Many older homeowners prefer reliable, dependable mortgage interest rates. It helps them plan their monthly financial calendars, especially when they are battling the challenges of paying for health care on fixed incomes.
Fixed-rate mortgages have been absent from the reverse-mortgage scene for more than decade, as lenders relied primarily on adjustable-rate mortgages insured by the U.S. Department of Housing and Urban Development. These mortgages, known as Home Equity Conversion Mortgages (HECMs), account for nearly 85 percent of the reverse market.
BNY Mortgage, which recently announced it would trim the interest rate charged on the adjustable-rate HECM, introduced two fixed-rate reverse-mortgage products on March 5.
The first, called the New Generation HECM, is similar to the current FHA/VA rate and hovers near 6.5 percent, not including the mandatory mortgage insurance premium. The interest rate is tied to the one-year CMY, or constant maturity treasury index. The second product, the Fixed Prime Advantage, is a “jumbo” product for loans greater than $405,000. The rate, which will be set at closing, is the prime lending rate plus .99 percent. That rate recently was a tick over 9 percent.
“By offering more options to seniors, we feel strongly that we are making reverse mortgages more accessible for today’s senior homeowners,” said Sarah Hulbert, executive director for BNY Mortgage’s western regional center. “Seniors who previously were put off by the adjustable-rate options will now have fixed-rate options, and seniors who previously did not qualify for a reverse mortgage due to insufficient loan proceeds will now be eligible.”
Reverse mortgages allow senior homeowners, with a minimum age of 62, to receive proceeds from a lender — either in a lump sum, regular monthly payments, a line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can’t owe more than the value of the home. The HECM program has insured more than 240,000 reverse mortgages since 1990, while private “jumbo” reverse plans also have been available.
Wells Fargo Home Mortgage, the nation’s leading retail originator of reverse mortgages, announced it also has trimmed the margin it charges on the HECM adjustable by 50 basis points. Seniors who have already applied for a reverse mortgage with Wells Fargo will be offered the lower margin.
“Reverse mortgages are about making the most of the equity that seniors have built into their homes,” said Jeff Taylor, vice president of Wells Fargo’s Senior Products Group. “By lowering the margin, we are lowering the interest rate charged on a reverse mortgage. This means more seniors will be able to use the reverse-mortgage program, giving them the ability to turn their home equity into additional retirement funds.”
Providential Home Income Plan Inc., a venture capital-funded company whose sole purpose was to originate and service reverse-mortgage loans, offered a fixed-rate reverse mortgage in the early 1990s. While the company was one of the first to begin offering a program to enable seniors to tap the equity in their homes, some of loans contained the controversial “equity share” component, giving the lender a significant portion of the appreciation in the home. Often, that portion was 50 percent of a rapidly appreciating home, leaving some homeowners in debt when the senior died or moved out of the home. The “equity share” component no longer is included in reverse mortgages and is a key reason for the popularity of today’s products.
In 1996, Transamerica HomeFirst purchased the reverse-mortgage servicing assets of Providential. Three years later, Financial Freedom, the Irvine, Calif.-based company specializing in jumbo reverse mortgages, purchased Transamerica HomeFirst.
Dr. Barbara Stucki, a Bend, Ore., researcher and consultant, completed a study for the National Council on the Aging that supports tapping into home equity via a reverse mortgage as the critical financing vehicle to help seniors afford long-term care services at home.
“There is simply no other pot of funds sitting around that is going to solve the long-term care situation in this country other than home equity,” Stucki said. “I just don’t see any other way — unless people simply want to dig deep down and pay out of their pockets. The idea is to use your home to stay at home.”
Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on amazon.com and on tomkelly.com. Tom can be reached at email@example.com.