As people grow older and retire, many confront the problem of not having enough money to live on and enjoy life, and at the same time, being able to stay in their current home or the home of their choice. This is because so much of their accumulated wealth is tied up in their home, so many seniors end up "house rich and cash poor," said Richard Glover (NMLS # 227036), director of the Reverse Mortgage Division of American Fidelity Mortgage Services, Inc. of Lisle (NMLS #179785).
For years, those older than 62 have been able to take out a Home Equity Conversion Mortgage, or HECM, popularly known as a reverse mortgage, on their current home or to purchase a new house, freeing up much more of their equity for use during retirement.
But HECM rules are changing as of Oct. 2, so Glover is urging homeowners who have been thinking about a reverse mortgage to contact American Fidelity immediately in order to schedule the required financial counseling and get an FHA case number before that deadline. This will ensure that they don't miss the opportunity to obtain a reverse mortgage under the expiring rules. They will then have 60 to 90 days to explore their options and make a final decision because they have to close on the mortgage within 120 days or the case number will expire.
The Department of Housing and Urban Development has experienced large losses recently, attributed to legacy loans dating back to 2007 to 2012. Those loans are now maturing with losses because of the way they were structured, Glover said. Because of this, HUD Secretary Ben Carson recently announced major changes to the program to make reverse mortgages less advantageous to the borrower than they are today.
"There's a small window of time to get into the higher loan-to-value program with less cost because after Sept. 30 the new rules will apply," Glover said.
Borrowers will no longer be able to access as much of their equity. In addition, the required mortgage insurance rates will rise. On a mortgage of $400,000, the insurance cost will rise from about $2,000 now to $6,000 and the total transaction cost will be higher, Glover predicted. This reverse mortgage loan will never be more advantageous to the consumer than it is before Oct. 2.
It would behoove anyone who has an interest to act immediately, Glover said.
"A reverse mortgage is a widely misunderstood and underutilized product," he continued. "It was designed in 1989 to make it possible for people to 'age-in-place' because there are not a lot of other options and most people want to stay in their home. When you compare it to a home equity line of credit, this is a much more sensible product. You get access to your home's equity in the same manner, but a monthly principal or interest payment is not required and, unlike a HELOC, with a HECM we actually extend additional credit to the borrower every month.
A senior's available credit line will grow as an investment when it remains unutilized.
"This means that a 65-year-old person who qualifies for $150,000 of their home equity and doesn't use it will have access to over $250,000 in ten years, and close to $500,000 at age 85, regardless the value of the house. When added to most financial plans, the presence of a HECM improves all outcomes," Glover said.
"You can use the reverse mortgage to pay off an existing mortgage, too. This adds to cash flow in the home and often creates the additional line of credit, as well. What a lot people don't realize is that they can make a payment if they want to, but it is not required," he added.
"With a HECM, everything is guaranteed until you turn 150 years old so that you don't outlive the terms. You can get things done in reverse," Glover said. "You can get a lump sum (payment), you can get a payment made for the remainder of the time you live in the house, (and/or) you can get a (monthly) 'term' payment for a period of years. Or you can leave the money on the line of credit. This annuitizes your home's equity because the available unused funds will grow at a rate equal to your interest rate.
"But if they do need to draw money, that credit line is always there when they need it and cannot be canceled as long as they are within the terms of the agreement, which includes occupying the home as their primary residence," Glover said.
The reverse mortgage loan is repaid using proceeds of the sale of the house after the senior moves or passes away.
"The worst thing that a senior can do is have income because that increases their tax liability and is self-defeating. But if you draw against funds that are yours, it does not count as income and is not taxable," Glover said.
If the homeowner chooses to receive term payments, lenders can arrange to have them made for only a certain number of years or for the entire time they live in the house. The nice thing, according to Glover, is that the homeowner can change the terms any time they wish by only paying a $20 re-administration fee instead of paying the fees and taking the time involved in a regular refinancing.
In addition, a misconception is that reverse mortgages are expensive loans. There are different cost structures depending on the percentage of available equity, or money accessed when the loan is set up and the amount of money drawn at closing. However, Glover said the costs can be comparable to that of a standard mortgage.
"The program was seeing approximately 5,000 case numbers pulled each month but now that it is changing. We are expecting that the number will spike to 15,000 or 20,000 this month," Glover said. "So we are urging people to get counseled (for a fee of $100 to $150) and get a case number pulled right away so they can take a breather and get educated. Then they can analyze the facts and decide if the program is for them or not."
American Fidelity Mortgages Services is one of only a handful of HUD-approved, FHA directly endorsed mortgage bankers based in Illinois. For more information about a reverse mortgage, call American Fidelity Mortgage at (847) 464-8080. Experts will be available to assist you over the phone seven days a week until the Oct. 2 deadline.