After the housing boom and boost, the real estate market is clawing back from the bottom. For those keeping track, prices peaked in 2006, before dropping by over 30 percent nationally and far more in some markets. Housing bottomed in January in 2012, almost three years after the stock market. The reason for the lag is simple: a house is an illiquid asset, which makes it more difficult to sell than a publicly traded stock or stock mutual fund. This year, activity has picked up and prices are finally rising. This is good news for those who were counting on selling their homes and/or using equity to help supplement their retirement income.
The firming housing market has brought reverse mortgages back into the spotlight. A reverse mortgage is a home loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM). (FHA provides on line counselors as well as valuable information here or by phone at (800) 569-4287.)
The borrower is required to continue to pay real estate taxes, utilities, and hazard and flood insurance premiums. The amount you can borrow depends on several factors, including: the age of the youngest borrower, the current interest rate, the appraised value of your home and whether the rate is fixed or adjustable. The more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow.
If the home is sold or no longer used as a primary residence, or the borrower dies, then the loan, the accumulated interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. If the house sells for less than the money owed, the FHA takes the loss - no debt is passed along to the estate or heirs.
Unlike a traditional mortgage, there's currently no lengthy underwriting process and you don’t make monthly principal and interest payments. But the reverse mortgage market could change in the coming months. The FHA has informed Congress that the housing market crash has meant that some reverse mortgage borrowers don’t have enough money to pay their property taxes and homeowners insurance. To shore up the system, FHA wants to introduce some form of financial assessment to the process as well as cap to the amount of money that can be extracted from the home’s value. To change the current system, FHA needs Congressional approval. The House gave the new ideas a thumbs up earlier in the summer, but it’s unclear whether the Senate will follow suit.
In essence, a reverse mortgage can help retirees convert an illiquid asset - a house - into a liquid one that can help supplement retirement income, which explains why at least 595,000 households have an outstanding reverse-mortgage loan, according to the National Reverse Mortgage Lenders Association.
But there is of course a downside: younger retirees who use them may run out of money and options at too young an age. These folks may have been better off selling their homes and using the equity to purchase another home or renting. Additionally, it may make sense to spend other assets before extracting home equity via a reverse mortgage.
Another consideration regarding reverse mortgages is the cost, which may be far less expensive than it was a few years ago, but can still total 2-3 percent of the loan amount. It’s also important to remember that reverse mortgage payouts also can impact a borrower’s eligibility for means-tested benefits programs, like Supplemental Security Income (SSI) and/or Medicaid.
If you are serious about a reverse mortgage consult a registered investment advisor or an attorney, who can help determine if it is in your best interest.