As the population ages, a unique loan product designed for senior citizens is expected to become red-hot. So far, though, seniors in Chicago and around the country have given the product–the reverse mortgage–only a lukewarm reception.
Now, however, a new version of the loan, sponsored by the Federal National Mortgage Association (Fannie Mae), which buys the mortgages from the lending companies that make them, has been introduced and promises to spark greater interest in reverse mortgages.
The reverse loan idea was conceived in the 1970s in order to give seniors who are homeowners but are cash-poor the ability to convert the value of their home into ready money.
The concept is similar to the home equity loan, which allows homeowners, regardless of their age, to borrow against their equity. For instance, if a home is worth $150,000 and the owner has a mortgage of $30,000, his equity is $120,000, and a lender will advance funds using the equity as security.
Seniors, who may have once celebrated paying off their original mortgage, may be inherently averse to the idea of taking cash from a lender in exchange for a new loan using their property as security. “There is some unease about the step (taking out a reverse loan) because it involves a new lien on the home, and for some that is viewed as a backward step,” says Steve Baer, president of American Senior Income Reverse Mortgage Corp., Chicago.
Also, seniors shy away because the reverse mortgage is a “complicated and complex product,” notes Karen Frank, housing specialist with the Suburban Area Agency on Aging, Oak Park.
Complicated, yes, especially if you concern yourself with the details of the different types of reverse mortgages available from lenders. But there are some common characteristics and key elements that explain the basics of this product, known variously as a home equity conversion mortgage, reverse equity loan, and reverse mortgage:
– Unlike a traditional home equity loan, a reverse loan isn’t paid back at all until the homeowner sells the home, moves away, or dies. Then, the senior homeowner or his estate repays what is owed from the proceeds of the home’s sale.
One of the most common misconceptions about reverse mortgages, says Ken Scholen, director of the National Center for Home Equity Conversion, an industry-sponsored clearinghouse for reverse mortgage research, is that you will be deeding away your home to the lender. The lender is eligible only for the amount due him. What’s more, all of the reverse mortgages now available have a feature that guarantees that the homeowner or his estate cannot owe more than the value of the home, says Baer.
– Because reverse borrowers don’t write out monthly checks to repay the loans, lenders don’t even consider a reverse loan applicant’s income or credit rating. Rather, an appraiser is dispatched to determine the market value of the home. The amount of the loan granted depends on the borrower’s age and the amount of equity the borrower owns to determine how much the lender can advance to the borrower. “It’s not like a regular forward mortgage, where you ask a lender for a certain amount,” explains Baer. The formula will determine how much the borrower is eligible for, and the older the borrower, the more money he can obtain.
Like life insurance actuaries, reverse mortgage lenders look at a borrower’s life expectancy. The bankers don’t want the interest charges and principal to add up to more than the home can be sold for upon the borrower’s death. So a 62-year-old who can be expected to live about another 20 years would get much less than a 76-year-old with the same value home.
New three-tiered market
The new reverse mortgage designed by Fannie Mae is expected to spur interest in the loans because it introduces another formula for determining how much money a lender can advance.
Explains Scholen: “There is now a three-tiered market.” A Home Equity Conversion Mortgage insured by the Federal Housing Administration (FHA) “generally works better for people with homes valued at no higher than the median price of houses in their metropolitan area,” says Scholen. “The Fannie Mae mortgage fills a middle ground, geared to those with homes priced from the median to the upper-middle range. And private products offered by individual lending companies are aimed at the upper-end of the market.”
Specifically, the FHA reverse loan will limit the amount of equity used in the formula to $152,362, notes Melody Lejcar, loan processor at WestAmerica Mortgage in Oakbrook Terrace. The Fannie Mae “Home Keeper” mortgage has an equity limit of $207,000.
However, because of some quirks in the actuarial science employed in the different formulas, says Baer, a senior with $200,000 or so in equity, who is looking for the maximum advance possible, should check out what he’s eligible for under both the Fannie Mae and FHA products. Sometimes, depending on the ages of the people who are joint owners, the FHA loan will permit more money, even though the equity limit is lower.
Advice, please
Acknowledging that signing up for a reverse loan is a big step, and a complicated one to boot, the FHA requires that all borrowers first obtain counseling from an independent third party. Counselors are located in community centers or local government offices. Although the free counseling is only required to receive the FHA loan, it’s open to any senior considering any type of loan. “We send people to counseling all of the time,” says Baer.
A counselor will begin by taking a rather broad assessment of a person’s finances and needs, says Kristin Jordan, housing counselor with the Arlington Heights office of the Community and Economic Development Association of Cook County. Sometimes, the counselor will be able to ascertain where the potential borrower can obtain services targeted toward cash-poor, older homeowners–such as free or cut-rate home repair or property tax deferral. “Some seniors find that one of the programs that might be sponsored by the county or the town they live in will solve their problem and that they don’t need a reverse loan,” says Jordan.
When a senior does want to investigate the reverse option, a counselor will carefully detail the upfront costs of the loans. “This is a costly loan, and it’s not right for everybody,” asserts Jordan. For example, says Lejcar, using the $152,362 equity limit allowed in the FHA formula, a senior pays $8,400 in upfront fees.
Because the whole idea of reverse loans is to help older homeowners who are short on cash, the lenders can’t expect the senior to pay those upfront fees out-of-pocket. Therefore, the fees are deducted from the amount extended to the homeowner. In addition, the reverse lenders require that any first mortgage remaining on the property be paid, and the amount of any outstanding mortgage is also taken from the loan proceeds extended to the senior.
As part of the federal truth-in-lending law, reverse lenders must now provide a “Total Annual Loan Cost,” or TALC figure, which provides a way to compare the interest rate and upfront costs of all the types of reverse mortgages.
In addition to the costs, borrowers have to examine options of how they can take the money. The most popular option is to receive a “line of credit,” whereby the senior is equipped with a checkbook that he or she can write checks on as needed, up to the specified loan limit. But, there are other ways the different reverse mortgages allow borrowers to tap their funds. Most of the reverse mortgage products allow borrowers to take a lump sum, or receive a specified monthly payment for a specified period of time.
Evanston resident Robert E. Clark has a line of credit on his Household reverse loan, which he uses to write checks for the hefty property taxes in that north suburb. Clark, who has lived in his home for about 25 years, says that his equity line requires that all checks he writes be at least $200, a feature he says will keep a borrower from frittering away the funds on miscellaneous expenses.
Available here
Two private lending companies–Transamerica HomeFirst Inc. and Household Senior Services, a division of Household Bank–offer reverse mortgages in Illinois that allow seniors to tap more equity than in either the Fannie Mae or FHA loans. The Household Senior loan has an equity limit of $250,000, while the Transamerica HomeFirst limit is $750,000.
Household Senior Services also offers its loan in Indiana, but neither the Transamerica nor Household loan is available yet for Wisconsin seniors. For more information on the Household loan, which is called “Ever Yours,” call 1-800-414-EVER. And for information on Transamerica, call 1-800-538-5569.
To find which lenders in your area offer either the Fannie Mae or the FHA loan, or to find a counseling agency near you, call 1-800-7-FANNIE.
Age requirements
All of the above loans are available if at least one homeowner is 62 years old, with the exception of the Transamerica product, which requires a borrower to be 65.
Although the definition of “senior” starts at 62 or 65, in reality most of the borrowers who take out these loans are in their 70s, say the experts. That’s because older borrowers are allowed more money according to the formulas. Yet, if a borrower is in his 80s or older, he may find that the upfront fees are too steep for a loan that he may use for only a couple of years.
