George A. Downey, a longtime reverse-mortgage lender, walked into a seminar designed to help people explore creative financing alternatives in an attempt to avoid default and foreclosure.
"There were some older folks in the room, but nothing was ever offered about a reverse mortgage being a possibility," said Downey, founder of Braintree, Mass.-based Harbor Mortgage. "The numbers have to work, but if they do, it can be a godsend for them. The current mortgage is paid off; they keep the house; and they have no future payments. …"
According to the United States Bureau of the Census and the National Center for Health Statistics, the older population — persons 65 years of age and older — numbered 35 million in 2000. While the years since the last census have altered the numbers, it showed the over-65 group represented 12.4 percent of the population — about one in every eight Americans. The census data showed nearly 80 percent of the nation’s seniors own their own homes, and 73 percent are owned free and clear of any mortgages, amounting to nearly $1.9 trillion in home equity.
It’s the 27 percent that do not own their homes free and clear that could be at risk. Lenders are finding that some seniors have refinanced in recent years and now cannot afford the monthly payments due mostly to declining incomes in their retirement years. While that scenario also has been the path taken by younger borrowers, seniors at least have the option of considering a reverse instead of a "forward" mortgage.
Eric Bachman, CEO of Oakland, Calif.-based Golden Gateway Financial, a reverse-mortgage brokerage focusing on online customers, recently helped a senior in Kansas "reverse a foreclosure."
"I think many people look at the reverse mortgage as a way of actually receiving payments, but some of them are only trying to get their current home debt off their back," Bachman said. "The lender in the Kansas case saw that it would be accruing costs from the foreclosure process and was willing to take less than was owed on the mortgage to make the reverse mortgage deal happen in a timely manner."
Downey and others agree that realistic options do exist for reverse mortgages, but word of the possibilities has been slow to spread.
"Even if the numbers don’t work at first, creative arrangements may be available to cover a shortfall and make it work. But, who knows about this? Too few, and it is not adequately publicized."
Reverse mortgages also can be a potential solution to saving the family cabin. Historically, reserve mortgages have been made to homeowners age 62 or older and exclusively on a primary residence. Rapidly appreciating and long-held second homes have become surprisingly valuable, providing another possibility for older homeowners to pay off current mortgages and draw funds to supplement their income for monthly expenses, health care, family reunions and investments. There are no restrictions on how reverse-mortgage funds are used.
Reverse-mortgage funds can be distributed either in a lump sum, regular monthly payments, 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.
Fixed-rate mortgages had been absent from the reverse-mortgage scene for more than a decade until earlier this year. In the past, 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. The HECM program has insured more than 290,000 reverse mortgages since 1990, while private "jumbo" reverse plans also have been available.
A reverse mortgage on a second home could be an appealing alternative for an individual or couple wanting to keep a family vacation home a few more years. Often, the parents would like to leave a cabin or getaway to their children, yet they need the equity from the cabin for their retirement years. Using a reverse mortgage to extinguish an underlying mortgage on the cabin could be the needed option of keeping the cabin in the family.
When the parents die or transfer title to their children later in their lives, the kids could sell the property and pay off the reverse mortgage with the proceeds, or refinance the property and continue the second-home use. When a child reaches the age of 62, the child would become eligible to take out another reverse mortgage on the vacation home.
Reverse mortgages do not require a credit report or income qualification required. The only critical requirements are age and significant equity in the home. With the recent reverse-mortgage programs for second homes, it’s now possible for a homeowner to have two reverse mortgages at the same time — one on the primary home and one on the second home — thereby having two sources of tax-free income.
If the second home or primary residence plummets in value, owners would see their equity evaporate even faster by using a reverse mortgage. That’s because the amount spent, plus interest, would further reduce any loss in market value. While reverse-mortgage costs and distributions can be "washed" in appreciating markets, they can quickly erode the bottom line in a down market.
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