How the Housing Law Affects Reverse Mortgages
Most seniors should be cautious
The housing bill signed by President Bush on July 30 raises the amount seniors can borrow using federally backed reverse mortgages and lowers the cost of getting the cash. But aging experts say you should still be cautious before spending down your home equity.
Here's how the new law affects reverse mortgages and what you still need to be wary of.
Instant cash—with strings. A reverse mortgage is a loan against your home if you're generally age 62 and over that doesn't have to be paid back as long as you live in that house. Tapping home equity to finance your golden years is growing in popularity, with 107,367 reverse-mortgage loans made in fiscal year 2007, up from 6,600 loans in 2000, but they still account for only about 1 percent of older households, according to the AARP. After you pay a variety of fees on the loan, you can get a lump sum, monthly payments, a credit line, or a combination of these options based on the value of your house. If the home is sold, the loan must be repaid with the proceeds, and any equity that remains after that is distributed to the borrower.
Know the limits. Most reverse mortgages are home equity conversion mortgages, which are backed by the Federal Housing Administration, so you'll still get your money even if the lender goes under. (The other two types are private loans and single-purpose reverse mortgages offered by some state and local government agencies and nonprofit organizations.) FHA limits the amount you can borrow with a HECM, which ranges from $200,160 to $362,790, depending on the county you live in. The new housing law, which will take approximately 60 to 90 days to implement, creates a single national loan limit of $417,000 that can increase to as much as $625,500 in high-cost areas.
Avoid fees. High cost is the reason 63 percent of reverse-mortgage shoppers ultimately decided against applying for the loan, according to a December 2007 AARP survey. And 69 percent of actual borrowers agreed that costs were high. The origination fees lenders can charge are currently capped at 2 percent of your home's value or the county lending limit, whichever is lower. The housing bill recently reduced the maximum fee to 2 percent on the initial $200,000 of the home's value and 1 percent on the balance thereafter, with a cap of $6,000. But some lenders charge less, so it can pay to shop around and negotiate on the fees charged. Also, bargain on closing costs, service fees, mortgage insurance premiums, and interest rates.
Get counseling. In order to qualify for a HECM, you must discuss the loan with a loan counselor employed by a nonprofit or public agency approved by the U.S. Department of Housing and Urban Development. "You should take the counselor very seriously and be very forthcoming with the counselor so that the counselor can help you do a thorough job of making sure that a reverse mortgage is really the answer for you," says Peter Bell, president of the National Reverse Mortgage Lenders Association, an organization that represents the reverse-mortgage industry. Barbara Stucki, director of home equity initiatives for the National Council on Aging, recommends spending an hour or longer discussing the loan. The counseling is free or has a minimal cost. You can find a local housing counseling agency by calling (800) 569-4287. The Financial Industry Regulatory Authority recommends verifying the independence of counselors recommended by your lender by asking whether they receive any funding from the lender or the mortgage industry.
Be wary of sales pitches. Nine percent of reverse-mortgage borrowers said their lenders offered them specific financial products like annuities and long-term-care insurance, which may be unwise investments depending on the purpose of the loan, the AARP survey found in late 2007. The new housing bill prohibits requiring the purchase of annuities and other financial products. But it never hurts to be cautious of any financial product someone is trying to sell you. "I think seniors still need to be careful that they are not talked into a loan that they don't really need," cautions Stucki. But if cash is a necessity, seniors should crunch the numbers on a traditional second mortgage and downsizing to cheaper housing alongside a reverse mortgage to parse the best deal.
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Reader Comments
reverse mortgage
to whom it may concern
my husband died dec 2006 leaving a reverse mortgage on our property without my consent or knowledge. he was 68yrs i am 59yrs now.he stated that he was not married on the contract(we were married 38 yrs)at the time.anyhow i did not get any of the money he obtained, can't sell of course because of the market problems. Myself, Bank of America, and HUD are currently in court.the thing is i am stuck paying the bills on the property- insurance, property taxes,maintenace etc. i do not have money for a lawyer-none of the agencies recommended by the court were able to help-i have tried so many places.(you won't beleive the problems that i have had. the case is still continued in court so far) when i told the judge the story he put his hands over his face and gave a continuance for now. i knew nothing until my husband died after a long illness in dec 2006. no on bothered to check out the truth of the application-but his lawyer knew, and the financial counsler also. now i am out of a house if i cannot find a way to refinance. i have lived in and helped pay for this house since 1971. thanks
Joyce Halsell
Frank & Patricia Esposito
Hi Frank,
I am with a NJ reverse mortgage lender that currently is not licensed in NY- so please don't think of this as a sales pitch as I will not gain anything from this explanation.
Given your age, and the age of you wife, under the new law you would be entitled to approximately $250,000. Given that your home is worth substantially more than this, I can see why you may have reservations about taking a reverse mortgage on your property.
A reverse mortgage should be thought of as a home equity loan that doesn't get paid back until you permanently vacate the home. What this means for you is that the remaining equity in your home, which is about $300,000 goes untouched except for any interest and fees accrued on the loan. If, for example, you took a reverse mortgage today for the full amount of $250,000 and decided to sell your home in 5 years, the only additional reductions to your home’s equity would be the interest that accrued against the loan. Thus, you are not losing your remaining equity.
Additionally, as the borrower remains the sole owner of the home, should both borrowers pass on, any value remaining in the home will be passed onto their heirs. In this sense, the process is quite similar to a home equity loan. Either the loan can be satisfied by the heirs and they can keep the home, or more often than not, the home is sold and the loan is satisfied. A feature unique to reverse mortgages is the MIP insurance which ensures that the value of the loan never exceed the value of the home. This has been an important characteristic of these loans as of late. To illustrate the purpose of this insurance here is an example: A borrower owned a $350,000 home in 2005 and took a reverse mortgage for $275,000. Now, in today's housing market the home is worth only $295,000 but the mortgage, due to accrued interest is $315,000. This $20,000 difference will not be passed onto the estate or your heirs, but will be absorbed by the MIP insurance. Unfortunately, contrary to the above article, this is not a negotiable fee as it is set by the FHA and HUD at 2%. In fact, the lender never sees this money as it goes directly into a special federal government pool.
I hope that elucidates some of the complexities of the program. As a member of the industry I find that the greatest problem that we face is the misinformation that has been given to seniors about reverse mortgages. Many people could truly benefit from this program, though it is not right for everyone. It is important to deal with principled lenders when taking a reverse to ensure that a program is designed to fit your needs and is only implemented if it is the best option for the borrower and if fully understood.
I am happy to answer any questions that you, or any other readers may have about reverse mortgages so please call or email me with your concerns.
Best,
Josh Fishkind
The Reverse Mortgage Center, LLC
P: 732 542 9400
F. 732 542 0927
E. jfishkind@thereversemortgagecenter.net
reverse mortgage
Question, I have a 2 family home in staten Island, NY. which is appraised for $625,000. My wife is 64 years old and I 66. As I read the revised law,the county limits have been elimitated and now based on number of dewelings units of the home! 2-Familt = $533,850. What will be the"loan principal limit" and what are the total settlement charges? Under the old law I was to receive $204,905 net dollars. Why would I give up $400,000 in equity to net $204,000? Thank you.
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