The latest on reverse mortgages
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Scott Jagow: If you’re 62 or older and the stock market is eating your retirement, here’s something to think about: a reverse mortgage.
Instead of making a payment every month, you get paid. It’s a loan, it’s tax free, and it’s due when the house is sold.
The government just made some changes to reverse mortgages, so let’s bring in Meg Burns. She’s with the Federal Housing Administration.
Meg, first, why a reverse mortgage instead of say, an equity line of credit?
Meg Burns: To qualify for a home equity line of credit, a senior has to have some source of income that demonstrates their capacity to repay on that mortgage and a lot of seniors don’t actually have cash flow, they don’t have a lot of assets to tap, and that’s the beauty of the reverse mortgage: you don’t actually have to have income to qualify for it.
Jagow: What do you have be careful with if you’re thinking about doing a reverse mortgage?
Burns: Well, there are two factors at play here. One is the senior gets hurt in the sense that they tapped into equity for something that maybe then they were disappointed they spent the money on and there’s not additional equity to tap for something else. When the senior dies, the estate is responsible for selling the property and then those proceeds are used to pay off the reverse mortgage, so it is true that potentially the heirs are affected by an unwise use of reverse mortgage proceeds as well.
Jagow: Now I read that the fees for reverse mortgages can be kind of high and that you have to watch out for that.
Burns: This is actually one of those interesting myths. The fees associated with the reverse mortgage are exactly the same as the fees and charges associated with the forward mortgage. The difference between the reverse and forward is that all of the charges are very transparent with the reverse mortgage. As we all know, when you get a forward mortgage you often have the option to a “no closing cost” loan or no origination fee but the lender folds that into the interest rate, so there are fees and charges that people don’t see that are very obvious to them with reverse mortgages which is actually a good thing.
Jagow: Yeah. Interesting. Well, I’m glad you brought that up. There have been some changes to the policy regarding reverse mortgages. Some of them have to do with consumer protection. I want to focus on the limit for these mortgages. It’s been up to $417,000. How does that affect the landscape for reverse mortgages?
Burns: It’s actually a very good thing for the FHA reverse mortgage product. FHA’s loan limits previously varied by geographic area and they were set based on the median sales price in the area. So, in low cost areas like Alabama, the limits were set in the $200,000 range. In higher cost areas like say, parts of California, they were set at the $360,000 range. So, the new single national loan limit makes the product more equitable for seniors living all across the country that based on the value of their property as apposed to the FHA loan limit, they would be eligible to tap the same amount of proceeds.
Jagow: Well, you’ve been very helpful Meg. Meg Burns from the FHA. Thanks for joining us.
Burns: Thank you for having me.
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