Reverse Mortgages Are Newer, Safer
Remember payment shock?
That was the term used when consumers received their new loan payment coupons after an adjustable rate mortgage underwent its first adjustment period.
A similar shock surfaced with the original reverse mortgage program in the 1980s, but the specific reverse mortgage program which allowed for payment shock is now grossly outdated.
Historically, reverse mortgages have enabled senior homeowners to convert a portion of their home equity into tax-free funds without having to sell their home, give up title, or take on a new monthly mortgage payment.
Reverse mortgages are available to individuals 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates, and a current home appraisal.
Funds obtained from the reverse mortgage are considered tax-free.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, as a line of credit, or in a combination of those options. No repayment is necessary.
Then, when the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus any accrued interest is repaid.
The borrower is not allowed to owe more to the bank than the value of the home.
Reverse Mortgages Improved To Protect Borrowers
Reverse mortgages are often vilified online and in print — similar to how people treated a certain type of “forward mortgage”, the adjustable-rate mortgage (ARM) — thirty-some years ago.
First authorized by the federal government in 1981, but almost unused before 1983, ARMs supplanted a system of fixed-rate loans and stimulated a drowsy home market.
ARMs caught on quickly simply because the market needed them.
As an inducement to borrowers, some lenders offered that were ridiculously low, qualifying borrowers for the first year of the loan but setting them up for potential bombshells shortly down the road — especially in a rising-rate market.
One specific type of ARM — the one-year ARM — gave the new mortgages a particularly bad reputation.
When borrowers finished the first year of seemingly easy payments, the discounted rate ended and borrowers were forced into markedly higher, second-year payments. These much larger monthly cash outlays became known as payment shock.
Lenders continued to refine and develop adjustable-rate mortgages, though. Today, to limit payment shock, many ARMs contain one-year, and life-of-the-loan, “caps” which limit their annual adjustments.
The original bold move to ARMs suffered an initial setback, yet was healthy for the industry. It the paved the way for a useable, practical option to what banks traditionally required.
Reverse mortgages can be viewed in a similar light.
Some early programs were flawed and have been improved. However, a few of the early loans are still in circulation, which can give the entire reverse industry a black eye on a punch it never saw coming.
Reverse Mortgage “Anecdotes” Still Sully The Product
Reverse mortgages have been in circulation since 1961 and the loan carries risk and reward like any other loan. However, there is one highly-publicized, oft-cited tale for which the reverse mortgage program is unfairly maligned.
The story begins in 1998 with a borrower who signed up for a reverse mortgage and whose family eventually owed the lender $765,000 after the home had sold. This real-life event sent a shock wave through the reverse mortgage community which had thoughtful steps toward creating viable programs for “house-rich-cash-poor’’ persons 62 years of age and older.
The borrower was 69-year-old when she took her a reverse mortgage on a home that was then valued at $980,000. The loan she selected contained an equity appreciation-sharing feature that entitled the mortgage lender, Transamerica Homefirst, to keep 50 percent of the increase in value over the life of the loan.
According to the story, the loan’s terms also required her to purchase an annuity that wouldn’t start to pay out for another 15 years.
Today’s reverse mortgages are not structured in this way at all.
The borrower, according to the syndicate story, received $58,000 of reverse mortgage benefit over a span of 32 months. Then, she passed away at which point her estate was presented with a balance due to Transamerica Homefirst in the amount of $765,112.
This case single-handedly slowed an industry that was headed down the right track toward providing financial options for seniors – many of whom had exhausted all other paths.
Reverse Mortgages Now Insured By FHA
Reverse mortgages suffer from lack of understanding and, sometime, fear-mongering.
And, to its credit, the National Reverse Mortgage Lenders Association, a national trade association for reverse mortgage companies, decided to increase its educational efforts regarding reverse mortgages and how they’re used.
The industry has changed, too. None of today’s reverse mortgages allow for equity shares in a home, or a “lender stake”.
Furthermore, the Federal Housing Administration (FHA), a section of the U.S Department of Housing and Urban Development, insures one such reverse mortgage product known as the Home Equity Conversion Mortgage (HECM).
HECM is the nation’s most popular reverse mortgage, accounting for more than 90 percent of all the reverse mortgages in the U.S. and Brian Montgomery, the former FHA Commissioner, was asked if he would encourage his own mother to get a reverse.
“I told her that I was her son and would always be looking out for her best interests,” Montgomery said. “I also told her that I administered the program for the United States of America and thought it was a pretty good idea.”