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Pros and Cons of Reverse Mortgages

Over the last decade, reverse mortgages have been marketed as an easy way for seniors to cash in their home equity to pay for living expenses. However, many have learned that improper use of the product – such as pulling all their cash out at one time to pay bills – has led to significant financial problems later, including foreclosure.

In actuality, there are some cases where reverse mortgages can be helpful to borrowers. However, it is imperative to do extensive research on these products before you sign.

Reverse mortgages are special kinds of home loans that let borrowers convert some of their home equity into cash. They come in three varieties: single-purpose reverse mortgages, Home Equity Conversion Mortgages (HECMs) and proprietary reverse mortgages.

Who can apply? Homeowners can apply for a reverse mortgage if they are at least 62 years old, own their home outright or have a low mortgage balance that can be paid off with the proceeds of the reverse loan. Qualifying homeowners also must have no delinquent federal debt, the financial resources to pay for upkeep, taxes and insurance and live in the home during the life of the loan.

Consider the following pros and cons as a starting point for trying or bypassing this loan choice. Even though HECM loans require a discussion with a loan counselor, you should bring in your own financial, tax or estate advisor to help you decide whether you have a safe and appropriate use for this product.

Pros of reverse mortgages:

They’re a source of cash. Borrowers can select that the amount of the loan be payable in a lump sum or regular payments. Proceeds are generally tax-free. Final tax treatment may rely on a variety of personal factors, so check with a tax professional. Generally, they don’t impact Social Security or Medicare payments. Again, important to check personal circumstances. You won’t owe more than the home is worth. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. Reverse mortgages may be a smarter borrowing option for some downsizing seniors. With proper advice, some borrowers use them to buy new homes.

Cons of reverse mortgages:

You may outlive your equity. Reverse mortgages are viewed as a “last-resort” loan option and certainly not a singular solution to spending problems. You and your heirs won’t get to keep your house unless you repay the loan. If your children hope to inherit your home outright, try to find some other funding solution (family loans, other conventional loan products) first. Fees can be more expensive than conventional loans. Reverse mortgage lenders typically charge an origination fee and higher closing costs than conventional loans. This adds up to several percentage points of your home’s value. Many reverse mortgages are adjustable rate products. Adjustable rates affect the cost of the loan over time. If you have to move out for any reason, your loan becomes due. If you have to suddenly move into a nursing home or assisted-living facility, the loan becomes due after you’ve left your home for a continuous year.

Bottom line: Reverse mortgages have become a popular, if controversial, loan option for senior homeowners. For some, they may be a good fit, but all applicants should get qualified financial advice before they apply.


Jason Alderman directs Visa’s financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.

[…]

5 Top Alternatives To A Reverse Mortgage

If you’re 62 or older, you may be able to convert the equity in your home into cash with a reverse mortgage. This loan lets you borrow against the equity in your home to get a fixed monthly payment or line of credit. Repayment is deferred until you move out, sell the home, become delinquent on property taxes and/or insurance, the home falls into disrepair, or you pass away. Then the house is sold and any excess after repayment goes to you or your heirs.

Home equity loans can be problematic if not done correctly ( see 5 Reverse Mortgage Scams ) and require careful attention to the rights of the surviving spouse, if you are married. And of course, the end of the process means you or your heirs give up your home.

There are other ways to tap into your home’s equity that are worth considering. Here, we take a quick look at the top alternatives to reverse mortgages.

1. Refinance Your Existing Mortgage

If you have an existing home loan, you may be able to refinance your mortgage to lower your monthly payments and free up some cash. One of the best reasons to refinance is to lower the interest rate on your mortgage, which can save you money over the life of the loan, decrease the size of your monthly payments and help you build equity in your home faster. Another perk: If you refinance instead of getting a reverse mortgage, your home remains an asset for you and your heirs.

2. Take Out a Home-Equity Loan

Essentially a second mortgage, a home-equity loan lets you borrow money by leveraging the equity you have in your home. It works the same way as your primary mortgage: You receive the loan as a single lump-sum payment, and you cannot draw any additional funds from the house. The interest you pay is generally tax deductible for loan amounts up to $100,000.

These are generally fixed-rate loans, which provide security against rising interest rates. Because of that, the interest rate is typically higher than for a home equity line of credit. As with refinancing, your home remains an asset for you and your heirs. Because your home acts as collateral, it’s important to understand that your home is at risk of foreclosure if you default on the loan.

3. Take Out a Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, gives you the option to borrow up to your approved credit limit, on an as-needed basis. Unlike a home equity loan, where you pay interest on the entire loan amount whether you’re using the money or not, with a HELOC you pay interest only on the amount of money you actually withdraw. HELOCs are adjustable loans; your monthly payment will change with fluctuating interest rates. The interest is generally tax deductible for loan amounts up to $100,000, and your home remains an asset for you and your heirs. As with a home-equity loan, your home acts as collateral and could be foreclosed if you default.

4. Sell Your Home (and Maybe Downsize)

The other options so far keep you in your existing home. If you’re willing and able to move, however, selling your home gives you access to the equity you have built. This option may be especially appealing if your current residence is too big for your current needs, too difficult/costly to maintain or has prohibitively expensive property taxes. The proceeds can be used to buy a smaller, more affordable home (or you can rent), and you’ll have extra money to save, invest or spend as needed. See Downsize Your Home To Downsize Expenses and Avoid the Downsides of Downsizing In Retirement.

5. Sell Your Home to Your Children

Another alternative to a reverse mortgage is to sell your home to your child (or children). One approach is a sales-leaseback agreement, where you sell the house, then rent it back using the cash from the sale. As landlords, your children get rental income and will be able to take deductions for depreciation, real estate taxes and maintenance.

Another approach is a private reverse mortgage, which works like a reverse mortgage, except the interest and fees stay in the family. Your children make regular payments to you, and when it’s time to sell the house, they recoup their contributions (and interest). Although it’s not free to set up this type of arrangement, it is typically much cheaper than getting a reverse mortgage through a bank, and the home remains an asset for your and your children.

Selling to your children has tax and estate-planning ramifications, so it’s important to work with a qualified tax specialist or attorney.

The Bottom Line

Reverse mortgages may be a good option for people who are “house-rich and cash-poor”, with lots of home equity, but not enough income for retirement. There are other options, however, that allow you to tap into the equity you have built up in your home.

Before making any decisions, it’s a good idea to research your options, shop around for the best rates (where applicable) and consult with a qualified tax specialist or attorney. See Is Relying On Home Equity In Retirement A Good Idea? , and Reverse Mortgage Or Home-Equity Loan?

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Reverse mortgages: Easy money or dumb move?

Faced with rising medical expenses and longer life expectancies, many seniors are turning to their single largest asset as a source of supplemental income: their home.

Indeed, reverse mortgages enable seniors who are 62 and older to convert a portion of the equity in their home into cash without having to sell.

As the name implies, such loans are structured as the mirror image of a regular mortgage. The lender makes payments to you in either a lump-sum amount or in monthly installments based on a percentage of your home’s appraised value. Eligible homeowners can also set up a reverse mortgage as a line of credit, providing access to emergency funds on an as-needed basis.

The money received can be used to pay off your existing mortgage loan and halt your monthly payment, supplement your retirement income, finance a home-improvement project or pay for health-care costs.

(Read more: Plan for financial independence, not retirement )

And the balance, including interest and financed closing costs, need not be repaid until you sell your home, no longer use it as your primary residence or pass away. Another perk? Proceeds are generally tax-free.

Yet such loans, while potentially solving a host of problems for retirees who are house-rich but cash-poor, also come with some pretty significant risks.

“Reverse mortgages are a useful tool for some people,” said Lori Trawinski, senior strategic policy advisor with the AARP Public Policy Institute. “They can enable retirees to age in place, but we always emphasize that these are loans, and as such, borrowers have obligations.”

Among those obligations, borrowers must stay current on their property taxes, homeowners insurance and any homeowner’s association dues and assessments. They must also keep their home well maintained. Failure to comply can send the loan into default and result in a foreclosure, according to Trawinski.

The amount you owe on a reverse mortgage also grows over time.

Interest is charged on the outstanding balance and added to the amount owed every month. Thus, your total debt increases as the loan funds are advanced to you and interest on the loan accrues.

(Read more: How do porn stars plan for retirement? )

That means fewer assets left in your estate to pass along to your heirs, which may not matter if you don’t intend to preserve your assets for future generations, said Marla Mason, a certified financial planner and vice president of Presidential Brokerage.

“If you plan to live out your life in your house and you don’t care about leaving a legacy behind, the reverse mortgage is a very valid option,” she said.

However, Mason explained, these loans come with a lot of fees.

The maximum origination fee allowed for a federally insured reverse mortgage, formerly called a Home Equity Conversion Mortgage, or HECM, is 2 percent of the initial $200,000 of the home’s value and 1 percent of the remaining value, with a cap of $6,000, according to the National Reverse Mortgage Lenders Association.

You will also owe a mortgage insurance premium fee based on the amount of funds withdrawn during the initial year. That fee is 0.50 percent of the appraised value of the home if you take no more than 60 percent of the amount available in the first year, and 2.5 percent if you take more than 60 percent of the available amount. On a $200,000 home, 2.5 percent amounts to $5,000, and 0.50 percent is $1,000.

(Read more: CNBC audience gets importance of retirement planning )

You will also owe a mortgage insurance premium annually, which accrues over time when the balance comes due. The annual premium is equal to 1.25 percent of the outstanding loan balance.

There are also appraisal fees, which vary by region but average around $450. If the appraiser determines that your house requires repairs, you will be required to complete the repairs as a condition of approval, as well.

Finally, there are closing costs, which are comparable to those of any mortgage loan and often amount to about $1,000. Some lenders will also charge a $35 monthly service fee for the life of the loan, but most have dropped that fee, according to Trawinski.

“These loans can be expensive,” she said, noting it all depends upon how much you borrow initially. “If you take out a lot of money upfront and exit the home in a very short period of time, it can be a very expensive way to borrow money.

(Read more: How to grow your 401(k) at any age )

“But if you borrow less and stay longer, the costs amortize over time, so it’s comparatively less costly,” she added.

Reverse mortgage loans come in three flavors: single-purpose reverse mortgages, which are offered by some states, local government agencies and nonprofit organizations; federally-insured reverse mortgages (HECMs); and proprietary reverse mortgages, which are private loans backed by the companies that develop them.

According to the Federal Trade Commission, single-purpose reverse mortgages are the least expensive option, but they’re not available everywhere and can be used for only one purpose, which is specified by the lender. The lender might indicate, for example, that the money can only be used to pay for home repairs, improvements or property taxes.

HECMs and proprietary reverse mortgages can be more expensive than traditional home loans, and the upfront costs can be high.

The amount of equity you can borrow in a reverse mortgage depends on your age; the type of reverse mortgage you select, such as lump sum, monthly payments or line of credit; and current interest rates. In general, the older you are, the more equity you have in your home and the less you owe on it, the more money you can take out, according to the FTC.

Other sources of cash
Before taking out a reverse mortgage, homeowners should consider alternatives, said Sean Keating, a certified financial planner and principal and founder at Patriot Financial Advisors. (All borrowers, in fact, must complete government-approved counseling before they can qualify for a HECM loan.)

For those with the means to pay off a home-improvement project or pricey dream vacation over the course of a few years, it’s generally less expensive to take out a home-equity loan, which involves only an appraisal fee and closing costs and does not deplete the value of your estate. The interest you pay is also generally tax deductible.

(Read more: Forget flashy cars and save up instead )

Seniors who assume a regular home-equity loan, however, must be prepared to make monthly payments until the loan is repaid.They should also be aware that failure to meet their home-equity loan obligations could result in the loss of their home.

Cash-strapped homeowners who are using a reverse mortgage as a last-ditch effort to hang on to their home should also think twice, Keating said.

“When an older couple cannot afford to live in the home anymore, getting a reverse mortgage will only delay the loss of the house and will leave them with no assets,” he said.

Better to sell the house and downsize, move in with a family member, take on a roommate or explore whether one of your adult children might be willing to purchase the family house through an installment sale, Keating added.

“The kids may not have a lump-sum payment to buy the house outright, but by making monthly installment payments, their parents get to stay in the home, collect a monthly income and the kids eventually own the house so it preserves that asset for the next generation,” he said.

Well-heeled homeowners with a highly appreciated home may benefit the most from a reverse mortgage, according to Keating.

(Read more: 50-somethings find growing nest egg gets easier )

Rather than using bond ladders to create consistent income-a strategy in which bonds’ maturity dates are evenly spaced to enhance liquidity-they can instead keep more of their money in higher-growth equities and use a reverse mortgage line of credit for living expenses during the months or years when the market is down. A more aggressive equity allocation also protects against longevity risk or the chance of outliving your savings.

“That way, you’re not pressured to sell in a down market,” said Keating, noting such strategy only works for homeowners with enough equity to cover one or two years’ worth of living expenses if necessary. “When the market rebounds, you can take out the amount of money you were expected to withdraw from your stock portfolio and pay back the reverse mortgage loan.”

Many state and local governments also offer low-interest and low-cost deferred-payment loans for improving or repairing your home that function like a reverse mortgage.

(Read more: Spoiled for choice? Less is more )

When mining your home for money, be aware of the fees you’ll pay, the impact on your estate and any alternatives that might be a better bet. At the end of the day, the math must make sense.

“For people who have a need for cash, reverse mortgages can be a useful way to access funds without having to sell their home,” Trawinski said. “But you are also spending down your equity, and the balance of your loan continues to grow, so it’s a good idea to think about alternative programs and sources of cash.”

-Shelly K. Schwartz, Special to CNBC.com

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Landing a Reverse Mortgage Just Got Tougher

The FHA insures some 90 percent of reverse mortgages purchased from private lenders. It says about 58,000 loans — or nearly ten percent of its reverse mortgages — were in default in 2012. That’s up from 2 percent ten years ago.

The FHA says it faces some $2.8 billion in losses from the defaults, which could force it to seek a bailout from the federal government next year.

By halting the fixed rate standard HECM, the FHA said in testimony before Congress late last year that it hopes to prevent more defaults in the future.

“This does limit an option for people thinking about reverse mortgages, but you can understand why the FHA is doing this,” Conway explained. “There’s some real concern about people spending their cash too soon and defaulting.”

Reverse mortgages are often thought of as a financial lifeline for seniors, especially with medical costs rising for an explosion of retiring baby boomers. (Read more: US Should Mandate Higher 401(k) Savings: Fidelity Exec)

The amount of the loan is based on the equity or sale value of the house, as well as the type of interest associated with the loan. Payments to borrowers are monthly for a specific time or as long as the borrower lives in the house.

The borrower retains title of the home, but the loan does have to be repaid when the person dies, sells the property or no longer uses the home as their primary residence.

Borrowers still have to pay property taxes, home owners and mortgage insurance and any other home maintenance fees. Before applying, potential borrowers must meet with a government approved housing agency for counseling.

Critics of reverse mortgages say they come at too high of a price. Interest rates can be steeper than traditional loans — current rates are between 4 and 12 percent. There’s also closing costs and up front fees, which can average anywhere between $2,000 and $15,000 depending on the lender and type of loan.

“Reverse mortgages are not a one-size-fits-all product,” said Steven Weisman, an elder law attorney and professor at Bentley University.

“For people who are cash poor and house rich and need the money to stay in their homes, the product may be helpful,” Weisman explained.

“However, reverse mortgages are a very expensive way to borrow money and should not be used as a first option when perhaps there are other, better options,” argued Weisman.

“Reverse mortgages are touted as a financial planning tool for seniors, however, I do not recommend them for my clients,” said Tara Wilson, general counsel at Wilson LF, a law firm specializing in estate planning.

“Not only are the transaction fees excessive, but they are usually a stopgap that leave seniors in a mush worse financial position when they are exhausted of their funds from the loan,” Wilson said.

Industry insiders say those critical of the loans don’t really understand them or the potential benefits they provide.

“Reverse mortgages are very popular and have something for everyone,” said Greg Smith, president of ORM, a reverse mortgage firm which handled some 5,000 reverse mortgage loans last year.

“These loans are no more complicated than any other type of loan. It’s a mainstream program and should be part of someone’s financial planning,” said Smith, whose firm uses actor Henry Winkler as its spokesman on TV commercials.

“They are a great cash flow tool even with the new restrictions. More people will take them out in the future,” Smith said.

Lending for HECM’s was down 25 percent in 2012. Only 54,591 loans were issued — the third straight year of falling loan volume and far below the peak year of 2009, when 115,000 loans were originated.

But more seniors are expected to apply for the loans in the years ahead. Seniors who need cash for health care and other expenses as they face limited retirement funds or job losses. (Read more: Social Security Cuts ‘Not Humane’)

The bottom line for Delores Conway is to proceed with caution.

“There could be better options but seniors should look at everything including reverse mortgages,” said Conway. “For some people they are great. They get a monthly payment, get to stay in their home. It could improve their financial situation. It just depends on what they want to do.”

[…]

Is a Reverse Mortgage Right For You?

A reverse mortgage can be a helpful option to people 62 years of age or older, enabling them to convert part of the equity in their home into cash while still maintaining homeownership. It is called a reverse mortgage because the mortgage flow is reversed: Instead of making monthly payments to a lender, the lender makes payments to the borrower in the form of a line of credit, a monthly payment, or a lump sum payment.

As long as you live in the home, you are not required to make any monthly payments toward the loan balance, but you must remain current on your tax and insurance payments.

Types of Reverse Mortgages HECM. HECM is a Home Equity Conversion Mortgage. It is federally-insured; created by, and regulated by, the U.S. Government Department of Housing and Urban Development (HUD). The mortgages are issued by the Federal Housing Administration (FHA). There are two types:

— HECM Standard: you receive money from the equity in your home and it is not paid back unless you die, sell, or move. Upfront costs are high–the first mortgage insurance premium payment is required at 2 percent. On a $200,000 home, that would be $4,000. The ongoing insurance premium is 1.25 percent annually of the outstanding loan balance. This mortgage insurance premium payment must be kept current.

— HECM Saver: created in 2010, for homeowners borrowing a lower amount (10 to 18 percent less than the Standard), this version offers significantly lower upfront fees of only 0.01 percent. On a $200,000 home, that would be only $20. The ongoing mortgage insurance premium is equivalent to the Standard’s at 1.25 percent annually. Proprietary

— These are private reverse mortgages backed by the companies that develop them

— Upfront costs are high

— There is no income or medical requirements and can be used for any purpose

— Amount you can borrow is based on age, type of mortgage, appraised value of the home, and current interest rates. Single Purpose

— This reverse mortgage is offered by some state and local government agencies and nonprofits. It is the least expensive and is for homeowners with low to moderate income

— It can be used for only one specific purpose and must be approved by the lender. Examples include an identified home improvement, home repair, or a tax payment WHO QUALIFIES

— Homeowners 62 years of age or older

— Single-family home occupied by borrower or 2 to 4 unit home with one unit occupied by the borrower

— HUD-approved condominiums and manufactured homes meeting FHA requirements

— Your home is paid off or you have a low enough balance that you can pay it off at closing from the reverse mortgage

— You must receive consumer counseling information prior to obtaining the loan. There is a fee of approximately $125, which can be waived if eligible. All aspects of the process will be explained, including all fees, premiums, upfront charges, and the cost of the loan over its term.

Loan Features

— Funds are not taxable

— Funds do not affect your Social Security or Medicare benefits

— Some mortgages are fixed rate (based on the current interest rate) and some are variable rates

— You retain title to your home

— No monthly payment

— Loan is repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as principal residence

— HECM loans provide that a borrower can be placed in a nursing home or other medical facility for up to 12 consecutive months before the loan is due

— You are responsible for taxes, insurance, utilities and maintenance

How You Receive Payments

Except for the Single Purpose Reverse Mortgage, which limits you to one approved expenditure, you can select:

— Fixed monthly cash advances over a specified period

— Fixed monthly cash advances as long as you reside in the home

— A line of credit available for your use

— A combination of monthly payments and a line of credit

Fees and Other Costs

— Origination fee

— Mortgage insurance premium

— Closing costs

— Appraisal fee

— Possible service fees over the term of the loan

Drawbacks

— The amount you owe on a reverse mortgage grows over time

— Interest is charged on the outstanding balance and added to the amount you owe each month

— Your total debt increases as the funds are paid to you and interest on the loan accrues

— The monthly mortgage insurance premium is based on a percentage of the growing balance

— If you don’t pay taxes, insurance premiums, or fail to maintain the condition of your home, your loan may become due and payable

Payment Due

— Upon death of last surviving borrower

— You move from your residence

— You sell the home

According to the National Reverse Mortgage Lenders Association, the good news is that no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This is referred to as non-recourse. If the HECM reverse mortgage balance exceeds the appraised value of the home at the time the borrower dies, moves, or sells, the federal government absorbs the loss. The government pays for it with proceeds from its insurance fund, which the borrower pays into monthly. This may be different with some proprietary (private) reverse mortgage lenders, so be sure you know what you are getting.

How to Cancel

After the loan closes, you have a three-day window during which you can cancel. Mortgage lenders may have different processes for canceling, so obtain contact and detailed information before leaving the closing. Generally speaking, you will want to notify the lender in writing, send the letter by certified mail, and ask for return receipt. Keep copies of correspondence and any enclosures for your records.

Is This For You?

There are certainly times when this will make sense for certain homeowners. Many people who have chosen this financial option as a way of freeing up more money in their retirement years are satisfied with their choice.

Unfortunately, there are also those who may have regrets for having gone this route because they listened to someone who did not have their best interest at heart.

If you are interested in getting more details about a reverse mortgage, contact a lender that is a member of the National Reverse Mortgage Lenders Association (NRMLA).

You can also get more information at www.Hud.gov.

Michal Cheney is a frequent contributor to Go Banking Rates, Credit Card Offers IQ, and Dough Roller, where you can find the best online banks to manage your money.

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Georgetown Mortgage Adds Texas Reverse Mortgage to Offerings

Reverse mortgages are options for people over the age of 62 who need extra cash and want to stay in their home.

GEORGETOWN, TEXAS (PRWEB) November 28, 2012

Georgetown Mortgage

announces the addition of

Texas reverse mortgages

to its lineup of mortgage offerings.

The bank is offering reverse mortgages throughout the state of Texas to people aged 62 and older.

Under the loan program, senior citizens can obtain a loan for 55 to 75 percent of their appraised home value without having to repay the loan so long as they still live in their home. Reverse mortgages usually result in the home owner receiving between $50,000 and $400,000 in cash while still maintaining complete ownership of their home.

According to the bank, reverse mortgages can be used to pay for daily expenses, travel, education, debts and more.

“Reverse mortgages are an excellent option for many seniors who need cash but still want to live in their home,” said Kristi France, a Georgetown Mortgage loan originator. “We once did a reverse mortgage for a senior whose wife was diagnosed with cancer and needed the money to try a very experimental treatment on her to save her life. The reverse mortgage enabled them to cash out so they could pay for the treatment. They were very happy.”

Reverse home loans allow homeowners to never have to repay the loan so long as they live in their home. When the last surviving spouse dies, the estate repays the loan, usually from the sale of the home.

To read more about Georgetown Mortgage’s loan programs, click here.

About Georgetown Mortgage

Georgetown Mortgage is a full-service mortgage bank in Georgetown, Texas. The bank provides home mortgages, refinances, construction loans and reverse mortgages to people across the state of Texas. Georgetown Mortgage aims to find the best mortgage solutions for its clients through the guidance of a personal loan consultant who works with the customer from beginning to end of the mortgage process. Although Georgetown Mortgage offers big bank products and services, its consultants pride themselves on offering the friendly service of a local bank.

###

Julianne Coyne
Fahrenheit Marketing
512-777-4325
Email Information

[…]

Georgetown Mortgage Bank Adds Texas Reverse Mortgage to Offerings

Reverse mortgages are options for people over the age of 62 who need extra cash and want to stay in their home.

(PRWEB) November 01, 2012

Georgetown Mortgage Bank

announces the addition of

Texas reverse mortgages

to its lineup of mortgage offerings.

The bank is offering reverse mortgages throughout the state of Texas to people aged 62 and older.

Under the loan program, senior citizens can obtain a loan for 55 to 75 percent of their appraised home value without having to repay the loan so long as they still live in their home. Reverse mortgages usually result in the home owner receiving between $50,000 and $400,000 in cash while still maintaining complete ownership of their home.

According to the bank, reverse mortgages can be used to pay for daily expenses, travel, education, debts and more.

“Reverse mortgages are an excellent option for many seniors who need cash but still want to live in their home,” said Kristi France, a Georgetown Mortgage Bank loan originator. “We once did a reverse mortgage for a senior whose wife was diagnosed with cancer and needed the money to try a very experimental treatment on her to save her life. The reverse mortgage enabled them to cash out so they could pay for the treatment. They were very happy.”

Reverse home loans allow homeowners to never have to repay the loan so long as they live in their home. When the last surviving spouse dies, the estate repays the loan, usually from the sale of the home.

To read more about Georgetown Mortgage Bank’s loan programs, click here.

About Georgetown Mortgage Bank

Georgetown Mortgage Bank is a full-service mortgage bank in Georgetown, Texas. The bank provides home mortgages, refinances, construction loans and reverse mortgages to people across the state of Texas. Georgetown Mortgage Bank aims to find the best mortgage solutions for its clients through the guidance of a personal loan consultant who works with the customer from beginning to end of the mortgage process. Although Georgetown Mortgage Bank offers big bank products and services, its consultants pride themselves on offering the friendly service of a local bank.

###

Julianne Coyne
Austin Web Design
512-777-4325
Email Information

[…]

Reverse Mortgages: Risky for Boomers?

Reverse mortgages were once considered a last-resort option for cash-strapped seniors in their late seventies and eighties. Now many recession-battered baby boomers are looking to these loans to shore up savings and pay off credit cards and other debt. New products — in particular, fixed-rate lump-sum loans — are a big lure.

But while the shifting landscape offers opportunities for younger borrowers, it also poses risks. Over time, these large loans could devour home equity, leaving borrowers short on cash in their later years. “It’s very important that people think strategically and ensure they aren’t just solving immediate problems,” says Barbara Stucki, vice-president of home equity initiatives for the National Council on Aging.

A reverse mortgage lets you tap your home equity in the form of a lump sum, line of credit or monthly draws. Applicants must be 62 or older, and there are no income or credit requirements. The loan does not have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months.

[More from Kiplinger: QUIZ: Are You Saving Enough For Retirement?]

Nearly all reverse mortgages are insured by the Federal Housing Administration. With the Home Equity Conversion Mortgage, the government pays the lender if the house sells for less than the loan’s balance. When the loan comes due, the homeowner will never owe more than what the home is worth. Any leftover equity will go to the homeowner or to the heirs.

Consumers can choose between two types of reverse mortgages: the HECM Saver and the HECM Standard. One of the downsides of reverse mortgages had been their large upfront fees. But the Saver, launched in October 2010, charges just 0.01% for an upfront mortgage insurance premium. The Standard charges 2%. Both have an annual 1.25% premium.

However, the Saver offers a lower loan amount than the Standard. Depending on one’s age, a Saver borrower will receive 51% to 61% of the home’s appraised value or of the FHA loan limit of $625,500, whichever is lower. The Standard’s loan amount ranges from 62% to 77%. With both products, the older the homeowner, the more money he or she can borrow.

Historically, most consumers, many of them widows, took reverse mortgages as monthly draws or a line of credit. “The money was used to supplement income,” says Stucki.

Although lenders were allowed to offer lump-sum loans in the past, few lenders offered them. That switched in 2008 when new federal rules changed how lenders could structure lump-sum loans, boosting the demand in the secondary market. Plus, many lenders have slashed fees on fixed-rate lump-sum products. Today, 68% of reverse mortgages are taken as fixed-rate lump-sum loans compared with less than 3% in 2008, according to a report by the new federal Consumer Financial Protection Bureau.

The large payouts have lured younger homeowners. By 2010, 21% of the seniors in reverse mortgage counseling were 62 to 64, compared with 6% of borrowers in 1999, according to a study by the MetLife Mature Market Institute and the National Council on Aging.

The Pitfalls for Younger Borrowers

But younger borrowers taking lump-sum loans could lead to big problems. In 10 or 20 years, with the compounding of interest, little or no home equity could remain. Many borrowers may not be able to raise enough funds from a home sale to move to a retirement community or an assisted-living facility. Or they could run into trouble if they’re short on cash for health expenses, home repairs or property taxes in later years — traditional uses of late-in-life reverse mortgages. “There may be some folks who will struggle,” says Megan Thibos, a policy analyst at the Consumer Financial Protection Bureau and author of its report.

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For extra cash, a borrower could refinance the existing reverse mortgage, says Peter Bell, president of the National Reverse Mortgage Lenders Association. But more money may be available only if the home value rises or interest rates drop. The borrower’s older age would help provide a boost.

Besides wanting the payout, many younger borrowers are choosing a lump sum because it offers a fixed interest rate. The line of credit and monthly-draw options require an adjustable rate, which generally comes with a 10% cap.

According to All Reverse Mortgage’s online calculator, a 62-year-old borrower with a $400,000 home could take a fixed-rate Standard loan with no fees at an interest rate of 4.99% and get a lump sum of $250,000. After nearly $12,000 in fees are wrapped in the loan amount, the same borrower could get a credit line of $238,050 at an initial adjustable 2.48% rate.

But while a fixed-rate loan may be fine for a regular mortgage, the interest on a reverse mortgage eats into home equity. With a fixed-rate reverse mortgage, the lump-sum loan starts accruing interest from the start. On the $250,000 lump-sum example above, in ten years that balance will climb to $465,841. Assuming 3% home price appreciation, that would leave about $72,000 in equity based on the home’s $537,566 value. In 20 years, the loan balance would reach $868,031, exceeding the home’s $722,444 value.

Borrowers may be better off with the adjustable-rate loan and its flexible payout. With the line of credit, you only accrue interest on the amount you tap. Any unused amount grows at the loan’s rate.

Let’s say the borrower above takes $12,000 a year from the credit line. After ten years, even with the fees, the loan balance grows to $164,824, and after 20 years, it reaches $385,309. Assuming 3% home price appreciation, the borrower is likely to have a significant amount of equity left when the loan comes due.

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A borrower must pay off an existing mortgage when taking out a reverse mortgage and can use the proceeds to do so. Younger borrowers are more likely than older borrowers to have a traditional mortgage and many are considering a reverse mortgage to pay off an existing loan, according to the MetLife study. But while you’ll be released from monthly mortgage payments, you haven’t reduced your debt, says Stucki. “You’re really just transferring the existing forward mortgage into the reverse mortgage,” she says. “You are deferring the date it has to be paid until you move.”

The consumer bureau’s report also notes that some homeowners, who may not have needed all of the borrowed money, may be tempted to invest part of the proceeds. They could be earning less on the money than the interest they are paying on their loans, and would be better off with a line of credit.

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