Reverse Mortgages Surge

by Broderick Perkins DeadlineNews.Com A tiny fraction of the residential mortgage market, reverse mortgages made a comeback this summer, due largely to record low mortgage rates. Older home owners are wise to consider other sources of cash before they take a knife to their home equity, say consumer advocates. The Federal Housing Administration (FHA) insured an all-time high 1,800 reverse mortgages in June 2003, as senior home owners turned to the loans to tap equity for cash. The National Reverse Mortgage Lenders Association (NRMLA) says that helped put the industry on pace to break the annual volume record for reverse mortgages by the end of summer if not sooner. "With the stock market boom over and interest rates down, many seniors are getting financially squeezed these days, no longer able to count on a healthy stream of dividends and interest income to supplement their Social Security," said NRMLA president Peter Bell. "In fact, many have seen their investment portfolios shrink. The result, is that more and more older homeowners are getting reverse mortgages to access the built-up wealth in their homes to generate additional income. By doing so, they can continue to live independently -- and comfortably -- right where they are," he said. An option for cash-poor but equity-rich home owners, reverse mortgages are equity loans and like equity loans, they enable borrowers to obtain loans on the debt-free portion of the value of the home. It's a "reverse" mortgage because the lender makes payments to the borrower, instead of the borrower making payments to the lender. Home owners who first purchased a home 10 to 20 years could be sitting on an equity gold mine, especially in regions where home prices have tripled or more in the past two decades. To qualify for the special mortgages, you must be 62 or older and own your home outright or have enough equity to pay off the original first mortgage before drawing extra cash. You can draw the cash as an immediate lump sum cash advance, as a credit line you use as you wish, as a monthly cash advance or in some combination of all three. You repay the loan principle and interest later, from the proceeds of a sale when you move, sell your home or die. Failure to pay taxes, home owners insurance and other conditions can also trigger a forced pay back. Each loan comes with different qualifications, costs, loan maximums, monthly payments and a host of other esoteric details, making understanding and comparing them a bit difficult. Two non-profits National Center for Home Equity Conversion (NCHEC) and AARP, along with FHA, offer detailed information on the loans. The most popular reverse mortgage is The Home Equity Conversion Mortgage (HECM), the only federally insured reverse mortgage, insured by the FHA. To be eligible for a federally-insured HECM, a home owner must receive counseling from a U.S. Department of Housing and HUD-approved counseling agency. Other reverse mortgages are offered by Fannie Mae lenders, National Reverse Mortgage Lenders Association and others. Consumer advocates advise home owners not to sign for any reverse mortgage without independent counseling and to carefully scrutinize other reverse mortgages and options from low cost public loans and Supplemental Security Income to outright selling the home. "There's No Place Like Home: The Implications of Reverse Mortgages on Seniors in California," a 1999 Consumers Union study found both pluses and minuses with the loans and the Union, AARP and NCHEC advise older home owners to consider all the options before signing on the dotted line. Soon after the study, the federal government began limiting fees that could be levied on the loans and installed other protections. Copyright © 2004 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.