After paying off house, seniors increasingly let it pay them
WASHINGTON — With an estimated 77 million baby boomers about to hit their golden years, the move toward reverse mortgages has begun.
Though less than 2% of seniors have decided to turn the equity in their homes into cash by taking out a mortgage that pays them instead of the other way around, half of those reverse loans were written in the last two years. Plus the lending community has embraced the loan product — big time.
Reverse mortgages, also known as home-equity conversion loans, enable homeowners age 62 or older to convert their equity into tax-free proceeds. The amount you can receive is based on the age of the youngest owner, the value and location of your home and current interest rates. Generally, the older you are, the more you can get.
The house (mobile homes and cooperatives are not eligible) must be your primary residence. If there is any outstanding debt, it must be paid off with proceeds from the loan.
Reverse-mortgage borrowers can take their money in a lump sum, as monthly payments, as a line of credit that can be tapped as needed or in any combination of the three choices. Interest accrues on the borrowed amount, but no payments are necessary until the home is no longer owned. Consequently, the loan does not have to be repaid until you sell, move out or die.
In the last few months, Bank of America and Countrywide Financial have entered the home-equity conversion market. Wells Fargo already lays claim to being the nation's No. 1 retail reverse-mortgage lender. A number of smaller companies also are joining the hunt with new reverse-mortgage products.
Although all this activity holds the promise of lowering costs and increasing consumer choices, it also raises the question of rip-offs. Fortunately, reverse mortgages are loaded with consumer protections. One of the most important protections is a requirement that all borrowers must agree to attend an independent counseling session with a government-approved agency to make sure the product is the right financial tool for their situation. If anyone suggests you don't need to seek outside advice, run — don't walk — to the nearest exit.
Two key loan features also serve as consumer protections:
• Reverse mortgages are nonrecourse loans, meaning you'll never owe more than the value of the house. You'll owe the sum of what you borrowed plus the accrued interest. If the house is worth more than you owe when you leave it, you or your heirs will receive the difference. But if it is worth less than what you owe, the difference is not your problem or that of your estate.
• Mortgage insurance guarantees you will continue to receive your money if the lender goes out of business or otherwise defaults on the loan. There are other safeguards built into the product as well, according to Cheryl Chapin MacNally, who runs the senior products group at Wells Fargo in Bourne, Mass. Interest rates on adjustable loans are capped, meaning they can never rise above a certain level. There is no prepayment penalty, and borrowers can change their minds up to 72 hours after signing the papers.
Despite these protections, reverse mortgages have been a tough sell.
"It's a 20-year-old business that's still in its infancy," says Barton Johnson, president of Irvine-based Financial Freedom Senior Funding Corp., a dominant player in the field. Wells Fargo's MacNally agrees: "We haven't even scratched the surface yet. It is still a very underserved market."
But Johnson and others believe that's about to change. "The boomers are coming!" says MacNally, noting that cash-strapped senior homeowners can use reverse mortgages as financial planning tools to supplement their retirement incomes, maintain their houses, pay their property taxes, cover healthcare expenses or take care of their children and grandchildren.
Peter Bell, president of the National Reverse Mortgage Lenders Assn. in Washington, D.C., predicts that within the next few years, as many as a million reverse mortgages a year will be written.
"It's going to be a real monster product," agrees Financial Freedom's Johnson.
By ; Lew Sichelman, United Feature Syndicate
Via:www.latimes.com
Though less than 2% of seniors have decided to turn the equity in their homes into cash by taking out a mortgage that pays them instead of the other way around, half of those reverse loans were written in the last two years. Plus the lending community has embraced the loan product — big time.
Reverse mortgages, also known as home-equity conversion loans, enable homeowners age 62 or older to convert their equity into tax-free proceeds. The amount you can receive is based on the age of the youngest owner, the value and location of your home and current interest rates. Generally, the older you are, the more you can get.
The house (mobile homes and cooperatives are not eligible) must be your primary residence. If there is any outstanding debt, it must be paid off with proceeds from the loan.
Reverse-mortgage borrowers can take their money in a lump sum, as monthly payments, as a line of credit that can be tapped as needed or in any combination of the three choices. Interest accrues on the borrowed amount, but no payments are necessary until the home is no longer owned. Consequently, the loan does not have to be repaid until you sell, move out or die.
In the last few months, Bank of America and Countrywide Financial have entered the home-equity conversion market. Wells Fargo already lays claim to being the nation's No. 1 retail reverse-mortgage lender. A number of smaller companies also are joining the hunt with new reverse-mortgage products.
Although all this activity holds the promise of lowering costs and increasing consumer choices, it also raises the question of rip-offs. Fortunately, reverse mortgages are loaded with consumer protections. One of the most important protections is a requirement that all borrowers must agree to attend an independent counseling session with a government-approved agency to make sure the product is the right financial tool for their situation. If anyone suggests you don't need to seek outside advice, run — don't walk — to the nearest exit.
Two key loan features also serve as consumer protections:
• Reverse mortgages are nonrecourse loans, meaning you'll never owe more than the value of the house. You'll owe the sum of what you borrowed plus the accrued interest. If the house is worth more than you owe when you leave it, you or your heirs will receive the difference. But if it is worth less than what you owe, the difference is not your problem or that of your estate.
• Mortgage insurance guarantees you will continue to receive your money if the lender goes out of business or otherwise defaults on the loan. There are other safeguards built into the product as well, according to Cheryl Chapin MacNally, who runs the senior products group at Wells Fargo in Bourne, Mass. Interest rates on adjustable loans are capped, meaning they can never rise above a certain level. There is no prepayment penalty, and borrowers can change their minds up to 72 hours after signing the papers.
Despite these protections, reverse mortgages have been a tough sell.
"It's a 20-year-old business that's still in its infancy," says Barton Johnson, president of Irvine-based Financial Freedom Senior Funding Corp., a dominant player in the field. Wells Fargo's MacNally agrees: "We haven't even scratched the surface yet. It is still a very underserved market."
But Johnson and others believe that's about to change. "The boomers are coming!" says MacNally, noting that cash-strapped senior homeowners can use reverse mortgages as financial planning tools to supplement their retirement incomes, maintain their houses, pay their property taxes, cover healthcare expenses or take care of their children and grandchildren.
Peter Bell, president of the National Reverse Mortgage Lenders Assn. in Washington, D.C., predicts that within the next few years, as many as a million reverse mortgages a year will be written.
"It's going to be a real monster product," agrees Financial Freedom's Johnson.
By ; Lew Sichelman, United Feature Syndicate
Via:www.latimes.com
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