgage. The taxes and homeowners insurance costs are the responsibility of the borrower. Because some past problems with unpaid taxes and insurance, a current financial assessment rule, which applies to reverse mortgage loans under the Home Equity Conversion Mortgage (HECM) program, requires borrowers to demonstrate the ability to pay property taxes and insurance premiums on the property. While a credit score is not an issue, lenders do look at the borrowers’ income and credit histories to ensure they can timely meet their financial obligations.
Borrowers who don’t meet the financial requirements for the loan have the option of setting aside money from the loan to pay the property taxes and insurance premiums. The amount of the set-aside depends on a formula, but the set-aside amount can be quite large and the reduction in monthly income may make the loan impractical for some borrowers. Borrowers who meet the credit requirements for the loan, but don’t have enough income can do a partial set-aside, which requires them to put aside less money but which may still make the reverse mortgage less desirable.
In recent years improvements to the reverse mortgage program have occurred. The fee structure, which initially was a bit exaggerated, has been revised and it now mirrors other refinance loan options. Non-borrowing spouses may now remain in the home following the death of the original borrower. Actuarial tables are constantly revised in an effort to maximize the funds made available to borrowers. Finally, loan factors can be adjusted depending upon individual needs of the borrower, most often resulting in greater funds becoming available.
The idea of being able to acquire a monthly stipend via borrowing against one’s home equity is enticing. As more people become eligible for the program and with continued aggressive promotion of the program, there is an increased likelihood that more lenders will enter the reverse mortgage market arena. This is especially true during the current reduction in mortgage loan origination. Unfortunately, this could result in some lenders viewing the reverse mortgage loan as a profit center resulting in less concern for what is best for the elderly borrower.
With all of the variables affecting these loans, it is clear that any potential borrower needs to acquire competent, unbiased counseling regarding both the advantages and the many pitfalls of a reverse mortgage. In some cases, the monthly income could be reduced sufficiently that a borrower might be better served via selling a home and using the equity in other ways. Bottom line, while a reverse mortgage may be just what some elderly homeowners need, it is not the answer for everyone.