While homeowners in financial difficulty are beating themselves over the head to modify their existing mortgages to get relief, many maturing folks, age 62 and older, are not being told about the reverse mortgage alternative.
The reverse mortgage, or Home Equity Conversion Mortgage (HECM) as it is known officially by its designation from the U.S. Department of Housing and Urban Development (HUD), is the best kept secret of the big bank mortgage bailout fiasco.
The best mortgage modification can offer is lowering the interest rate, extending the term of the loan and/or delaying repayment of a portion of the mortgage principal until the end of the loan term. Furthermore, currently these remedies are only offered on a trail basis. If the homeowner falls behind in mortgage payments again under the modification all bets are off.
A better idea for aging homeowners, it seems to me, is the reverse mortgage, but the major banks for some reason are not promoting that alternative, perhaps because it’s only available to a limited segment of the market. Even without major advertising exposure, seniors are learning about this financial lifeline. More than 112,000 loans were taken in 2008 and reverse mortgage sales are on pace to set a record this year, according to HUD data.
Here’s how they work:
The Federal Housing Administration (FHA), which insures the reverse mortgage, establishes a formula to determine the allowable loan amount based on the age of the borrowers, the current interest rate and the appraised value of the home.
The borrower and spouse must be 62 years old or older to qualify. The older the borrower, the lower the interest rate, because the risk to FHA is reduced. Why?
Because, except for origination fees and loan insurance payments, which are substantial and paid up front, the reverse mortgage does not get paid off until the last surviving mortgage holder dies.
Meantime, if the borrower has considerable equity in the home, the value being much higher than the outstanding existing mortgage, a reverse mortgage can generate a payout for the reverse mortgage holder as well, besides satisfying any outstanding debt on the property and eliminating monthly mortgage payments for the life of the loan. Moreover, the credit standing of the borrower does not matter and the home cannot be foreclosed on so long as the borrower is current on payment of property taxes, homeowner’s insurance and homeowner’s maintenance dues.
Want to know more about reverse mortgages? AARP.org offers an online reverse mortgage calculator to get started by plugging in your age and estimated value of your home to come up with a ball park figure of how much you can expect to get out of a reverse mortgage. ReverseMortgageGuides.org provides chapter and verse on every aspect of the reverse mortgage. And, finally, HUD requires every prospective reverse mortgage taker to go through an hour-long financial guidance session with an accredited counselor before a reverse mortgage is entered into. As with any major financial decision, it’s wise to get as much information as possible before making a commitment.
No question, the reverse mortgage is not for everyone, but it certainly beats the mortgage modification alternatives that the major banks are now offering.
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