By: Paul Weideman
Published online: Sunday, February 03, 2013
Appeared in: Home, Santa Fe Real Estate Guide
Edition: February 2013 Vol. 15 No. 11
The reverse mortgage is a way for homeowners aged 62 and up to borrow against their equity with no mortgage payment, as long as it’s the primary residence. Interest and mortgage insurance are added on to the balance each month and that’s repaid when the house is sold or at death. Meanwhile, the owner is still responsible for paying property taxes and homowner insurance and keeping the property in good repair.
In 2005, more than 40,000 Americans participated in FHA’s reverse mortgage program, more formally known as the Home Equity Conversion Mortgage (HECM). The number climbed to over 110,000 in 2009, but it has dropped since then — to about 55,000 in the 2012 fiscal year. About 700,000 of the loans have been made in the last decade or so, up from much smaller numbers before that, according to a story about reverse mortgages last June at the internet site of the National Association of Realtors.
The way the program works, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. One disadvantage is that up-front costs can be high. At closing, you will be charged an initial mortgage insurance premium of up to $12,510 (and over the life of the loan, you will also be charged an annual premium that equals 1.25 percent of the mortgage balance.) There will also be an origination fee of as much as $6,000 at closing. You can pay for most of these costs by financing them and having them paid from the proceeds of the loan. Of course, that reduces the net loan amount available to you.
The majority of reverse mortgages being done now are the standard, fixed-rate program. That gives you the maximum, one-time cash payment. If you do a variable rate, you have different choices, such as leaving it in a line of credit to draw on as you need it, or arranging to have monthly payments.
“These used to be much more expensive than they are today,” Ruybalid said. “And FHA came out with a Saver program a few years ago and that reduces the highest closing fee, which is the mortgage insurance, from a maximum of $12,510 to just $62.55. But there is a catch: you get significantly less money. That can be $50,000 or even $100,000. It depends on your age and the appraised value.
“Every situation is different. You can have somebody who is just 62 trying to decide if he can retire or not and if he could get rid of the mortgage payment, he could retire and use Social Security to live on.”
One caveat is that the reverse mortgage has to be the only lien against the property. “We have to pay off any existing mortgages. If you took out an 80 percent loan, and now you’re coming to me at 62 for a reverse mortgage and I can only give you 50 percent of the value, you’re short. You’re not going to be able to pay off that 80 percent mortgage. It won’t work, mathematically.”
Ruybalid said more than a dozen people pursue reverse mortgages each year in Santa Fe. “We have had some loss in value, so that doesn’t help. And some are distressed sales, short sales or foreclosures. Before, you would sort of discount distressed properties but now they’re so common, it’s standard to use them in an appraisal and not discount them.”
Ruybalid said there will be some significant changes to the HECM program in 2013. First, it is likely that the standard fixed-rate program will disappear. In addition, lenders are going to have to put into place some kind of financial assessment to make sure people using the reverse mortgage program will be able to pay their property taxes and homeowner insurance in the future. HUD may require escrows for those things — an amount will be withheld from the money you get.
“There is a huge part of the population that could qualify for a reverse mortgage, but they don’t know about it, and most mortgage loan officers don’t understand it,” Ruybalid said. “The number-one misconception is that you’re giving the house to the bank. Some people don’t like it because the interest is accumulating and reducing the equity so that the kids will inherit less. On the other hand, if you owe more than the house is worth, you’re not on the hook for that; it’s covered by the mortgage insurance.
“Secondly, these are non-recourse loans, so the senior has no personal liabiliy for the debt: it is paid off when the house is sold. And it does not show up as a debt on your credit report.”
Ruybalid said he is always glad to talk to people, at no obligation. His number is 690-1029.