A different kind of debt
This article appeared in Reverse mortgages started out as a niche product to give cash-strapped seniors supplemental income. The loan allows people 62 and older to cash in some of their home equity and receive a lump sum, regular payments, or a credit line.
Existing mortgages are paid off with a portion of proceeds. Borrowers make no monthly payments. As long as the homeowner keeps the home in good repair and pays property taxes and property insurance, the loan does not have to be repaid until the last borrower dies, sells, or lives elsewhere for 12 consecutive months.
If the market value of the home is less than the loan balance when it comes due, federal insurance compensates the lender for the difference.
For a $300,000 home in the New York City area, recent lender quotes show that the maximum available up front on the loans, also known as home equity conversion mortgages (HECMs), with a monthly adjustable interest rate was $152,074 for a 64-year-old borrower or $182,541 for a 74-year-old.
The fees on a reverse mortgage can add up. That 74-year-old reverse-mortgage borrower living in a $300,000 house could expect to pay about $15,000 in up-front costs (insurance premiums, broker's fees, and other closing costs) for the federally backed reverse mortgage plus another $15,000 over the life of the loan in monthly insurance premiums and servicing fees. That's $30,000 in fees, or one-sixth the amount borrowed.
Moreover, fees aren't paid up front but are generally folded into the loan from the start. Most reverse mortgages also have interest rates that are adjustable monthly, and the rate can increase by up to 10 percentage points over the life of the loan. So the borrower is paying interest on the fees and premiums as well as the lump-sum cash or monthly payments.
Since 1990 the FHA insurance fund has backed more than 500,000 reverse mortgages, and growth is expected to continue in 2009. Meanwhile, the lending limits have climbed from $417,000 to $625,500.
Now lenders and other financial professionals are trying to broaden the appeal of reverse mortgages to retiring baby boomers, who turn 65 at the rate of about 10,000 per day. They're an alluring target: By 2010, more than 50 million Americans will be 62 or older, and more than 80 percent own their homes, controlling an estimated $4 trillion in equity.
