Third-quarter usage data from Golden Gateway Financial reveals that more senior citizens are looking at reverse mortgages as a way to ride out the current economic storm.
A reverse mortgage is a special type of low interest home equity loan for homeowners age 62 and older that does not have to be paid back for as long as the person(s) lives in the home. A reverse mortgage allows homeowners to convert part of the equity in their homes into cash, and the loan does not have to be repaid until the last surviving homeowner permanently moves out of the home or passes away, at which time the estate has 12 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate.
Since reverse mortgage loan advances aren’t taxable, they don’t affect Social Security or Medicare benefits.
Glenna Castagna, a reverse mortgage specialist at PierPoint Mortgage in Muskegon, said she’s finding that a lot of seniors are saving the reverse mortgage option as their “ace in the hole,” because people are living much longer than their benefits provide for.
Even though home values are down right now, a reverse mortgage doesn’t work on the basis of what the market is doing, Castagna explained: It works on the basis of the homeowner’s need.
“If they’re in a financial situation and a reverse mortgage is available to them, it sometimes makes so much difference to their situation: It can mean a huge increase in their spendable income,” Castagna said.
“There are a lot of reasons for doing a reverse mortgage. Most of the time people choose it as a means to improve their lifestyle.”
If, for instance, a couple who retired at age 65 are now 85, and their Social Security income is very meager compared to the cost of living, they can cut into the home equity they have and not have to leave their home.
Barb Deuell, a reverse mortgage specialist with Independent Bank, said that if homeowners 62 and over are in need of cash, they’re not going to gain much by waiting until the market comes back.
“They’re better off taking care of their health and their situation. Some people are losing their homes and are coming to get a reverse mortgage to stop foreclosure,” Deuell said.
She has definitely seen an increase in the number of seniors seeking reverse mortgage loans. She had a record 20 calls in October, and 11 in September.
A reverse mortgage is much easier to secure than a regular mortgage loan, particularly in today’s tight credit environment, because there are no income or credit qualifications, she said. Senior homeowners can take the equity in their home out as a monthly allowance, a lump sum, or a little bit now and a little bit later, she noted.
The homeowners have to reside in the home to qualify, but that doesn’t mean they can’t spend a few months in Florida during the winter, Castagna pointed out. They do, however, have to take FHA-approved reverse mortgage counseling, which lasts about 45 minutes, Deuell said.
“The counselor goes over their budget and informs them completely of the reverse mortgage process so they have a better understanding of it from a neutral third party,” Deuell explained. “We encourage their children or another family member to go with them so everybody can see the ‘picture.’”
There are very few things that can bar a senior homeowner from securing a reverse mortgage if they have clear title to the home. One hold-up would be a court-ordered lien on the house by a creditor, which would have to be paid, Deuell said.
Age, life expectancy and the interest rate are the three factors that determine the amount the senior is going to receive, said Darrell Johnson, relationship manager at Financial Freedom Senior Funding Corp., the nation’s largest reverse mortgage originator and servicer. Typically, homeowners must have 20 to 50 percent equity in the home, Johnson said. The loan-to-value ratio is between 50 to 80 percent of the home’s value, depending on the age of the homeowners. If a couple is 62, for example, they’re probably only going to be able to access about 50 percent of their home’s equity, but if they’re 99, they could access about 80 percent because their life expectancy is much shorter.
The life expectancy component is one of the risks to the reverse mortgage holder, Castagna said.
“If the person lives to be 110, that mortgage keeps compiling and compiling: The interest is added back into the mortgage every year, so you’re actually paying interest on interest, and that could eventually grow beyond the value of the house.”
One of the drawbacks for the homeowner is that a reverse mortgage comes with high up-front fees: The insurance premium is 2 percent of the home’s appraised value, and there’s a monthly charge of $25 to $35 to maintain the account from year to year. That’s expensive over 20 to 30 years, Castagna said.
“A reverse mortgage is certainly not something a senior should do short term because the closing costs are way, way too high,” Castagna advised. “A home equity loan should be used short term.”
There aren’t a lot of financial institutions in Michigan that offer reverse mortgage loans. That could be because reverse mortgages are quite cumbersome to service and the training is intense, so perhaps some banks just don’t want to deal with it, Deuell suggested.
Independent Bank sells all its reverse mortgage loans through Financial Freedom, and the process takes about six weeks.
“I have had no unhappy customers,” Deuell said. “It’s so rewarding to help people with their problems and dilemmas.”
Johnson said that year-over-year, the reverse mortgage industry is up 5 percent, and it’s spiking a little higher in the fourth quarter, which he attributes to the fact that some seniors lost income from their investments in the housing market implosion, and a number of them live off income from those investments.
Furthermore, as of Nov. 7, the national lending limit on reverse mortgages went from $226,100 to $417,000, which increased the monies available to seniors for reverse mortgages. Previously, if a senior had a $400,000 home, Freedom Financial would have had to cap the appraisal at the former lending limit of $226,100, he said. When the lending limit went up, it presented an opportunity to many seniors.
“If they have some equity in their home and are struggling to afford life in whatever form, or they have some goals they haven’t achieved yet, this is a way for them to access a portion of their home’s value to, hopefully, make life easier and make their golden years a little bit brighter.”