Reverse Mortgages Help Seniors Tap Home Equity
Harry Short describes the reverse mortgage that he secured on his Vacaville, Calif., home half a dozen years ago as “a lifesaver.” Refinancing that reverse mortgage recently also was a smart move, he says.
“I nearly dropped my teeth,” Short said. “I didn’t realize my house had appreciated so much.”
Reverse mortgages are loans made only to homeowners who are at least age 62. These loans allow seniors to tap the value of their home equity without selling the house or saddling themselves with a monthly payment, as they would be if they took out a home equity loan. But the loans are expensive and advisable only for those who have a lot of equity in their home and little cash.
With a reverse mortgage, the bank pays the homeowner, rather than the other way around. Homeowners can receive the money from the loan in monthly payments from the bank, as a lump sum that they can tap at will or a combination of the two.
In return, the bank gets an ownership stake in the home equal to the amount of the loan outstanding plus interest. But the bank can’t collect on the loan until the homeowner moves or dies. At that point, the home must be sold or the heirs must pay off the loan balance. The bank guarantees that the loan amount never will exceed the value of the home.
Tapping a Good Deal
These days, low interest rates and rising home prices have made reverse mortgages a better deal than ever.
Even though the fees associated with a reverse mortgage are high -- and they are as high with a refinanced reverse mortgage as with a newly originated one -- many homeowners will find that they can receive significantly more from a reverse loan today than they could only a few years ago.
Short, for example, was able to boost his reverse loan by about $30,000.
“Conditions today make it ideal for a number of existing reverse mortgage borrowers to refinance their loans,” said Peter Bell, president of the Nation- al Reverse Mortgage Lenders Assn.
That’s because the amount a homeowner can borrow through a reverse mortgage is based in part on the value of the home and the level of interest rates.
Property values matter because they represent the bank’s collateral for the loan. (The higher the property value, the more than bank is willing to lend.) Meanwhile, the interest rate determines how fast the loan balance grows. (The lower the interest rate, the less the homeowners or their heirs must pay the bank.)
The borrower’s age is another important factor because the bank can’t get repaid -- or collect interest payments on the loan -- until the borrower dies or moves.
In simple terms, when interest is accumulating at an 8% rate, a bank that lends $100,000 is owed $222,000 at the end of 10 years. When the rate is 5%, the loan balance is $164,000.
Because the bank has a vested interest in whether the home will be worth as much as the loan at the end of the term, a homeowner with a 10-year life expectancy and a $200,000 home can borrow about $121,000 when interest rates are 5% but just $90,000 if rates are 8%.
Lenders caution that reverse mortgages are not for everyone. They are ideal for borrowers such as Short who have little savings but substantial equity in their homes and no compelling urge to leave their house free and clear to heirs.
For Short, getting a reverse mortgage has provided a nicer lifestyle than Social Security and his modest savings would allow.
In today’s market, a 62-year-old with a home worth $280,000 could get about $155,000 in a lump sum from a reverse mortgage or could choose payments of $860 a month for life, said Lloyd Daniels, president of California Reverse Mortgage Co. in Sacramento.
Older homeowners would get more -- about $1,036 a month starting at age 70 or about $1,200 starting at 75, Daniels said.
But the high cost of the loans is one reason many seniors consider them only as a last resort. Although reverse mortgages have been around for more than a decade, only about 70,000 have been made.
Proceed With Caution
The costs unique to a reverse mortgage amount to about 4% of the home’s value (not the loan amount, which always will be less than the home’s actual value). In addition, borrowers pay an average of $1,600 in closing costs such as appraisal fees and title insurance, said Dave Carey, product manager for reverse mortgages at Fannie Mae in Washington.
Translation: Getting a reverse loan on a $150,000 home would cost nearly $8,000, he said, not including interest.
Although most of that cost usually is financed as part of the loan, it reduces the amount of cash the borrower receives.
“We recommend that homeowners consider their options carefully,” Carey said. “A reverse loan is more complicated” than a regular mortgage.
Industry experts suggest that borrowers contemplating reverse mortgages discuss the decision with their heirs and with loan counselors, who can be contacted through senior organizations or state offices on aging.
Cash-strapped homeowners who want to consider reverse mortgages can learn more about them -- and calculate the maximum they could borrow -- at the National Reverse Mortgage Lenders Assn. Web site, www .reversemortgage.org.
“Reverse loans are still new to most people,” Bell said. “But with rates being so low and home values so high, we think people might want to take a look.”
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Kathy M. Kristof welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012; or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit The Times’ Web site at www .latimes.com/perfin.
