Ever since the mortgage mess began, many have criticized homeowners for treating their real estate like an ATM. For older homeowners, though, trying to turn their home equity into cash is a real need -- and with the current state of the housing market, it's been far from easy.
That's why many seniors will be glad to hear what a number of lending institutions are saying about reverse mortgages. Under new pricing schemes that several lenders plan to use, you could save thousands of dollars if you decide to go forward with a reverse mortgage. But the question remains: Is it the best way to get at your home equity?
Home sweet home
The largest asset that many people ever own is their home. Over time, as you pay down your mortgage, you'll end up with an increasing amount of money tied up as home equity. Eventually, longtime homeowners pay off their mortgage completely and own their homes free and clear.
Not having to worry about a big mortgage certainly brings a measure of security, especially in these troubled times. But there's a cost to having a lot of home equity: It can be difficult to get that money out when you need it. Given the current state of the housing market, selling your home for a reasonable price simply isn't an option in many areas. And even during better times, many seniors don't want to give up their homes.
Traditional mortgage financing doesn't really meet the needs that most seniors have. Under a mortgage or home equity loan, you'll typically get a lump sum up front, and you'll then need to make monthly payments to pay it off. Yet typical retirees don't have the income to cover a mortgage payment.
The mechanics of reverse mortgages
That's where a reverse mortgage comes in. Offering a lump sum, regular monthly payments, or a line of credit that you can draw on at will, reverse mortgages are flexible enough to tailor to your particular needs. Most of them are available through a program of the Department of Housing and Urban Development, with Fannie Mae (NYSE: FNM ) providing funding for the HUD program. They don't require the homeowner to make monthly payments. Best of all, you can keep and live in your home as long as like -- and the reverse mortgage doesn't come due until either you sell your home or move to another home as your primary residence, or until after your death.
One concern about reverse mortgages, however, has been their cost. Historically, a sizable amount goes to origination and servicing fees as well as the government insurance required to open a reverse mortgage. However, according to the Wall Street Journal, a number of big players in this industry are cutting some of these fees. In particular:
- Wells Fargo (NYSE: WFC ) is cutting origination and servicing fees on adjustable-rate reverse mortgages. MetLife (NYSE: MET ) is doing so on its FHA-backed fixed-rate reverse mortgage.
- OneWest Bank -- the successor to the failed IndyMac -- has agreed to cut interest rates by 0.75 percentage points.
- Genworth Financial (NYSE: GNW ) and Bank of America (NYSE: BAC ) are both either making similar moves or studying cost-cutting measures for the future.
Does it make sense?
The danger of reverse mortgages is that it may encourage seniors to use their homes to spend beyond their means. Reverse mortgages certainly aren't the simplest way to draw out captured home equity, and even with cost reductions, the process of getting one is expensive. And if that money runs out, seniors may run out of options.
But reverse mortgages aren't as dangerous to the financial system as traditional mortgage and home equity loans. The required FHA insurance makes sure that when the loan period ends, even if the sale proceeds of the home aren't sufficient to pay off the loan, neither you nor your heirs will be stuck with a bill for the shortfall. There are strict limits on how much equity you can draw out, geared toward protecting the insurer and lender.
With the housing market still struggling to recover, the last thing seniors need to worry about is how they'll get the money they need from their homes. If you have the financial discipline not to treat it like an ATM, a reverse mortgage is worth looking into -- and it may give you the best balance between meeting your financial needs and letting you stay in your own home as long as you can.
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