Once seen as a last resort, reverse mortgages are increasingly used by wealthy seniors for luxuries, or "lifestyle enhancements,” like mobile homes or European vacations.
Traditionally a last resort for poor widows trying to pay taxes or medical bills, they are now being used to hedge against real estate value fluctuations. Because higher priced homes may be harder to sell, reverse mortgages can help high-net-worth seniors turn equity into cash.
And reverse mortgages are booming: The number of Home Equity Conversion Mortgages (HECMs), traditionally the bulk of reverse mortgages, easily more than doubled to 107,558 in fiscal 2007 from the 2005 figure of 43,131, according to the Federal Housing Administration.
Lenders, too, are chomping at the bit at the thought of 78 million baby boomers approaching retirement and becoming eligible for the loans, especially since liquidity for traditional forward mortgages has dried up
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Loan amounts for the FHA-insured HECMs are limited to between $200,160 and $362,790 depending on the location, but private lenders recently introduced loans for larger amounts and even "super jumbos” for loans over $1.5 million.
They’re also advertising lower upfront fees, greater flexibility, and other helpful features.
Bank of America entered the field in a big way by purchasing Seattle Financial Group’s reverse mortgage group, the third-largest originator of the loan type. The bank is piloting a product in Arizona, the Senior Equity Maximizer, which offers loans up to $10 million, lower fees, larger loan-to-value rations, and automatic increases in loan amounts.
Countrywide introduced its Simple Equity with lower upfront costs for higher initial loan amounts. Wells Fargo said it would cut its margin for variable-rate reverse mortgages by half a percent.
One lender, Lender Lead Solutions of Melville, N.Y., even said it will offer the loans to homeowners as young as 60, two years under other lenders’ limit.
Financial Freedom, an IndyMac Bank subsidiary, recently introduced its Cash Account Advantage that allows larger loans for properties valued between $450,000 and $750,000 and a Simply Zero Cash Account that eliminates upfront costs.
Reverse mortgages have traditionally been dominated by HECMs, Financial Freedom, and Fannie Mae’s Home Keeper product.
Developed to address needs not met by HECMs, Home Keeper can lend to condominium owners and seniors wishing to use a reverse mortgage to purchase a new home. Its maximum loan limit is also larger, up to $417,000.
Maximum amounts for a reverse mortgage are based on the homeowner’s age and home value. They are not repaid until the senior dies or moves, with repayment coming from the sale proceeds.
The loan can be a lump sum, monthly payment, line of credit, or a combination of the three. Although homes must be owned free and clear, the homeowner could use a reverse mortgage to pay off a previous mortgage.
But more products can make decisions more confusing. Homeowners must carefully consider the lender’s interest rate, index, and fees. Fees can be high, ranging from 2 percent for some private products to 7 percent for government insured loans, a distinct disadvantage.
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