Dispelling the Ever-Present Myths of Reverse Mortgages

To all:

I am always scouring financial news, mortgage reports, senior citizen need articles to bring the best, and most updated information to this blog. To encourage seniors who can make good use of a reverse mortgage, and to ward off others, who may benefit from other financial solutions.

Today I saw the following article from the business section of the Lubbock Avalanche-Journal, and thought it would be good to share the best of it with you.

Some of these myths, such as the bank taking a seniors home or selling it, actually go back over 25 years to the early days when reverse mortgages were small private loans. But since HUD/FHA and Congress made it a government regulated loan, senior homeowneres are protected from this.

Another ongoing myth is that adult children do not want their parents to “mortgage up” their inheritance. Actually, a review of the literature shows that most adult children want their parents to be independent as long as possible, enjoy their retirement years and use their assets for their own enjoyment, or to defray any heavy health care costs.

Stay tuned to this website for more information regarding the uses and dynamics of parents-adult children and reverse mortgages.

I hope you find today’s article helpful and informative.

And, enjoy today to the fullest!

Gloria

BUSINESS FOCUS
Lubbock Avalanche-Journal
Monday, May 19, 2008
Story last updated at 5/19/2008 – 1:58 am
05/19/08

As reverse mortgages have increased in popularity, so have the myths about these unique loans. While there’s better information available today, many seniors and their adult children who are exploring reverse mortgages still encounter a host of misconceptions. Here’s a look at common myths and the facts:

1. The bank takes the house or the borrower can lose the house.

With a reverse mortgage, the borrower retains title throughout the life of thereverse mortgage. The borrower cannot, as a result of the reverse mortgage, be
forced out of the home as long as property taxes and insurance are paid and the
home is maintained in reasonable living condition. Once the borrower permanently
moves out of the home, the loan must be repaid. Most properties secured by
reverse mortgages still have equity when a maturity event occurs; the borrower
or heirs can opt to sell the home to repay the loan and preserve this equity for
the benefit of the borrower or his/her estate.

2. The home must be paid off or be debt-free to qualify.

Reverse mortgages convert home equity into cash. As long as there is sufficient
equity in the property, the homeowner may be eligible for a reverse mortgage. In
fact, many seniors use a reverse mortgage to pay off an existing mortgage in
order to eliminate a required monthly mortgage payment.

3. When a reverse mortgage becomes due, the bank sells the home.

The borrower is in control of the home and retains title, not the bank or
lender. While it’s common for the borrower or heirs to sell the home to repay
the loan, it’s a decision they make. They might instead refinance the home to
repay the loan.

4. It’s cheaper to move to a smaller house.

Seniors need to analyze their costs carefully before making this assumption.
Selling a home and moving can be expensive. The typical real estate commission
of 6 percent, combined with moving expenses, can make finding a new home a
serious financial undertaking.

5. Children want the home or don’t feel comfortable with their parents obtaining a reverse mortgage.

Seniors should talk with their family about reverse mortgages. Often adult
children are pleased their parents have a financial solution available to help
them live more independently and financially secure.

6. The borrower could owe more than the house is worth.

Due to built-in safeguards, the borrower or his estate can never owe more than
the value of the home upon repayment. In addition, the HECM product are insured
by the Federal Housing Administration.

7. Reverse mortgage processes will impact Social Security and Medicare benefits.

Generally, a reverse mortgage will not affect regular Social Security payments
or Medicare benefits, although some Federal Supplemental Security Income of
state programs may be impacted. Borrowers should speak with a financial advisor
or the appropriate agencies.

8. There are restrictions on how the money is used.

Actually, there are no restrictions, and proceeds from the reverse mortgage can
be used for any purpose – travel, to pay off debt, make purchases or just live
more comfortably.

9. Once proceeds are received, taxes will need to be paid.

Since the proceeds are already the borrower’s money, they are tax-free*.

10. Reverse mortgages are only for seniors in need or for the “house rich, cash poor.”

Reverse mortgages are excellent financial planning tools that have been used by
homeowners for all walks of life to enhance their retirement years.

Burl D. Greaves is a Reverse Mortgage Specialist for Financial Freedom Senior Funding Corporation.

*Consult your tax advisor.

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News: USA TODAY Report on Reverse Mortgages

Seniors tap equity with reverse mortgages
By Sue Kirchhoff, USA TODAY
(Excerpts)

WASHINGTON — Even in the midst of a housing recession, one segment of the mortgage market has been booming: reverse mortgages, which provide a line of credit or monthly payments to seniors 62 or older, using an existing home as collateral…The Federal Housing Administration, which insures about 90% of reverse mortgages, announced a tenfold jump in the loans from 2000 to 2006…

“We both have pensions. We both have Social Security. And we could exist on that, and that’s (all) we could do: exist,” says Joan Borden, 74, of Kings Park, N.Y.

She and her husband, Noel, also 74, took out a reverse mortgage with a line of credit three years ago. They’ve used the money for home improvements, trips to see their children and gifts for their grandchildren.

The Bordens always expected to leave their home as their legacy to their children. Instead, their kids were the ones who suggested they take out the loan to improve their quality of life.

“The one thing that holds people back: They think that the government will own their home, and that’s not true,” says Joan. “The other thing, if you can believe it, is that their children talk them out of it. … We’ve heard this from so many people.”

Unlike a traditional home-equity loan or second mortgage, borrowers don’t repay reverse mortgages until they sell their home, move or take some other action that means the house is no longer their main residence. Lenders collect the loan principal plus interest when a home is sold. FHA insurance protects lenders against loss if borrowers’ equity withdrawals exceed the value of a home when it is sold.

While most reverse mortgages are adjustable-rate products, lenders are beginning to develop fixed-rate and larger-denomination loans. Additionally, many reverse mortgages don’t require a credit or income test. As an added protection, borrowers taking out FHA-insured products undergo mandatory financial counseling. Some states also require counseling.

Further, federal officials estimate millions more borrowers could become eligible for loans if Congress passes legislation raising the current $362,790 home-value cap on FHA-insured products.

“We’re just starting to scratch the surface,” says David Peskin, CEO of the Senior Lending Network. “The baby boomer generally is accustomed to debt, so they’re walking into this understanding the concept of a mortgage.”

Lenders are gearing up, holding training sessions for brokers and hiring celebrity spokesmen such as actors James Garner and Robert Wagner. Ginnie Mae, a government-sponsored entity charged with creating a market for bonds backed by federally insured or guaranteed mortgages, is trying to rev up more reverse mortgage bonds. Mortgage giant Fannie Mae also creates a market for the loans.

“Growth has been really fantastic, but we’re still in a situation where the market is very new. … We’re at less than 1% of potential customers,” says David Cesario, executive vice president of 1st Reverse Financial Services.

Cautions for consumers

The jump in lending also comes with some cautions.

AARP says the mortgages can be a boon but adds that they can have higher rates and fees than some other loans.

Reverse mortgages have been seen as a way to help seniors who are asset rich but cash poor remain in their homes and cover medical bills, home upkeep and daily living costs. A surprisingly large number of borrowers are using the loans for other reasons, or carrying debt into retirement.

A “use we had not anticipated is that many homeowners also use all of the reverse mortgage proceeds that they are eligible to borrow at closing to pay off any existing conventional or ‘forward’ mortgage,” says Bronwyn Belling, director of the Reverse Mortgage Education Project for the AARP Foundation.

Peskin says about half of his customers use reverse mortgages to help
retire an existing mortgage.

Cesario says more-affluent retirees seeking jumbo reverse-mortgage products may not want to touch their stock investments to finance current spending. They can effectively use reverse mortgages to cover conventional mortgage payments of a second house without affecting cash flow. Reverse-mortgage lenders’ websites also offer testimonials from people who used the loans to finance international trips, for example.

Meg Burns, FHA director of single-family program development, notes that pricing is becoming more competitive as the market expands.

“One of the things that we hear over and over about the baby boomer population is that they’re entering their retirement years with less savings,” Burns says, because of lifestyle choices as well as declining pensions and other financial issues.

“We see more people who maybe don’t desperately need it … but it’s somebody who feels that they could live more comfortably if they tapped into their equity,” Burns says.

Burns notes she has heard from seniors that reverse mortgages have allayed their fear that they won’t be able to cover their bills in case of an emergency. Burns expects the FHA share of the reverse mortgage to decline over time as the overall market expands and more lenders offer their own specialty products.

A recent report by the National Reverse Mortgage Lenders Association estimated that Americans 62 and older hold $4.3 trillion in home equity.

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