Peter Bell, president of the National Reverse Mortgage Lenders Association, was in Greenwood Village last week to discuss the often-confusing refinance product. With longer lifespans, Bell says aging boomers will increasingly have to look at their homes as financial assets.Photo by Peter Jones
By Peter Jones
Have you ever wondered if a reverse mortgage is right for you?
Bet you’ve heard that one before – perhaps on television commercials, starring the likes of Fred Thompson or Henry Winkler.
More to the point, what exactly is a reverse mortgage – and isn’t anything with a name like that too good to be true?
Is it really a mortgage that pays you – not the other way around?
Peter Bell, president of the National Reverse Mortgage Lenders Association, was in Greenwood Village last week to talk about the changing face of a mortgage product that many have dismissed as a last resort for the elderly indigent.
Denver is one of three cities, along with Seattle and Philadelphia, that the Washington, D.C.-based trade organization has targeted for a months-long marketing and public-information campaign focused on the often-confusing refinancing option created by Congress in the late 1980s.
As Bell, 61, explained in an interview with The Villager, it may be increasingly important for aging baby boomers to think of their house as more of a functional financial asset than an object of inheritance for their children.
Villager: What exactly is a reverse mortgage?
Bell: It’s no different than a home-equity loan with the exception that it has a deferred-payment feature. You draw out the money while you’re living there and then the loan becomes due and payable, plus the interest that has accrued over time. Unlike a home-equity loan, it’s patient money. The lender will wait until you permanently leave the home to collect.
Villager: So when you die, instead of inheriting a home, your kids inherit debt?
Bell: They don’t inherit a debt, but if the balance is bigger than the value of the home, then the home will be used to pay it off. No matter how much you owe in the end, you’ll never owe more than the current value of the home. For instance, if the balance due is $300,000 and the house is worth $250,000, the lender will accept the payoff at $250,000. Your kids would never owe money. What’s interesting is at least half of the loans are originated by kids. Mom and Dad are struggling to make ends meet. The kids say, “This is your wealth. Don’t worry about us.”
Villager: How can lenders afford to take that loss?
Bell: The loans are all FHA-insured. If the lenders come up short, they have the ability to file an insurance claim with HUD and have FHA pay them back. Because of that, HUD is highly regulated. Every one of the borrowers has to go out to a third party for counseling required by statute. [Some have said] if the rest of mortgages had that same safeguard, we wouldn’t have had the meltdown.
Villager: Surely you can’t take more money than your home is worth.
Bell: Yes and no. You get a percentage of the value of the home based on your age. If you’re younger, presumably you’ll be there longer, so more of the value will be used for interest that will accrue. Therefore, you get a lesser benefit. If your age at 70 gave you 60 percent of value, you could take it all upfront as a lump sum, you could set it up as a line of credit, or you could calculate fixed monthly payments.
Villager: Would you still be making house payments?
Bell: No. This has to be the primary lien on the property. Some of the proceeds will be used to payoff that mortgage. The balance is available to the homeowner.
Villager: These mortgages aren’t right for everyone. Are they still primarily for seniors with financial challenges?
Bell: Historically, that’s the way it’s been looked at, but that’s really the change. The big challenge for us as a society is funding longevity. My grandparents worked till age 70 and passed away at 78. They had eight years of retirement. My dad worked till 65 and now he’s 90. How do we make those resources last? When you look at boomers, there’s 60 to 70 million of us approaching retirement and half have no savings other than the wealth in their homes. Clearly, home equity has to be part of the funding-longevity equation.
Villager: When should that become a part of the equation?
Bell: Once upon a time, the thinking was – and some consumer advocates still say this – that you should spend everything else first. What happens is people are often forced to sell assets, either bonds before maturity or sell stocks into a down market. If you take the money out of the reverse mortgage, you can hold onto your other assets and let them recover in value or continue to generate dividends. The net result is you have a higher amount of wealth through your lifespan.
Villager: Who is a reverse mortgage not right for?
Bell: People who don’t expect to be in their house for a while. Because you are paying some upfront fees, which could be paid out of the loan proceeds. If you’re buying shorter term, there might be more cost-effective ways to do it.
Villager: You’ll be eligible for this in a year. Are you going to get a reverse mortgage at age 62?
Bell: I won’t do it right away. I have a big mortgage, so it would not give me enough to pay off my current mortgage. You have to have enough equity to retire that debt.
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