Reverse Mortgages Require Equity: Will Boomers Have Enough?

1/29/2008

posted by N. Sioris

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The reverse mortgage industry is practically salivating over the thought of 78 million baby boomers starting to retire this year. The US government is also counting on reverse mortgage loans to help some seniors defray the ever increasing costs of health care and prescription drugs. It's no secret that entitlement programs like Social Security, Medicare, and the prescription drug plan are teetering on insolvency. Things are only going to get worse as the huge boomer generation starts requiring payments from these programs.

Consequently, reverse mortgages are being closely watched by those in government that need the boomers to rely more on their own assets than from the assistance of federal entitlement programs as earlier generations did. The second sector that is watching closely, are the many lenders and mortgage brokers that are now introducing competitive products and training reverse mortgage sales representatives by the droves, with the expectation of "cashing in" on this tremendously large segment of the population.

But… and this is a big But – The elephant in the room that everybody is trying to ignore, is the fact that a lot of baby boomers will be entering retirement still carry large mortgage balances on their homes. This generation will be entering retirement carrying more mortgage debt than any previous generation in history.

The Baby Boom generation has never been opposed to borrowing on credit or carrying debt. It has never bothered the typical boomer to live a lifestyle beyond his means, and simply say “charge it,” when he wanted something now, instead of saving for it and buying it later with cash. Boomers, as well as many Americans that own homes today, have been using their homes as if they were ATM machines. This was especially prevalent from 2000 through 2005 when home values soared in many parts of the country.

In order to qualify for a reverse mortgage the main requirement is considerable equity in the home. The equity must be substantial because the home’s value needs to keep pace or out-pace the accumulating interest on the loan. If the typical baby boomer is going to live 25 or 30 years after retirement age, the reverse mortgage loan for all intents and purposes must not end up having a higher balance than the home is worth after interest accumulates over that 25 or 30 year time frame. (in the event that the balance is more than the house is worth at the end of the term, the mortgage insurance pays the shortfall to the lender.) But you can be sure that the lenders and the insurers carefully calculate the amount of money that can be taken from the built up equity in the first place, so that in the majority of cases there is no shortfall. Consequently, someone that is 62 (the youngest age allowed for most reverse mortgages) may only be allowed to borrow 30 to 50% of the value of the home, because that 62 year old could conceivably live to be 92. Thirty years of interest could easily make the ending balance close to 100% of the value of the home by that time, depending on appreciation and interest rate fluctuations.

So here’s the rub: If the baby boomers still owe 60, 70, 80+ percent of the value of their homes at retirement age, there is no equity for them to tap into with regard to a reverse mortgage.

If you would like to find out if you have enough equity to qualify, request your free personalized reverse mortgage evaluation here.

Watch HECM Reverse Mortgage Video

1/15/2008

posted by N. Sioris

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View this video for an excellent snapshot of what a reverse mortgage is, and how it might benefit you and your family. In less than 5 minutes you will learn some of the major myths, pros and cons, as well as the benefits of the most popular reverse mortgage: the government insured HECM (Home Equity Conversion Mortgage).

Amount Of Money Available From A Reverse Mortgage Disappoints Some Seniors

1/14/2008

posted by N. Sioris

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With the recent surge in popularity of reverse mortgages, more and more senior homeowners are looking into this unique type of home equity loan. However, some seniors are disappointed with the amount of money that they can actually receive from a reverse mortgage.

One of the common misconceptions about reverse mortgages is that the loan amount allowed by the lender will be similar to that of a conventional forward mortgage. Many people assume that 75 to 80% of the value of the home will be loaned on a reverse mortgage loan. Unfortunately this is not the case.

A reverse mortgage is almost the opposite of a "forward" mortgage. Because a reverse mortgage is a rising debt, falling equity loan, the lender must factor in several variables in order to insure that the equity that is being paid out to the homeowners, plus the accumulated interest does not exceed the value of the home at the anticipated time that the lender will be repaid. In other words, the lender is factoring life expectancy and home appreciation into the calculations, so that at the time the homeowners permanently leave the home, the lender is in a break even situation and not "underwater" on the loan.

Because life expectancy is such a large part of the equation, the loan to value necessarily must be lower than on a forward mortgage. The beauty of a reverse mortgage is that the homeowner does not have to repay the loan until he permanently moves out of the home or passes away. The house stands alone for the debt, not the heirs or the estate. Consequently, the lenders will try to predict what the outstanding loan balance will be based on the life expectancy of the youngest borrower. Using actuarial tables, the current interest rate, and the value of the property at the time the reverse mortgage is initiated, the lender will determine the loan amount that is available for the reverse mortgage.

Reverse mortgage loan amounts can sometimes be as low as 35 or 40% of the current appraised value if the borrowers are young (close to 62). For someone that has just turned 62, conceivably that borrower could remain in the home another 30 or more years. Therefore, the lender must factor into the loan amount, the accumulated interest for those 30+ years. The lender then factors in an annual appreciation figure for the property and makes a calculated risk that the home will be able to pay off the balance of the reverse mortgage when the home is sold or refinanced after the seniors permanently leave the home.

If the lender miscalculates and the reverse mortgage loan balance is greater than the value of the home at the time of repayment, the lender is then reimbursed the shortfall from the FHA Mortgage Insurance fund, (if the loan is a HECM reverse mortgage,) not the heirs or the estate.

Sometimes you will hear complaints about the high closing costs associated with a reverse mortgage. One of the components of the costs is the 2% FHA Mortgage Insurance Premium that all HECM loans require. If the mortgage insurance was not available, there would be very few lenders in the market today that would offer non-recourse reverse mortgages. The risk of a shortfall would be too great and the lenders would simply not be offering the product.

The older the homeowners, the higher the loan to value percentage for the reverse mortgage loan amount. Obviously, this is because the life expectancy is shorter and the loan repayment date will be sooner. To see how much money you can qualify for, request a free personalized reverse mortgage evaluation today.

Avoid Mortgage Fraud: Video By Freddie Mac

1/11/2008

posted by N. Sioris

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Freddie Mac, one of the nation's largest investors of residential mortgages, produced this two minute video to help educate distressed homeowners to avoid mortgage fraud.

If you suspect that you have been a victim of mortgage fraud, you can report it by calling the Mortgage Fraud Hotline: 1-800-437-2838. You can also contact your state's Attorney General through the Consumer Fraud Reporting Website.

There Is No Such Thing As A Free Lunch

1/09/2008

posted by N. Sioris

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We have all heard the expression; "There is no such thing as a free lunch." Most everyone interprets that phrase to mean that if something is being offered free, it usually has strings attached.

Today, more and more people, seniors in particular, are being offered a "free lunch" or sometimes even a "free dinner," in exchange for attending a seminar. Usually the seminar presenters are hawking financial services, investment products, reverse mortgages, annuities, life insurance, long term care insurance, etc. etc.

In the January 2008 issue of Kiplinger magazine, author Kimberly Lankford, discusses retirement schemes. Lankford says that the Securities and Exchange Commission discovered that unethical business practices occurred in almost half of the seminars that were checked by the SEC.

Kiplinger outlines four strategies to protect your assets from retirement rip-offs.

1. Be wary of promises of unrealistic returns. "Anything that talks about average returns higher than 11 percent should be treated with suspicion." says Lankford. "If the broker goes from saying 'averages' to 'guarantees,' be ready to walk away."

2. Check the professional background of the broker by going to the website for Financial Industry Regulatory Authority's Broker Check. Here you can find information on about 660,000 registered brokers and 5,100 securities firms. If the advisor is a financial plannner, you can check credentials with the CFP Board of Standards. You can also refer to the Senior Investor Resource Center and the SEC's senior investor page. Something as simple as verify whether an agent is licensed or not can keep you from being a victim of a scam.

3. Keep records of all meetings. Take notes when speaking with a broker about your investment goals, or ask for a written summation of your discussion. Requesting paperwork can discourage an agent in search of an easy target.

4. Set up an account. When paying for your investments, never write checks directly to an individual. Open an account with an independent financial institution. That way you will also have leverage if your investment starts to lose value, or if you discover your broker has rated the risk it carries below its real potential.

Living Expenses Should Be Lower In Retirement - But Is This Really The Case?

1/05/2008

posted by N. Sioris

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Conventional wisdom says that during retirement your expenses will be lower than they were while you were raising a family and working. Many financial planners contend that you will only need about 75 to 85% of your pre-retirement income to live comfortably in retirement. The expenses that will no longer be a factor are taxes, commuting, savings and other bills that will disappear after you leave work.

However, a recent survey conducted by the Wall Street Journal says that for many retirees their financial needs equal or exceed their spending during their working years. Some of the factors contributing to this phenomenon are that retirees, especially during the early years, wish to travel, make home improvements, help family members and contribute to their communities. Discretionary spending actually increases for many retirees. In addition, retirees are encountering higher than expected costs for such things as home owner's insurance, property taxes, health care and long term care insurance.

One way that many senior homeowners are covering some of these expenses is by tapping into their accumulated home equity, by using a reverse mortgage. By taking equity from your home with a reverse mortgage you are not obligating yourself to any additional monthly mortgage payments. A Reverse Mortgage is the reverse of a regular conventional mortgage, in that, the lender now makes payments to you instead of the other way around. The money you receive from a reverse mortgage is tax-free and will not negatively impact your Social Security or Medicare benefits.

A free reverse mortgage benefit summary can be obtained without obligation, just click here for your Free Evaluation, and see if you qualify for this unique financial planning tool.