Watch and hope for final passage of the FHA Modernization Bill, for there could be a reverse mortgage in your future, even if you live in a co-op or high-cost areas such as New York, Chicago or the cities of California.
The House and Senate bills to bring up to date the Federal Housing Administration and its popular reverse mortgage program, the Home Equity Conversion Mortgage, passed with bipartisan support late last year and have been in a conference committee to iron out minor differences. Preoccupation with the economic stimulus package has delayed action on the housing bill.
While lawmakers are still haggling about the housing portions of the bill, what concerns us here are the sections that provide new incentives for older homeowners to take advantage of the FHA-guaranteed reverse mortgage. It’s one way to use the equity in your home to get a tax-free cash cushion that can be taken in a lump sum, a line of credit or monthly payments, with the money used to pay debts or buy long-term care insurance.
According to reader Dennis Haber of Hicksville, a reverse mortgage specialist, these are among the new provisions in the bill:
FHA would expand Home Equity Conversion Mortgages to include co-ops, which could be a great help in areas like Manhattan where thousands of valuable co-ops are occupied by older people, many of them single women.
The bill would allow use of reverse mortgage proceeds for a home purchase. Someone, for instance, could sell a primary residence even though it had a reverse mortgage if he used the proceeds buy a retirement home as his primary residence.
The bill would eliminate the cap on the overall number of loans the FHA is authorized to insure.
It would replace county-by-county loan limits with a single, national loan limit of $417,000. It also would set a maximum origination fee of 1.5 percent of the loan amount and call for a study on the possibility of reducing mortgage insurance premiums or exempting borrowers from premiums altogether if part of the loan proceeds were used to purchase long-term care insurance.
Although other reverse mortgages are offered by Fannie Mae and private lenders such as Financial Freedom, the Home Equity Conversion Mortgage is the most popular and the safest in this volatile mortgage market because it’s insured by the FHA.
That means neither the borrower nor the lender can lose if the loan amount plus interest exceeds the value of the home.
The program is supervised by the Department of Housing and Urban Development, which requires that each prospective borrower undergo counseling by a HUD-approved agency to make sure he or she knows the disadvantages as well as the advantages of a reverse mortgage.
I have praised the Home Equity Conversion Mortgage as a good deal for older homeowners, and I have one myself. But last month I came across a story in USA Today that spells out one major problem: taking out a reverse mortgage when you’re too young. Home Equity Conversion Mortgaged are available to people who are at least 62, which means the leading edge of the boomer generation is becoming eligible.
Many boomers who have most of their assets tied up in their homes may be tempted to turn their equity into cash. But as the story noted, reverse mortgages would be of little help for people in their early 60s. That’s because the loan amount depends, in part, on the applicant’s age as well as the value of the home.
The older you are, the more money you can get. In addition, closing costs are high, and interest piles up, although those costs become part of the loan, to be paid off at the end. No one should take out a reverse mortgage who doesn’t expect to remain in the home for at least five years.
In the USA Today example, a 62-year-old Michigan widow who applied for a reverse mortgage on her $250,000 home got a loan of $116,000 while incurring $11,400 in fees and costs; at her age, the proceeds may not sustain her through her remaining life span. The ideal age for her to take out a reverse mortgage would have been over 70, when the loan amount would have been more than $130,000.
Haber’s new little guide to reverse mortgages, “Piggy Bank Your Home,” glides a bit too easily over the disadvantages of such loans.
For example, the interest really mounts up because it’s compounded over time; so the monthly statements you’ll get seem scary. Debt increases as the equity declines. But, as I said, if your home has increased in value, there will still be plenty of value left if you or your heirs decide to pay off the loan and sell the property.
Finally and most important, if the elderly property owner lives alone and must go into a nursing home and the property is vacant for more than a year or is no longer the borrower’s primary residence, the loan comes due. But if the borrower has executed an affidavit that he/she intends to return to the home and does so for at least some time each year, that might be a way around the problem.
There is more you should learn about reverse mortgages, including how much you can expect to get in a loan. Visit one of these Web sites: reversemortgage.org, aarp.org or hud.gov.
Found here.
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