Understanding Reverse Mortgage Fears

Understanding Reverse Mortgage Fears

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Estimates indicate that there is a target population of some 8.8 million senior households that both qualify for and are good potential candidates for HUD’s home equity conversion mortgage (HECM) reverse mortgage program. (Under an HECM loan, a lender advances money to a elderly homeowner, in the form of a series of fixed monthly payments, a line of credit on which the borrower may draw, or a combination. The senior homeowner is not required to make any payments on the loan so long as he or she remains in the house. The lender collects the loan balance-which includes the accrued interest and other charges as well as the amounts paid out-when the house is sold or the owner dies.) Yet in the most recent federal fiscal year, just 43,131 HECM loans were originated; over the sixteen year history of the program, a total of 162,268 HECMs have originated, representing only a tiny share of the potential market.
There are some obvious and tangible factors that help explain this low market penetration, most notably the high origination fees and closing costs relative to amounts that can be borrowed through the program. Less obvious are the intangible psychological fears that may prevent senior homeowners from stepping into a reverse mortgage. Being aware of these factors can help potential borrowers more clearly assess their own situation and make a more calculated decision about whether or not a reverse mortgage is right for them:
* Fear of Giving-up a Hard-Earned Goal – Most elderly homeowners have spent their working lives focused on the goal of “paying off the mortgage.” Taking out a reverse mortgage is, in essence, a decision to do a complete turnabout and initiate the process of growing a new mortgage. For some seniors, this just doesn’t make sense, no matter how rational the decision to trade-in home equity for better living standards in later life may appear to a detached observer.
* Fear of Being Suckered – HECMs are administered, heavily regulated and insured by federal government agencies (in particular HUD). From the standpoint of protecting innocent borrowers from ruthless lenders, HECMs are about as “safe” a mortgage product as can be imagined. Yet there are true horror stories from the pre-HUD reverse mortgage era about seniors being forced to sell their homes or lose them to foreclosure. Unfortunately, these stories have now become urban legends and still taint the phrase “reverse mortgage”.
A related issue is the ongoing problem of elderly homeowners being contacted by “home repair” companies, annuity salespersons, and other pitch-men promoting the reverse mortgage as the ideal way to pay for their valuable product or service. The tacky nature of this type of solicitation further increase doubts and fears about whether reverse mortgages are truly legitimate.
* Fear of Financial Complexity – There is no question that reverse mortgages are complex financial tools. Moreover, by their very nature they run counter to many of the golden financial management rules that senior homeowners have strived to abide by over their adult lives – i.e. “reduce debt”, “avoid high transaction fees”, “grow your home equity”, etc. Largely because of the complexity, HUD requires all HECM applicants to participate in counseling sessions to ensure they have full understanding of the reverse mortgage process and the other alternatives that may be available. Yet, while necessary and well-intended, the counseling requirement itself may scare-off some potential applicants who feel that they just won’t be capable of digesting all the new information presented.
* Fear of Not Leaving an Inheritance – For many seniors, the desire to leave an inheritance to children or grandchildren is quite strong – even to the point of accepting a more modest than necessary lifestyle to ensure that an estate survives them. Seniors who have this goal and whose largest asset is their homestead, clearly will perceive that a reverse mortgage runs directly counter to their strong bequest motive.
* Fear of Sacrificing Future Flexibility – To be a sensible financial decision, a reverse mortgage should equate to a conscious decision by the homeowner to stay put for the long term – minimally 5-7 years and, ideally, for the rest of the homeowners’ lives. Obviously, this commitment is especially difficult for the elderly homeowner. Death, long-term illness or incapacity and similar issues weigh heavily on the minds of many seniors and make long-term housing commitments especially stressful.
To a large extent, further growth in the reverse mortgage area will depend on the success of efforts to educate the target population. Some observers feel that the next generation of retirees -i.e. baby boomers – will enter their retirement years with a far greater understanding of financial matters and with less aversion to indebtedness. This may prove true but the reverse mortgage concept is so fundamentally different from what people are used to that overcoming the fears of potential borrowers will remain a challenge.

Reverse Mortgage: A Dignified Way For Retirees To Supplement Income And Take Care Of Expenses

Reverse Mortgage: A Dignified Way For Retirees To Supplement Income And Take Care Of Expenses

For many Americans reaching the retirement age, the equity build up in their home is their only real asset. Reverse mortgage is a way to tap into this asset and create a stream of income needed for retirement or take care of an unexpected financial need that is usually related to health care costs in the elderly.

Reverse mortgage is not like a refinance, equity loan or a second loan on your home and there are some pitfalls.

So what is a reverse mortgage?
As the term implies the flow of money is reversed. Instead of the homeowner paying the lender on a predetermined schedule, the lender pays the homeowner and there aren’t any payments due until the home owner moves or dies.

How did reverse mortgage start?
Roger Maris broke Babe Ruth’s single-season home-run record in 1961 but like most things in life, a single act of kindness has a much longer longevity and a more widespread influence than that of fame and ironically these acts of kindness remain obscure.

The history of reverse mortgage can be traced to Nelson Haynes of Deering Savings & Loan (Portland, ME) who made the first reverse mortgage loan to Nellie Young, the widow of his high school football coach. This event was reported to be motivated by kindness and started a chain of events over the following forty years to extend a helping hand to today’s retirees.

Reverse mortgage helps many retirees cope with their financial difficulties and more importantly,helps them to have a way to retain their independence and dignity. And retirees are reaching for this solution in record numbers. According to the National Reverse Mortgage Lenders Association in 2004, lenders originated a record 37,829 HECM loans during the most recent federal fiscal year – a 109 percent increase over the 18,079 loans closed the previous year.

Why would a lender do this?
The act of kindness may have started this idea but lenders are not charitable organizations and they will not be in business long if they don’t have a return on their investments. In this case, they calculate the amount they lend based on the value of your home, projected appreciation, your age and a number of other factors. They expect to get paid the money they have lent plus the interest when the homeowner moves or dies.

What are HECM Loans?
Federally-insured home equity conversion mortgage (HECM) is the most common of reverse mortgage loans that the U.S. Department of Housing and Urban Development started offering in 1989.

Who cares about federal insurance?
In traditional loans, when you borrow the money, you have the cash in hand and the lender has taken all the risk secured by your home. However in a reverse mortgage, you may plan to receive a monthly payment over a period of time. What will happen if the lender is no longer around to pay you?

This is why the federally insured reverse mortgage ads another dimension of safety and peace of mind. This peace of mind also comes with a price tag. HECMs limits the maximum loan amount a homeowner can borrow.

What about Non-HECM?
Many lending institutions offer this category of reverse mortgages and their limits are usually higher than that of HEMD. However they are not federally insured and they can have a much higher expense associated with their processing.

Can any one qualify for a reverse mortgage?

The eligibility requirements for a reverse mortgage are:

* You are a homeowner

* You are 62 years of age or older

* You own your home outright, or have a low mortgage balance that can be paid off at the closing with proceeds from the reverse loan

* You live in the home

* In case of HUD, you are also required to receive consumer information from HUD-approved counseling sources prior to obtaining the loan. You can contact the Housing Counseling Clearinghouse on 1-800-569-4287 to obtain the name and telephone number of an HUD-approved counseling agency and a list of FHA approved lenders within your area.

* Upkeep of property taxes and staying out of bankruptcy are also required.

How much money can I borrow?
The amount of money you can borrow is based on a different set of formulas than the traditional mortgage qualifications. Your age, the value of your home, the current interest rates, and the loan costs impact the amount. Older individuals with more valuable homes in lower interest rate environment can borrow more.

What types of homes are eligible for reverse mortgages?
Single family, two-to-four unit properties, townhouses, detached homes, units in condominiums and some manufactured homes are eligible. However various restrictions apply to all with most significant being that you own them, live in them and have kept them in reasonable condition.

What about my heirs?
If death occurs while you still owe money to the lender, your heirs are obligated to pay the borrowed amount, plus interest and other fees, to the lender. They usually do this by selling the house. Whatever remains after paying the lender belongs to your heirs. The loan cannot be passed along.

What are my borrowing options?

You have five options:

* Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

* Term – equal monthly payments for a fixed period of months selected.

* Line of Credit – unscheduled payments or in installments, at times and in amounts of borrower’s choosing until the line of credit is exhausted.

* Modified Tenure – combination of line of credit with monthly payments for as long as the borrower remains in the home.

* Modified Term – combination of line of credit with monthly payments for a fixed period of months selected by the borrower.

What about reverse mortgage scams?
Like most other scams directed to senior citizens, telemarketing is on top of the list. Never agree to anything over the phone, especially on the first call and do not give personal information, financial or otherwise, over the phone.

There is never a cost associated with getting information on reverse mortgages. This information is available for free. Ask for written copy of everything that should include an address and a phone number so that you can confirm the data.

* DISCLAIMER: Vishy Dadsetan, FreeCreditReport.ws or My Favorite Shop, Inc. do not endorse any reverse mortgage product or lender. This article and website does not provide legal, accounting, or other professional services. If legal or other expert assistance is required, the services of a competent professional should be sought. Although Vishy Dadsetan has made every effort to ensure the accuracy and completeness of the information contained in this site, it assumes no responsibility for errors, omissions, inaccuracies, or inconsistencies.