Will the Market see a Influx of Reverse Mortgages?
With interest rates at the lowest they’ve been in decades the time is optimal for older Americans with equity in their homes to take advantage of a reverse mortgage.
Why Seniors are Taking Reverse Mortgages Now More Than Ever:
In today’s market, those taking out reverse mortgages are likely to receive more from the proceeds than if they held off taking out the loan, writes The Mortgage Professor, Jack Guttentag.
The FHA’s reverse mortgage program, The Home Equity Conversion Mortgage (HECM) enables homeowners to withdraw some of the equity in their home. The US Department of Housing explains that the HECM is a safe plan to give older Americans greater financial security to help pay for expenses such as unexpected medical bills and home improvements as well as to supplement their social security income.
Mortgage Professor Jack Guttentag recommends seniors that may not need a reverse mortgage now but will in their future, do so at today’s interest rates – even if they don’t have an immediate need. The terms of a reverse mortgage are dependent on the age of the youngest borrower, the current interest rate, value of the home (within certain limits), and the initial mortgage insurance premium. The higher the interest rate, the less a borrower can take out from the equity of the home. Seniors today can take out more equity on their homes at a higher interest rate than if they wait until later and have to pay a higher interest rate for less cash.
Guttentag explains further:
“For example, at an expected rate of 4%, which has been a common rate during 2013, a senior of 62 with a home worth $300,000 can draw an initial credit line of about $174,000. At an expected rate of 6%, the line drops to $140,000 and at 10% it falls to $54,000.”
Demand for Reverse Mortgages:
There has been a huge rise in Reverse Mortgages recently due to the deadline on the availability of the HECM Standard fixed rate. The Department of Housing and Urban Development (HUD) has decided to eliminate the HECM Standard fixed rate April 1st. Kathy Conley, a housing specialist for GreenPath, Inc. explains, “Many clients state, when they call for an appointment, that they are seeking the HECM Standard with a fixed rate and would like to be scheduled as soon as possible, before April 1.” Conley has had to turn away many of these interested seniors because she as appointments booked solid until April 3rd and already has a long waiting list for cancellations.
Mortgage counseling agencies across the country have reported wait times around three to four weeks or more for HECM borrowers. In North Carolina, where face-to-face counseling is mandatory, wait times are on the higher end of the spectrum.
Other reverse mortgage counseling agencies have noted a drop off in reverse mortgage applications. Allen Stacey, reverse mortgage counselor with CredAbility, explains there it is virtually impossible to get the certification in hand needed to order the case number in time for the HECM standard rate deadline.
What is a Reverse Mortgage?
As explained on the HUD Portal, A reverse mortgage converts a portion of a homeowner’s equity into cash, a credit line, or monthly payments and pays the borrower for the remainder of their lives or for an agreed upon term. There are no principle or interest payments with a reverse mortgage. When reverse mortgage borrowers no longer use the home as their primary residence or break the terms of the mortgage, the loan must be paid back.
A reverse mortgage is different than a home equity loan. A second mortgage, or a home equity line of credit, requires borrowers to have adequate income to qualify for the loan, and then borrowers must make monthly payments on the principle and interest.
There are serious risks associated with taking out a reverse mortgage. Read the next blog in this series: “The Risks of Reverse Mortgage” to begin to get a better understanding of complications that could arise with this type of loan.
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