This special type of home loan lets homeowners convert a portion of his or her home equity into cash providing for a secure financial future. Without selling the home, giving up title, or taking on a new monthly payment senior homeowners have the benefit of maintaining a lifestyle they have earned. The money from the reverse mortgage provides seniors with the financial security they need to fully enjoy their retirement years.
A reverse mortgage, the most popular form being the “Home Equity Conversion Mortgage” (HECM), is a mortgage that allows seniors (aged 62 years and above) to access and borrow against the equity in their home without having to sell it, give up the title, or incur a monthly mortgage payment. While such funds can be used for any purpose, repayment is required only if the borrower dies, sells the home, or no longer occupies the home as the primary residence. The proceeds of the reverse mortgage depend upon the age of the youngest borrower, the current interest rate, lower of the appraised value or purchase price of the home, and the maximum mortgage limit. While the traditional HECM program oﬀered ﬁnancing on existing primary residence, Congress has, over the recent years, expanded the program to allow for the purchase of a home.
Reverse mortgages have become increasingly popular with seniors who have equity in their homes and are seeking to supplement their income. During the ﬁrst four years of the program, HECM originations increased exponentially exhibiting an average year-on-year growth of 167% and resulting in an increase in HECM originations from just 389 in 1991 to 6,737 in 1994. In the thirteen years that followed, up until the recession of 2008, HECM originations increased at an average annual rate of 33%, reaching 346,177 loans in December of 2007. This rapid growth can be attributed to the increase in elderly population of 5%, and a home price driven equity increase of nearly 45%. Due to the recent recession and resultant drop in home values, the HECM growth slowed to an average annual rate of 16% from 2008 to 2013.
Since the inception of the reverse mortgage program, HECM origination volume and the Housing Price Index (HPI) have shown a strong positive correlation (Figure 1). As home values appreciate, the demand for HECM loans increases and vice versa. The Federal Reserve reported that new equity in household real estate rose by $2.2 trillion from the third quarter of 2012 to the third quarter of 2013, and is expected to have a similar growth in 2014.
Equity growth and increasing home values provide a strong positive evidence for future increases in HECM loan volume. The numbers are also encouraging for the average U.S. homeowner, especially for those who are eligible and considering a reverse mortgage.
Wondering if a reverse mortgage is right for you? Reverse mortgages are home loans that allow eligible homeowners, 62 years of age or older, to tap into their home equity. While that friendly reverse mortgage salesperson can be helpful, the Consumer Financial Protection Bureau (CFPB) says you should not rely only on advice you get from someone who will benefit from selling you a loan. We couldn’t agree more. And if you’re reading this blog, I’m sure you’ve already seen all the upbeat reverse mortgage TV commercials. Remember, though, that television actors and spokespersons are paid to say good things about reverse mortgages, but they will not be there to protect you if something doesn’t turn out as expected. At the end of the day, this is about your real life, not a sales pitch or a television script.
If you’re a Californian, beginning in January 2015, under a new law you must receive important information about reverse mortgages. The law also gives you time to consider your choice before you can become obligated on a new reverse mortgage.
The new law:
1. Requires reverse mortgage sellers to give prospective borrowers a self-evaluation worksheet before the required counseling session to consider key issues in deciding whether a reverse mortgage is right for them. The worksheet will make the counseling session more efficient by pre-identifying any issues of importance for discussion, such as:
- What happens to others living in a home with a reverse mortgage when the borrower dies or moves out.
- Whether the borrower has sufficient assets to avoid a reverse mortgage default by keeping up with homeowners insurance, property taxes, and home maintenance.
- The importance of fully exploring other options to a reverse mortgage.
- Dangers of using a reverse mortgage to fund the purchase of other financial products.
- The possible impact a reverse mortgage may have on a borrower’s eligibility for government assistance programs.
2. Requires the counselor and the prospective borrower to sign the reverse mortgage worksheet guide.
3. Prohibits a lender from taking a reverse mortgage application unless the applicant has received from the lender a specified reverse mortgage worksheet guide.
4. Prohibits a lender from taking a reverse mortgage application or assessing any fees until seven days from the date of loan counseling.