LISTEN:Re-shuffling the Reverse Mortgage (4:45min)
Some changes in the reverse mortgage market may make it easier for seniors to access their home equity, but they also protect lenders from declining values in the real estate market.
A reverse mortgage allows people age 62 or older to convert equity in their home to cash, in the form of a lump sum, a line of credit or monthly distributions. Borrowers using a reverse mortgage do not have to make monthly repayments. The loan is due, with interest, when the borrower dies, moves, sells the house or fails to pay property taxes or homeowner’s insurance. To qualify for a reverse mortgage, the property must be the borrower’s primary residence, and must either be held free and clear or be paid off with a portion of the proceeds from the reverse mortgage. The amount received depends on the property’s value and the age of the recipient.
While reverse mortgages can provide a much needed source of retirement income for retirees, some commentators have criticized their upfront fees, which can total as much as 5% of a home’s value. The Federal Housing Administration, which has oversight responsibility for reverse mortgages, also provides insurance to lenders should the future value of the property be less than the amount owed when the loan comes due. To cover this risk, FHA collects an up-front insurance fee, which can be as high as 2% of the property’s value, according to a January 8, 2011, Wall Street Journal report by Anne Tergesen. In addition, banks also typically add transaction and service fees for originating a reverse mortgage. Thus, the transaction costs for a reverse mortgage on a $500,000 property could approach $25,000.
As a result of the recent decline in housing prices, it is likely that many current reverse mortgagees will owe more than the value of their property, which leaves the FHA on the hook to make up the difference. To minimize this occurrence going forward, the agency has authorized a new reverse mortgage format. In exchange for receiving a smaller percentage of equity from their reverse mortgage, FHA has lowered their insurance premium to 0.01% of the property value. In addition, some banks have either lowered or waived fees, provided that the borrower takes a lump-sum payment (thus accruing interest on the full amount of the reverse mortgage loan). The interest charged for a no-fee loan is typically higher as well.
While these provisions may lower up-front costs to consumers, they also either lower the risk for lenders, or increase potential returns for lenders. In some circumstances, individuals may find the older, “more expensive” format is actually a better value in the long run.
Given these new variables, a consultation with your trusted financial specialist is recommended before considering a reverse mortgage. And the FHA actually has a nationwide network of approved reverse mortgage counselors.
DID YOU KNOW?…
Early life insurance policies covered the Pope and government officials
Some of the first recorded life insurance contracts were owned by Italian bankers that insured the lives of religious and government officials. The account books of Bernardo Cambia, a banker with the powerful Italian family, the Medicis, show premiums paid for Pope Nicholas V, the Doge of Venice and the King of Aragon. F. E. de Roover, author of the 1945 book “Early Examples of Maritime Insurance,” comments that these contracts were essentially personal wagers on the lives of these men, as there were no life expectancy tables on which to calculate the insured’s health or longevity (although Pope Nicholas served just eight years and died while in office, so the Medicis may have collected on their investment).