Today’s borrowers who use reverse mortgages represent every level of the economic spectrum.
Chris Warner, a reverse-mortgage consultant with MetLife Bank in Bethesda, Md., says he has helped homeowners in countless situations, from a couple borrowing against their multimillion-dollar Georgetown home in order to make a substantial donation to a university to an elderly low-income woman who needed money to repair her home and her health after a home invasion. That woman not only was able to fix her home. but also had enough home equity to receive substantial monthly cash payments through a reverse mortgage even after she had paid for repairs.
“While few traditional-mortgage borrowers give me a hug after the closing, it is very common to have that happen after we close on a reverse mortgage,” Mr. Warner says. “Most people are just so relieved to have that financial pressure relieved.”
Reverse mortgages are available to homeowners age 62 and older. Approval for a reverse mortgage is based on a sliding scale tied to the homeowners’ age and the appraised value of the home, not the creditworthiness of the borrowers or their income.
A reverse mortgage enables the homeowners to access the equity in their home. Rather than making a monthly mortgage payment, the homeowners receive money from the lender in the form of a lump sum, a line of credit or monthly income. Though interest charges are applied to reverse mortgages, the interest is added to the loan balance and will not have an impact on the payments received by the homeowners.
When the owners move or die, the loan must be repaid by the owners or their heirs or by selling the property. If there is equity left over after the loan is repaid, it is returned to the owners or their heirs.
As long as the owners maintain the home and pay their property taxes and homeowners insurance, they continue to own the property and will always be able to live in it. As with any other homeowner, failure to pay property taxes could lead to a foreclosure.
“A reverse mortgage is different from a standard mortgage because the property stands for the loan, not the homeowners,” says Gary Onks, branch manager of Security One Lending in Fredericksburg, Va. “This is a total non-recourse loan, so that even if the appraised value of the home drops below the reverse mortgage balance, no other assets from the owners or the heirs can be attached to repay the loan. The loan will be repaid by the sale of the home, and if a balance is still due, this will be paid to the lender by the FHA insurance fund.”
While some senior homeowners have eagerly embraced the option of a reverse mortgage to borrow against the equity in their homes, others have been wary, worried about the high upfront costs of the loan and misunderstanding some of the details about how these loans work.
FHA-insured reverse mortgages were introduced in 1989, although the product has been around since 1960, says Russell Rothstein, a division director for American Home Bank Reverse in Rockville, Md. Ninety-nine percent of all reverse mortgages are FHA-insured mortgage loans, known as Home Equity Conversion Mortgages, or HECM.
“The perception has been that reverse mortgages are more expensive in terms of fees and closing costs than other mortgages, but the biggest cost has been the mortgage insurance required by the FHA,” Mr. Rothstein says. “The other costs are similar to the closing costs on a regular mortgage.”
In 2010, the FHA introduced the HECM Saver mortgage, with lower upfront costs in exchange for a lower borrowing limit. Upfront mortgage insurance costs on a standard reverse mortgage are 2 percent of the appraised property value, while the saver version requires an upfront mortgage insurance premium of .01 percent of the home value. Both reverse mortgages require a monthly insurance premium charged at an annual rate of 1.25 percent of the outstanding loan balance. Reverse mortgage borrowers generally wrap all fees and closing costs into the loan amount, with the exception of the appraisal fee.
“In addition to the saver option for a reverse mortgage, a couple of other changes that have taken place in the past couple of years have created a new enthusiasm for these loans,” Mr. Warner says. “First, a fixed-rate option was introduced, which a lot of people prefer over an adjustable-rate mortgage. Second, a number of lenders, including MetLife, decided to lower the origination fees and servicing fees on a reverse mortgage to make them more attractive to borrowers.”
Mr. Rothstein says that while borrowers can benefit from the reduced cost on a saver reverse mortgage (saving $12,000 on a $600,000 home, for example), they also will have their borrowing power reduced by about 20 percent compared with what they can borrow on a standard reverse mortgage.
“The saver reverse mortgage works best for people who need a smaller amount of money,” Mr. Rothstein says.