Reverse mortgages are hot. Baby boom demographics, inadequate retirement funding, and problems in the traditional mortgage market (pushing brokers into alternate products) have combined to make marketing of reverse mortgage products to senior citizen homeowners one of the hottest niches in the mortgage business.
And the effort is paying off for marketers. Federally-insured Home Equity Conversion Mortgages (HECMs) are the predominant type of reverse mortgage in the U.S. Recently, the number of HECMs originated has averaged about 9,000 per month, more than double the average in 2005. Moreover, about two-thirds of the the total HECM reverse mortgages ever issued have been originated in the last two years.
Reverse mortgages are only available to homeowners age 62 and older who have paid off their mortgage or have only a small mortgage balance remaining. The sales pitch for these loans is enticing: tax-free retirement income for as long as you own the home - even for life; no monthly loan payments; no repayments until the home is sold, and payment options flexible enough to meet any need! In many cases a reverse mortgage is the ideal tool for senior homeowners.
But there is one big drawback with reverse mortgages: high upfront closing costs that can sometimes reach $20,000 or more. Combined with the regular interest that accrues on the loan balance, the upfront costs can make this an extremely expensive way to borrow. To spread these costs out and make the cost of borrowing reasonable, it is imperative that the borrower be confident in their ability to remain in the home for at least 5-7 years and, preferably, longer. Unfortunately, government data shows that most HECMs are paid off in seven years or less.
So, while a reverse mortgage may be a good fit for seniors in many situations, it is always important to carefully explore alternatives to see if a more cost-effective means to achieve your retirement financing goals is available.
We discuss below seven alternatives for you to consider:
Intra-Family Loan - Do you have a relative or friend with deep pockets and a good heart? An intra-family reverse mortgage loan can be an excellent way to gain the advantages of a reverse mortgage, but avoid most of the costs. The concept is straightforward: instead of a bank lending you retirement funds in exchange for a lien on the house, structure an arrangement with a relative or friend to lend you the money instead - collateralized with your home, of course. You can avoid most of the upfront costs this way and have more flexibility to set interest rates and loan terms. There is even a company called Circle Lending ([http://www.circlelending.com/familyadvantage/reverse-mortgage.asp]) that specializes in drafting these loans as "official" arms length transactions and then provides monthly loan servicing just as a traditional lender would do.
Price Appreciation Agreement - There are also firms that will give you money today in exchange for an "equity-share" in the future appreciation of your home's value. These programs are usually aimed at higher value homes (over $500,000) and may only be available in areas of the country with a track record of strong property value growth. The benefit of these programs is that you may be able to tap into your equity without the high upfront costs of a reverse mortgage. The drawback is that it could cost you substantially more in the long run in the form of forgone home appreciation.
If you think this type of arrangement may be a good fit for you, here are two programs to look into to: Equity Key (http://www.equitykey.com/) and, Rex Agreement (http://www.rexagreement.com/).
Deferred Payment Loans - Many states, local governments and nonprofit organizations sponsor loan programs for the benefit of "house rich, cash poor" senior homeowners. Much like reverse mortgages, these programs lend money today that is paid back when the senior homeowner sells the home or dies.
The drawbacks are: 1) the use of loan proceeds is usually restricted to a specific purpose (e.g. home repair, payment of property taxes or special assessments, etc.) and, 2) eligibility may be restricted to seniors qualifying as lower income.
Deferred loan programs often have very low (even zero) closing costs and interest rates. This which makes them an alternative worth looking into before deciding on a reverse mortgage. To find out what deferred loan payment programs are available in your area, contact the Area Agency on Aging (AAA) for your region ([http://www.eldercare.gov/Eldercare/Public/Home.asp]).
Tim Paul has more than twenty-five years experience as a finance director and benefits manager. His blog Reverse Mortgage Information, focuses on providing objective and independent reverse mortgage facts to senior homeowners.
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Article Submitted On: November 12, 2007
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