The economy shifts, retirement savings plummet
By Frank N. Darras
Today's senior citizens have spent their entire lives building a family nest egg to ensure they can pay the bills after they retire. Despite the diversification in their portfolios, losing nearly half of their life savings has put older Americans in a panic about their financial futures.
Although seniors live robust lives well into their nineties, many are worried they do not have 20 to 30 years to recover their lost savings. With talk of deflation and predicted hyperinflation, it's prudent for senior clientele to consider the next steps to remain financially independent through the coming years.
The increasingly popular reverse mortgage has been shopped by lenders and targeted to homeowners older than 62. This is a special mortgage that lets seniors convert equity in their homes into cash. This may be a viable option, but before recommending it, advisors should keep in mind that this strategy is not completely without risk.
Here is how it works:
Today's reverse mortgages are called Home Equity Conversion Mortgages (HECMs) and are insured by the Federal Housing Administration. HECMs allow senior citizens to tap home equity and not have to make monthly payments. According to the U.S. Department of Housing and Urban Development (HUD), the HECM is considered a safe plan that helps senior citizens have greater financial security. The HUD says that many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more.
Here are the top ten things HUD recommends you know if you are interested in a reverse mortgage. They are also posted at the www.HUD.gov Web site:
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA's HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price, plus closing costs for the property you are purchasing.
2. Can I qualify for FHA's HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are further required to receive consumer information from an approved HECM counselor prior to obtaining the loan. You can contact the Housing Counseling Clearinghouse on (800) 569-4287 for the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders within your area.
3. Can I apply if I didn't buy my present house with FHA mortgage insurance?
Yes. It doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured.
4. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
5. What's the difference between a reverse mortgage and a bank home equity loan?
With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.
You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."
No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home.
7. Will I still have an estate that I can leave to my heirs?
When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.
8. How much money can I get from my home?
The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You can use an online calculator like the one on the AARP website to get an idea of what you may be able to borrow.
9. Should I use an estate planning service to find a reverse mortgage?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HUD-approved housing counseling agencies are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.
10. How do I receive my payments?
You have five options:
- Tenure -- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term -- equal monthly payments for a fixed period of months selected.
- Line of Credit -- unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
- Modified Tenure -- combination of line of credit with monthly payments for as long as you remain in the home.
- Modified Term -- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
There are costs associated with an HECM. The lender can charge up to $2,500 in origination fees, and although capped at $6000, that is a lot of cash to come up with on a fixed income. Rolling that fee into the reverse mortgage can be painfully expensive. In addition, you will be charged closing costs, Mortgage Insurance Premiums, servicing fees and interest.
Make sure your client crunches all numbers after you've both looked into the upfront costs and remember, he or she is still responsible for property tax and hazard insurance, so be sure to uncover all the potential expenses and trappings of a reverse mortgage.
Most importantly, don't let fear and the lure of an easy solution drive your client's decision. Even though new legislation and lower interest rates promise to make it less expensive to borrow, it could cost your clients in the long run -- if they aren't careful.
Remind your clients that, no matter what, the loan will have to be repaid somehow -- and in full. Usually that occurs when the homeowner dies. They should also understand other restrictions could cause premature payback of the loan so make absolutely sure of what they're signing.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.