The Reversal on Reverse Mortgages
Lee Rosenberg, CFP | April 9th, 2009Reverse mortgages are one of those financial strategies that have come full circle. When first introduced, they were highly touted as a viable solution to helping retirees stay in their homes while generating tax-free monthly income. Essentially, for the cost of a one-time origination fee, the homeowner would tap into their equity, stop making mortgage payments and create an income stream to supplement Social Security, pensions and other retirement income.
Then came all the warning bells- excessive origination fees, small lending limits, and high pressure tactics by lenders requiring that in order to secure the loans, borrowers would have to also purchase financial products like long term care and annuities (from the lenders, of course).
Now the pendulum has swung back again. Thanks to the Housing and Economic Recovery Act of 2008, reverse mortgages or HECMS (Home-equity conversion mortgages) may once again provide seniors with a good alternative to having to move or relocate, which could be costly and of course, emotionally unsettling. The biggest advantage remains- you can take the frozen equity out of your home in exchange for tax-free cash flow and the loan is backed by the federal government.
There remain several caveats: the borrowers must be 62 and older, they must be the owners of the home, they must continue to live in the house and if there is a second mortgage on the property, that loan must be paid off with a portion of the proceeds from the reverse mortgage.
Here are the three biggest changes in HECM’s:
1. Prior to the law changing, lenders could charge either 2% of the home’s appraised value or 2% of the local HECM lending limit, whichever was lower. In many areas, for example, the lending limit was capped at $363,790, making the origination fee a whopping $7,255. Now the maximum origination fee is 2% of the value of the home for the first $200,000 and 1% of the balance, with a total cap at $6,000.
2. To better reflect higher housing values, the loan limit cap was increased from $363,790 to a range of $417,000 to $625,000, based on the geographic region and the housing market within these locales
3. Homeowners are required to work with a home lending counselor who is employed by an HUD approved nonprofit or public agency. This not only assures the borrower that they will be advised by trained, qualified people, but also eliminates the pressure they felt from fast talking advisors who were pushing financial products as a deal-closer.
Here are some helpful resources to get more information:
o AARP offers a reverse mortgage calculator that will show you how much income you can receive based on the size of the loan and the value of your home. www.rmaarp.com
o To find a HUD approved counselor to discuss your reverse mortgage needs, call 800-569-4287, or go to www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm
Keep in mind that reverse mortgages are not for everyone. They don’t make sense if you don’t plan to live in the house for at least five years or if you have other sources of income. The fees, while less likely to fall into the price- gouging category, are still high enough to warrant making absolutely sure that the advantages outweigh the possible downsides.
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Tags: hecms, home lending, homeowner, hud, lee rosenberg, mortgages, real estate market, retirement income, reverse mortgages, tarp, tax free income
About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.
