The new reverse mortgage: Right for you?
A new product is making a splash. It's cheaper up front but monthly costs are higher.
This post comes from Marilyn Lewis of MSN Money.
A new, lower-cost reverse mortgage unveiled this week could make a difference for some older people who're thinking of drawing equity from their homes. Lenders now are selling "the Saver," insured by the Federal Housing Administration, and it's getting a lot of attention.
But that's not to say buying a reverse mortgage has become cheap, or an easy call. Or that even this new product is right for everyone. These still are expensive loans.
The Saver is a type of FHA-insured loan known as a home equity conversion mortgage -- HECM or "heck-um" for short. Most, but not all, reverse mortgages are HECMs.
The Saver reduces previously steep upfront mortgage insurance fees -- 2% on the standard FHA-insured reverse mortgage -- to just 0.01% of the loan value. On a $200,000 loan, the fee would be $20 rather than $4,000. Writes The New York Times:
"It really changes how we think about reverse mortgages," said Barbara Stucki, vice president for home equity initiatives for the National Council on Aging, a nonprofit advocacy organization. "In the past, with the sizable upfront fees, it was only appropriate for people who wanted to stay in their home for the rest of their lives. But now that advice no longer applies to Saver loans."
That's the good news.
But, wouldn't you know it: There are trade-offs. Among them, more-costly ongoing mortgage insurance. The AARP compares the Saver with a standard reverse mortgage:
The trade-off with the HECM Saver is that the amount you can borrow against your equity is between 10% and 18% less, depending on your age, than the FHA's standard reverse mortgage. Borrowers are also charged mortgage insurance premiums on an ongoing basis equivalent to 1.25% annually of the outstanding loan balance.
Meanwhile, the FHA has raised fees on its standard reverse mortgage. This is the product you'd use if you want to extract more of your equity.
Here's a comparison:
- The HECM Saver has cheaper upfront fees than the standard FHA-insured option. But you're limited in how much equity you can withdraw.
- If you need to take out more money, your government-insured option is the HECM standard loan. The upfront insurance premium for this loan is still 2%, but the monthly insurance premiums have been increased, from 0.5% to 1.25%, calculated annually -- the same as on the Saver.
Behind the changes is the government's intent to reduce risk as home prices continue to fall. (The risk is that it might let you take out more money than it'll get back when the home is sold.) Says U.S. News & World Report's Money blog:
The new program is designed, in part, to shield the government from losses on the HECM program. The FHA said the lower payout of the HECM Saver program would "substantially" reduce risk to its insurance fund.
"In reality," adds the AARP, "the FHA has raised the ongoing insurance premiums on its reverse mortgages, even as it has reduced the amounts that can be borrowed."
You'll be hearing more about reverse mortgages. Older Americans are a juicy market. As the Times previously reported:
More than 7 million people over the age of 65 with annual incomes below $30,000 own their homes outright, according to the Census Bureau's American Housing Survey conducted in 2007, the most recent data available.
With the downturn, more folks in their 60s are tapping home equity to keep going. The Times says:
For the last decade, borrowers were most commonly in their 70s. But now, borrowers are increasingly in their 60s: more than 5% of borrowers in 2009 were 63, compared with just 2% 10 years ago, according to Reverse Market Insight, which tracks the industry. While the sheer number of baby boomers eligible can explain part of the increase, the economy is probably forcing many people to resort to these products earlier, John K. Lunde, president of the R.M.I., said.
Let's back up just a minute. You may be wondering: What exactly is a reverse mortgage? It's a reasonable question. These financial products can be complicated. (Read "A mortgage that pays you? Think twice.")
- Who's eligible? Reverse mortgages are only for older folks. You have to be at least 62 to get a government-insured product (the safest). The older you are, the lower the interest rates you'll be offered.
- How's it work? This loan lets you borrow some of your home's equity. Not all, by any means. The loan is repaid -- plus substantial fees and interest -- when you sell or die and the property changes hands. You or your heirs get any equity that's left. You can take your money in installments or as a lump sum, or you can get it as a line of credit to tap when you need it (cheaper, because you only pay interest on money you're actually using). The products that appear to be cheapest -- fixed-rate reverse mortgages -- require you to withdraw all the equity you're eligible to take out in a lump sum and you have to start paying interest on it immediately, making them actually more expensive.
Do you really need a reverse mortgage? The AARP calls them a last resort for older borrowers "who've run out of options." Before buying, really research this question, starting here:
- "Money in your 60s: 12 steps to take."
- "Reverse mortgages: Now a better deal."
- The AARP's explanation of alternatives to reverse mortgages.
Among the problems: A big payout could make you ineligible for government aid programs. To see if you qualify for aid, the Times suggests checking:
No discussion of reverse mortgages is complete without noting that you'll be dealing with a sophisticated industry (locate lenders through the National Reverse Mortgage Lenders Association who have signed a code of conduct) with motivated salespeople and, as we pointed out in March, bad apples among the good. Most consumers, on their own, are no match.
"Concerns have emerged about the adequacy of consumer protections for this product," says the Government Accounting Office in this report.
Each case is unique, so do the math to figure out your final cost and whether the trade-offs are worth it. To even the playing field, get free, government-funded consumer counseling, in person or by phone. (In fact, counseling is required for purchasing a HECM Saver.) Find HUD-certified counselors here or call (800) 569-4287).
In particular, beware of salesperson who:
- Pressures you to buy other products, particularly deferred variable annuities. You should comparison shop anyway, but drop any lender who pressures you and find others.
- Says you have to buy before a particular deadline. It's not true.
- Doesn't tell you about the risks as well as the benefits.
- Fails to tell you that you've got to keep paying the property taxes and homeowners insurance (different from mortgage insurance) on your property.
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