Helping Seniors Make Informed Financial Choices

It may sound hard to believe, but one part of the mortgage market is hot—reverse mortgages.  And that’s giving older homeowners more options to tap the equity in their homes, but also opening the door to more confusion and mistakes.

Less than two years ago, homeowners interested in reverse mortgages had little to choose from beyond the plain vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners 62 or older to mortgage a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments, or a line of credit.

Now, nearly a dozen large banks and mortgage lenders have launched reverse mortgage products with lower fees and larger payouts.  One lender has reduced the minimum age requirement to 60; others are making loans on second homes.  “Jumbo” reverse mortgages (for homes valued at as much as $10 million) are becoming more common.

I recently originated two reverse mortgages for a very successful contractor.  One was on his and his wife’s primary home and another was on their vacation home.  Both homes were valued well in excess of $1 million.  His strategy was to give himself a “stay of execution” on over $5,500 of monthly mortgage payments during these challenging economic times.  This example shows how we are now seeing reverse mortgage play an active role in financial planning for higher net worth homeowners 62 and over.

Reverse mortgage products have evolved from meeting basic needs to fulfilling the desires of a new generation of retirees, such as funding a vacation getaway or a recreational vehicle.  The new options, though, mean more potential for confusion among consumers and a bigger chance that they could miss out on getting the best loan for their situation.

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“Because of all the choices, homeowners need to be a lot more strategic in how they shop for a reverse mortgage.”

Reverse mortgage lenders traditionally have charged variable interest rates; now, fixed rates are available, but they may cost you more, says Barbara Stucki, director of the National Council on Aging’s home equity initiative.

“Because of all the choices, homeowners need to be a lot more strategic in how they shop for a reverse mortgage,” Ms. Stucki says, such as factoring in how they want to take the payments and how much money they want to take upfront. 

The boom in reverse mortgages helped Ronald Prast, a 74 year old retiree.  When he first applied two years ago, he was told by a loan officer that he wasn’t a good candidate; government rules would have allowed him to cash out only a small portion of the value of his half-million dollar home. But last year, a new reverse mortgage was unveiled that allows homeowners to borrow as much as 65% of a property’s value, up to $10 million, Mr. Prast and his wife quickly signed up.

The couple’s house, for which they paid $105,000 in 1981, was appraised at $540,000, Mr. Prast says.  They used an initial draw of $208,000 to pay off their outstanding mortgage, home equity loan, and one year’s property taxes, freeing up an extra $21,000 a year formerly used to make mortgage payments for travel and indulgences like paying for a granddaughter’s semester in Australia.  They also have a credit line worth $75,000 that they are setting aside for medical expenses.  “We were comfortably well off, and we wanted to release some of the funds we had tied up in our home,” Mrs. Prast says. (continued on Page 3)