Reverse Mortgages

Sandy Fink

ECO6226

What is a reverse mortgage?

Allows seniors 62 and over to use their home equity as an income stream:– Loan amount is not taxable as income;– No credit qualifications– Loan amounts are capped by county:

• In 2004, loan ceilings ranged from $160,176 to $290,319

Why haven’t we heard about this before?

Created in the early 1960’s– Reverse mortgage agreements written in the

early 1990s carried high interest rates and received bad press due to appreciation clauses:

• New Jersey woman moves to nursing home:– Had taken a reverse mortgage 18yrs ago, and has received

$312.00/month; 11.5% interest rate, TALC=13.43%– For $67,586=total advanced payments;– $158,218.19 includes 11.5% compounded interest…

Bank has 100% appreciation interest as clause in contract….a total of $416,500!!

CAVEAT EMPTOR!

Then…and now

Truth in Lending Act & Real Estate Procedures Act of 1974

Home Ownership and Equity Protection Act of 1994 (HOEPA)

Home Equity Conversion Mortgage (HECM) is FHA insured– FHA insurance costs up to 2% of loan amount and .2%

annual fees in addition to interest rate quoted

– Counseling is required

Facts & Figures

HECMs have tripled in the past few years:– 6,638 in 200 to 12,848 in the 1st 5 months of

2004• Interest rates are at historical lows

• Increasing medical care costs

• Corporate pensions are now a “remember when?”

• Baby Boomers are turning 60!

• More and more elderly couples are childless or have no bequest motives.

Advantages & DisadvantagesAdvantage Disadvantage

Provides cash flow from retained housing equity:

o Can assist with unexpected expenses or provide a vehicle to enable additional investments.

Emotional benefits of being able to stay in the home.

o Remaining independent; o Feeling safe & secure

Proceeds are tax free No minimum income requirements

Mortgage fees and insurance premiums are more costly than other conventional loans.

o Appreciation provisions Homeowners may be spending their

children’s inheritance; Vulgarities of age may make such cash

availability dangerous.