Aid for the 'home rich but cash poor'
Acquiring a mortgage loan
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Tess Vigeland: Here's one area of the mortgage market that's seeing some action: federally-insured reverse mortgage applications are up 14 percent last year and most of those are getting approved.
Reverse mortgages are for people who are 62-years-old or older. They're designed to make the mortgage get bigger as they fills up the homeowner's pockets with cash.
Marketplace's Jeremy Hobson has that story.
Jeremy Hobson: Kate Love is a loan originator outside Seattle. She used to get people into forward mortgages. But, as she puts it:
Kate Love: 2007 was an interesting year to be a loan originator.
You can translate "interesting" to "disastrous." So Love was looking for a part of the mortgage market that was a bit more stable. She found it selling reverse mortgages for a company appropriately named "Stay In Home." Reverse mortgages are loans that are aimed at cash-strapped older homeowners.
Love: You know in this day in age where everyone's facing economic hardship, seniors are having a rougher time in my opinion than those of us who can still work. And so, it's been a growth market.
Essentially, reverse mortgages allow seniors to use the value of their house as an ATM. To explain how it works, here's a potential customer. He's 67, lives in Wichita, Kan. with his wife, has no children, and -- well, I'll let him introduce himself.
Sam Knecht: OK, it's Sam Knecht. First name: Sam. Last name: K-N-E-C-H-T. I usually say my parents were poor and couldn't afford to buy more than one vowel.
They could afford to buy a house, though, and Sam inherited it after they died. It's a ranch house worth about $150,000. He owes about $70,000 on the house and pays about $800 a month.
Knecht: And it looked like it'd be a good idea to supplement our retirement income by eliminating our mortgage payments.
So Knecht shopped around for a reverse mortgage. In exchange for an up front fee and a modest interest rate, a reverse mortgage lender would let him increase the debt on his house to free up some cash. That would pay down his forward mortgage and allow him to do some traveling. The money would be paid back to the bank when the house is sold.
Knecht: We expect to spend our last dollar on our last day.
Knecht -- or more importantly, the lender -- wouldn't have to worry about the value of the home decreasing and the mortgage going upside-down. That's because almost all reverse mortgages are insured by the Federal Housing Administration. With that kind of safety net, it's no wonder banks are still offering reverse mortgages.
But are they a good fit for everyone? I asked David Certner of the AARP.
David Certner: Well, it's generally a good fit for somebody who is what we might call "home rich but cash poor."
Certner says an increasing number of seniors are finding themselves in that position. The value of 401(k)s have plummeted in recent months and retirees are living longer.
Certner: Roughly one out of every three retirees is living almost entirely on Social Security alone, 90 percent or more of their income coming from Social Security.
But Certner says there are drawbacks to reverse mortgages. Right now, those federally insured loans can only assign a maximum value of $417,000 to your house. And reverse mortgages have high closing costs, including fees to the FHA in exchange for that federal insurance. He warns seniors to beware of loan originators who may try to get you to use the money from the house to buy a product you don't need.
But for the most part, he says, reverse mortgages are safe and may become more common as an increasing number of Americans retire without enough money to live on.
I'm Jeremy Hobson for Marketplace Money.