Note: The National Reverse Mortgage Lenders Association's website is now at ReverseMortgage.org.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
For cash-strapped seniors, reverse mortgages might look like a godsend, but do these products make sense for many investors?
Here to discuss that question is Ilyce Glink. She is the author of Buy, Close, and Move In!. She is also a blogger and a real estate expert.
Ilyce, thanks so much for being here today.
Ilyce Glink: It's nice to be here, Christine.
Benz: So, Ilyce let's start at the beginning. What is a reverse mortgage?
Glink: A reverse mortgage, which is a complete misnomer, is a loan that you can get if you're 62 years of age or older, and if you have almost no existing or current mortgage on your property; so you have to have a lot of equity. A reverse mortgage allows you to tap into that equity, receive the money either in a lump sum, stream of income over the months you can annuitize it, or as the form of a credit card, where basically it's a line of credit and you can charge against that line of credit, as you need it.
But like a mortgage it's structured based on interest payments that are due, except that with a reverse mortgage you don't pay anything on the loan until you and your spouse, if you have one, move out of the home permanently either selling it or you move somewhere else to live.
Benz: Okay. So you had mentioned to me Ilyce, that this landscape has changed a lot, and things have changed for people taking out reverse mortgages. Can you discuss what's going on there the past few years?
Glink: Sure. So, think about it. We've been in a housing crisis now for at least four years. I would say conservatively, but some people might say three--regardless, the home values have plummeted across the country. So, we've seen since the height of the market home values dropped by 30%, 40%, 50%.
Let's say, you are a reverse mortgage lender and you, Christine, although you are nowhere near 62, let's say, that you took out a reverse mortgage, and interest is accruing on this loan that you took out, let's say, 6.5% or 7%, while your home value has now dropped by 50%--let's say, you live in Arizona or Las Vegas. So, the investor or the lender who lent you the money, they were expecting that your home value would have actually kept increasing in value 4% a year from the point that they lend it to you.
So, if your house was worth a $100,000, and you took out a reverse mortgage for say $60,000 of that, they would have expected that has to increase at 4% per year starting at the $100,000 level. So, $104,000 the next year, you know, and again and again.
What's happened, though, is your house is worth $50,000, you've borrowed $60,000, you've got interest accruing on that $60,000, and the lender is underwater.
So, nationally, reverse mortgage lenders are waking up and finding that tens of thousands, maybe even hundreds of thousands of these homes are now underwater with their loans, just like all the homeowners out there. So, what this has done is started everybody rethinking how reverse mortgages work, how you can ensure that the equity and the borrowing don't get out a whack, and what you can do going forward to ensure that there isn't a huge loss for the lender or, in many of these cases, the federal government.
Benz: So, for current holders of reverse mortgages there really aren't any implications for them, just the lenders, but for people looking at these products for the future, do you think there will be changes in the terms they can receive? Will it be less favorable for them?
Glink: We've already seen some changes. So, reverse mortgages when they started out maybe a decade or so ago, there was a law that changed and you were allowed to have them. They were frightfully expensive. People would take out a $100,000 reverse mortgage, and they might pay $20,000 in fees.
So those have been brought down and capped at maybe $6,000 per loan, and then there is some other fees built in, and because mortgage interest rates are so low your reverse mortgage loan--though slightly higher than the say 3.75% I just got on my 15-year mortgage--you won't pay that, but it won't be 7% or 8% or 9% either.
So, for people going in, the costs are down significantly, but for lenders there is certainly some uncertainty about whether you want to be backing these loans--really there is only two kinds, Fannie Mae-backed loans, and then the government backs them.
Benz: So, if I'm evaluating a reverse mortgage versus a home equity line of credit, what are some of the variables that I should be thinking about?
Glink: One thing to think about is what money you need, what do you need it for, and how long you're going to need it?
So, when people come to me and they say, should I get a home equity line of credit? I need to fix my roof.
I say to them well, you're young, you're working, you're still getting income in, can you support the home equity line of credit?
A reverse mortgage is a loan that you never have to pay back [until the homeowner moves out or passes away]. So, it's ideal for seniors because they don't have to worry about making the monthly payments--with a home equity line of credit you do. So, if you are a senior on very limited income, probably won't qualify for a home equity line of credit. But you would qualify for a reverse mortgage, because you don't have to worry about those payments upfront. That's one big consideration.
Next consideration is, what do you really need the money for? If this is a temporary loan, you know you are going to be selling the house. It's very expensive, if you're only going to keep a reverse mortgage for a short period of time, to get it, because you have some fixed upfront costs.
Home equity loans on the other hand, if you can get a lender to do one--and it's more difficult than it was--are an easy walk-in, walk-out kind of a loan with few upfront costs. So, you really want to look at what you need and what you need it for, and again, how long you're going to keep that loan.
Benz: Okay. So, finally, if I have latched under reverse mortgage as a good idea for me, what are some of the resources I should look to when trying to decide and decide among products that might be out there?
Glink: Sure. I think there are a couple of big lenders that do reverse mortgages. Undoubtedly, if you do a Google search, you'll run up against them.
AARP has a really decent site on reverse mortgages. You can also go to reverse.org, which also has some great information as well. And then the government has some information up at hud.gov.
Benz: Okay. Sounds good. Thank you, Ilyce. Thanks for sharing your insights into this area.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.