Converting home equity into cash has been a challenge for homeowners since the real-estate downturn, but a growing number of lenders are quietly reviving a loan for seniors that does just that: the reverse mortgage.
Reverse mortgages allow homeowners who are at least 62 years old to draw down on their home's equity in exchange for cash in several ways, including one lump sum, a line of credit or monthly payments.
Compared to a few years ago, the total number of reverse mortgages is small. But lending has been picking up. In 2011, MetLife Bank originated 10,512 reverse mortgages, up 171% from the previous year, according to data firm Reverse Market Insight. The firm tracks reverse mortgages insured by the Department of Housing and Urban Development, or about 95% of total originations. Other lenders also had sharp increases. Quicken Loans' company One Reverse Mortgage doled out 4,619, up 43%, while Urban Financial Group and Genworth Financial Home Equity Access, a subsidiary of Genworth Financial, increased lending by 80% and 96%, respectively.
And in June, housing lenders US Mortgage Corporation, based in Melville, N.Y., and Irving, Calif.-based Greenlight Financial Services each launched reverse mortgage divisions.
This comes in spite of recent moves by HUD to lower the amount homeowners can borrow. The limit is now 62% of a home's value for a 62-year old; an 80-year-old can borrow up to 72% of the home's value.
With falling home values making it difficult for homeowners to refinance or sell -- and the stock market not delivering great gains -- the loans are understandably attractive to many Americans. Lenders say reverse mortgages can be a portfolio diversifier that provides retirees with extra income to supplement their 401(k).
But there are good reasons why advisers have historically recommended them only as a last-gasp way to raise cash.
For one, because borrowers are still responsible for property taxes and homeowner's insuran! ce, if t hey fall behind, lenders can foreclose on the property, says Karin Hill, director of single family program development at HUD.
Also, reverse mortgages carry hefty fees. Origination fees can be up to 2% of a home's value, capped at $6,000, says John Lunde, president of RMI. Closing costs vary but are often about 2% of the loan.
There are also mortgage-insurance fees charged by HUD. HUD charges an upfront mortgage insurance premium of 2% of the property's value plus another insurance fee of 1.25% annualized rate that accrues monthly on the loan's outstanding balance. HUD also offers a reverse mortgage option with a lower upfront mortgage insurance premium that's just 0.01% of the property's value for smaller loans; qualifying will vary based on several factors.
Most fees can be rolled into the mortgage, but the loan plus interest must be paid back to the lender when the homeowner passes away, sells the home or moves out. Interest rates on these loans currently average 5% for a fixed-rate reverse mortgage and around 2.5% for an adjustable rate. A 65-year-old with a home that's worth $500,000 who took an initial advance of $303,500 at a 5% fixed rate could owe $978,190 (including interest and fees) after 18 years, says Lunde. If a homeowner or his heirs can't sell the home for this amount, HUD will pay the difference between home's value and the outstanding balance to the lender; that money comes from the HUD insurance fees borrowers pay during the life of the loan.
Some advisers say a home-equity loan, which allows homeowners to borrow against some of their home equity in one lump sum, is often the safer bet. Closing costs tend to be smaller than on a typical reverse mortgage and in some cases lenders can waive them, says Buz Livingston, a certified financial planner in Santa Rosa Beach, ! Fla. The downside? Average interest rates on home-equity loans are currently higher.
There are situations where reverse mortgages make sense. Financial planner Mike McGervey of North Canton, Ohio, says he thinks they can be a good solution for people in their 80s, who are usually able to convert more home equity into cash than younger borrowers.
In some cases, homeowners sign up for a reverse mortgage as a lump sum to pay off their mortgage. That is what Joseph Rinaldi, 62, did when he signed up through US Mortgage Corp. three months ago. Now, rather than paying $2,200 per month in mortgage payments, Mr. Rinaldi, who lives in Mamaroneck, N.Y., says he and his wife use that money for everyday living expenses. "This saved mine and my wife's life," he says.
For homeowners who are convinced a reverse mortgage is right for them, advisers say there are reasons to sign up sooner rather than later, since qualifying may soon get more difficult. HUD is developing guidelines that will lead to more extensive underwriting, which could be announced as soon as this year. Details haven't been released yet, but industry experts say they could require lenders to check applicants' income and assets to make sure they can cover ongoing costs of the home, including taxes and insurance.
In November, MetLife was the first lender to implement additional requirements, such as providing income or asset documentation (like Social Security payments and dividends) and a list of monthly living expenses, and experts say more lenders could follow.
Reverse mortgages allow homeowners who are at least 62 years old to draw down on their home's equity in exchange for cash in several ways, including one lump sum, a line of credit or monthly payments.
Compared to a few years ago, the total number of reverse mortgages is small. But lending has been picking up. In 2011, MetLife Bank originated 10,512 reverse mortgages, up 171% from the previous year, according to data firm Reverse Market Insight. The firm tracks reverse mortgages insured by the Department of Housing and Urban Development, or about 95% of total originations. Other lenders also had sharp increases. Quicken Loans' company One Reverse Mortgage doled out 4,619, up 43%, while Urban Financial Group and Genworth Financial Home Equity Access, a subsidiary of Genworth Financial, increased lending by 80% and 96%, respectively.
And in June, housing lenders US Mortgage Corporation, based in Melville, N.Y., and Irving, Calif.-based Greenlight Financial Services each launched reverse mortgage divisions.
This comes in spite of recent moves by HUD to lower the amount homeowners can borrow. The limit is now 62% of a home's value for a 62-year old; an 80-year-old can borrow up to 72% of the home's value.
With falling home values making it difficult for homeowners to refinance or sell -- and the stock market not delivering great gains -- the loans are understandably attractive to many Americans. Lenders say reverse mortgages can be a portfolio diversifier that provides retirees with extra income to supplement their 401(k).
But there are good reasons why advisers have historically recommended them only as a last-gasp way to raise cash.
For one, because borrowers are still responsible for property taxes and homeowner's insuran! ce, if t hey fall behind, lenders can foreclose on the property, says Karin Hill, director of single family program development at HUD.
Also, reverse mortgages carry hefty fees. Origination fees can be up to 2% of a home's value, capped at $6,000, says John Lunde, president of RMI. Closing costs vary but are often about 2% of the loan.
There are also mortgage-insurance fees charged by HUD. HUD charges an upfront mortgage insurance premium of 2% of the property's value plus another insurance fee of 1.25% annualized rate that accrues monthly on the loan's outstanding balance. HUD also offers a reverse mortgage option with a lower upfront mortgage insurance premium that's just 0.01% of the property's value for smaller loans; qualifying will vary based on several factors.
Most fees can be rolled into the mortgage, but the loan plus interest must be paid back to the lender when the homeowner passes away, sells the home or moves out. Interest rates on these loans currently average 5% for a fixed-rate reverse mortgage and around 2.5% for an adjustable rate. A 65-year-old with a home that's worth $500,000 who took an initial advance of $303,500 at a 5% fixed rate could owe $978,190 (including interest and fees) after 18 years, says Lunde. If a homeowner or his heirs can't sell the home for this amount, HUD will pay the difference between home's value and the outstanding balance to the lender; that money comes from the HUD insurance fees borrowers pay during the life of the loan.
Some advisers say a home-equity loan, which allows homeowners to borrow against some of their home equity in one lump sum, is often the safer bet. Closing costs tend to be smaller than on a typical reverse mortgage and in some cases lenders can waive them, says Buz Livingston, a certified financial planner in Santa Rosa Beach, ! Fla. The downside? Average interest rates on home-equity loans are currently higher.
There are situations where reverse mortgages make sense. Financial planner Mike McGervey of North Canton, Ohio, says he thinks they can be a good solution for people in their 80s, who are usually able to convert more home equity into cash than younger borrowers.
In some cases, homeowners sign up for a reverse mortgage as a lump sum to pay off their mortgage. That is what Joseph Rinaldi, 62, did when he signed up through US Mortgage Corp. three months ago. Now, rather than paying $2,200 per month in mortgage payments, Mr. Rinaldi, who lives in Mamaroneck, N.Y., says he and his wife use that money for everyday living expenses. "This saved mine and my wife's life," he says.
For homeowners who are convinced a reverse mortgage is right for them, advisers say there are reasons to sign up sooner rather than later, since qualifying may soon get more difficult. HUD is developing guidelines that will lead to more extensive underwriting, which could be announced as soon as this year. Details haven't been released yet, but industry experts say they could require lenders to check applicants' income and assets to make sure they can cover ongoing costs of the home, including taxes and insurance.
In November, MetLife was the first lender to implement additional requirements, such as providing income or asset documentation (like Social Security payments and dividends) and a list of monthly living expenses, and experts say more lenders could follow.
