Great Video on Reverse Mortgages from 01/06/09
Watch the video: http://www.pbs.org/nbr/info/video-share.html?s=nbre07n1bb7q4c4
From The Wall Street Journal Encore- Originally published Oct 26, 2008
By Anne Tergesen
Reverse-Mortgage Fees Drop, Loan Limit Rises
Recent housing legislation is likely to make reverse mortgages more popular among homeowners in need of cash. But the risks of such loans remain substantial.
The new law, enacted last summer, cuts the fees on reverse mortgages while raising the amount that homeowners can borrow against. “We’ll see a surge of applications,” says Peter Bell, president of the National Reverse Mortgage Lenders Association. These provisions will take effect Nov. 1.
Generally available to those age 62 and older, reverse mortgages let homeowners convert home equity into cash. Rather than having the homeowner write a check to the bank each month, the process works in reverse: The bank pays the homeowner, who can elect to receive a lump sum, a line of credit or monthly payments.
When the homeowner dies, moves or sells the home, the loan must be repaid. If the sale price doesn’t cover the balance, the homeowner doesn’t have to make up the difference.
Up to now, those applying for the federally insured loans that make up about 90% of this market could borrow against the lesser of either their home’s value or a limit that ranges from $200,000 to $362,790, depending on location. But the limit is slated to rise to $417,000 nationwide under the new rules. The older the homeowner, the more he or she can generally borrow.
Those borrowing more than $200,000 also will see their fees decline. While homeowners currently pay a 2% origination fee on these loans, under the new law they will pay 2% on the first $200,000 and 1% on the rest, with the total origination fee capped at $6,000.
That said, origination fees are only one part of the total cost, which can total as much as 10% of a home’s value, says David Certner of AARP, the advocacy group for older people. Of course, it makes little sense to pay such a high fee if you expect to move soon.
Moreover, the arrangements can be risky for those who may need home equity to pay for long-term care. If your home falls in value after you spend the money from a reverse mortgage, you may have little left over once you pay off the loan.
“There is a niche household a reverse mortgage is exactly right for,” says Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School of Business. “That person knows they want to stay in their home until death, and they really need the cash to allow them to do so.”
Write to Anne Tergesen at anne.tergesen@wsj.com
