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Reverse mortgages can be helpful … for some

Boston condo owners: Here’s what you need to know about reverse mortgages

With the stock market getting volatile but the Boston condo market still maintaining high prices, reverse mortgages have become a more attractive tool for older Americans who need cash for retirement but want to stay in their homes.

Home Equity Conversion Mortgage loan volume was up 26% in March, according to data from the U.S. Department of Housing and Urban Development reported by service provider Reverse Market Insight. It dropped 3.8% in April but remained well above 6,000 loans for the month — above the average in the last few years.

The economics of reverse mortgages are not as good as they used to be. In 2017, rule changes made by the U.S. Department of Housing and Urban Development, which administers the HECM program, increased the mortgage insurance premium on the loans to 2%, from 0.5%, with the aim of reducing potential losses to taxpayers. That increased the upfront costs of reverse mortgages by $1,500 per $100,000 mortgage face value.

The market conditions for reverse mortgages, however, are favorable.

Older home owners:

Reverse mortgages have developed a strong following in the financial planning profession, with advisors recommending them as a potentially useful option in retirement distribution management.

Home equity represents about 66% of the average retired American’s wealth, so using it as a potential source of funds if you’re strapped for cash makes sense — even if costs are higher now.

Real Estate Line of Credit

The idea is that even if you don’t need cash immediately, setting up a line of credit through a reverse mortgage on good terms can provide access to significant funds down the road. The line of credit will continue to grow at the rate of the reverse mortgage’s interest rate, regardless of what happens to the value of the home. In other words, a reverse mortgage hedges the risk of falling home prices.

Not all advisors are sold on reverse mortgages.

Top pros and cons of reverse mortgages

Pros

  • With interest rates still relatively low and housing prices very high, borrowers can tap an average of close to 60% of their home equity on very good terms as either a lump sum, monthly payments or as a line of credit that carries interest only on withdrawals.
  • Reverse mortgages are non-recourse loans. As long as you pay property taxes and maintenance expenses, you can stay in the house as long as you like and the terms won’t change, regardless of the housing market or changes in prevailing interest rates. The loan is due when you die or leave the home.
  • A reverse mortgage line of credit provides flexibility in managing the distribution of retirement benefits. It allows a borrower to take tax-free withdrawals on the credit line rather than sell investments (and pay taxes) after a drop in the market.

Cons

  • It is easier to qualify for a reverse mortgage, but they are more costly than other mortgages and home equity lines of credit. If for health or any other reason, you don’t stay in the house for long, the costs will seem even higher.
  • If you use the proceeds of a reverse mortgage for questionable spending or risky investing, you’re setting yourself up for financial ruin. If it represents a last resort for funds, you are probably living an unsustainable lifestyle. “The better option is to downsize your home and reduce your spending,” said Hook of EKS Associates.
  • Homeowners are still required to pay property taxes, insurance and maintenance costs on the home. The lender could seize the property if you don’t.

Boston Condos and the Bottom Line on Reverses Mortgages

“It’s easy money and it can foster bad habits.”

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A story from the Journal discusses reverse mortgages, and how more and more elderly homeowners are using them in order to save their homes from foreclosure.

With a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank.

The loan is repaid, with interest, when the borrower sells the house, moves out permanently or dies. The products are complex and have high fees — typically about 7% of the home’s value — and they make it difficult for homeowners to leave the property to their heirs.

But they may be the best option for people who have built up equity in their home and would otherwise lose it.

First, a little information.

With a reverse mortgage, what happens is, the lender gets title to the property, but lets the current owner stay there until he or she dies or moves out (to a nursing home, for example). The lender makes payments to the owner (monthly payments or even one lump sum …).

The owner gets a steady payment which can be used for medical bills, taking vacations, or simply living the same life they did before.

The lender assumes the risk, but also the reward. They are basically “lending” the owner money – paid out monthly. The lender charges interest on this loan, which is how it makes a profit on the deal.

But, they only earn a profit if the owner dies or moves out when expected.

When the owner dies or moves out permanently, the lender gets back its money by selling the property, presumably for more than what it paid out during the time it held the loan.

But, if the owner doesn’t die or move out, the lender has to wait, and continue to make the payments.

If the owner sells the home before he/she dies, the loan is paid off, just like a regular home sale — although I would assume the lender has to approve the sale, since it has a lien on the property.

More importantly, the owner cannot ever “owe” the lender money. The lender has to keep making the monthly payments, even if the owner lives for a lot longer than anyone expected … the lender takes the risk, the owner lives off the money, everyone’s happy.

Of course, with a reverse mortgage, the lender ends up owning the home once the owner dies, meaning there (may be) nothing left for the heirs (thanks, Mom and Dad!).

It seems like it’s a case of “having your cake and eating it, too”, which is probably why these types of programs have become so popular over the past several years.

So, getting back to the article, these days a lot of seniors (I call them “old people”) who are facing foreclosure are taking out reverse mortgages, in order to hold onto their homes.

A senior doesn’t have to own his or her home, outright, in order to participate in the program. The lender simply pays off the current mortgage loan when it makes the new loan.

In the article, one lawyer is making agreements with many subprime lenders to accept “cents on the dollar” repayments from many of their borrowers.

He then turns around and puts them into reverse mortgages.

Again, everyone’s happy, right? The new lender gets the home, the homeowner gets to stay home, (and the lawyer gets a fee, undoubtedly).

Of course, the original lender isn’t very happy, since it ends up eating the loss on the expected income it would have earned over the next thirty years (well, less, since the old person would probably have died at some point …).

But, according to the article, at least, a lot of these loans shouldn’t have been made, in the first place.

In fact … (and this is why I have written this very long entry):

Elizabeth Renuart, a staff attorney at the National Consumer Law Center in Boston, reviews hundreds of mortgage documents annually, and says that the adjustable-rate mortgages she has examined this year that she considered “to be made inappropriately were almost entirely made to people over 60. To me, that’s a very shocking revelation.”

Um, yeah.

To me, too! And, probably to you, as well.

Maybe the federal government should require you be over 60 years old in order to have your loan terms rewritten …

Source: Reverse Mortgages: A Way Out Of a Bind for Older Homeowners – By Kelly Greene, The Wall Street Journal

 
 

Updated: Boston Real Estate Blog 2022