If you have been toying with the idea of taking out a reverse mortgage, note that the market today is significantly different from what it was just a couple of months ago.
Monthly insurance premiums on new loans went up last week, making an expensive product even more so. But the Department of Housing and Urban Development has offset that rise by introducing another reverse mortgage — the Home Equity Conversion Mortgage Saver — which slashes the upfront cost.
"It's a mixed bag," says David Certner, legislative policy director for AARP, of the reverse mortgage market.
A reverse mortgage is suited for older homeowners who have lots of equity built up in their home, but little cash and no other ways to increase their income. The amount you can borrow is tied to your age — you must be at least 62 — the value of your home and the interest rate. And you can get the money in a lump sum, monthly payment, line of credit or any combination of these.
Unlike a traditional mortgage, you don't make monthly repayments with a reverse mortgage. Instead, the principal, interest and fees add up month to month. The loan is repaid when you sell the house, move out or die.
High fees have been a major drawback of reverse mortgages. With these loans, you have many of the same expenses you do with any mortgage, such as an appraisal. On top of that, the origination fee on a reverse mortgage can be up to $6,000.
You also must pay a monthly mortgage insurance premium for reverse mortgages that are federally insured, which is almost all them. This insurance protects lenders in case a house ends up being worth less than the amount borrowed and covers borrowers in case a lender fails.
That monthly insurance premium last week for new loans went from an annual rate of 0.5 percent on balance to 1.25 percent. This was raised to protect the government — and ultimately taxpayers — from having to make big payouts to lenders because of falling house prices, Certner says.
The new Saver mortgage offers some relief, though, by substantially cutting one of the upfront fees.
With the standard reverse mortgage, borrowers must pay an upfront insurance premium worth 2 percent of the value of the property, up to a certain limit. That's $4,000 on a $200,000 house.
The Saver loan's upfront premium is 0.01 percent, or $20 on that same home.
The trade-off is that you can't borrow as much under the Saver program. For example, a 70-year-old with a $200,000 home could borrow up to $116,279 in a lump sum from a regular reverse mortgage, compared with $89,985 under the Saver loan.
The Saver mortgage with its lower fee is better suited for homeowners who don't expect to remain in their home for long and don't have a need to borrow as much, says Peter Bell, president of the National Reverse Mortgage Lenders Association.
Shop around for a lender, too, because some are waiving origination fees to encourage borrowing, Bell adds.
Reverse mortgages are complicated, so much so that the government requires prospective borrowers to undergo counseling before taking out a federally insured loan. Here, too, there have been changes.
Starting last month, counselors must ask a series of questions to make sure that homeowners know what they are getting into, says Barbara Stucki, a vice president with the National Council on Aging. If homeowners don't understand, they won't receive a counseling certificate needed to get a loan, she says.
Robert Nowlin took out a reverse mortgage on his Baltimore home three months ago and has no regrets.
"We had been under stress from bills for quite a while," says the 71-year-old, adding that his wife had been working two jobs to try to keep up.
With the proceeds, bills were wiped out, Nowlin's wife was able to reduce her hours at work and the old mortgage was paid off, which freed up $600 a month for the couple. And some of the leftover funds were used to take trips to Georgia and Florida, Nowlin says.
The reverse mortgage, he says, "gives us some sort of peace."
Before you borrow
•If you're in the market for a reverse mortgage, seek independent counseling before you even talk to a lender to learn about loan alternatives or tips on negotiating with a lender. Find a government-approved counselor near you at http://www.hud.gov or by calling 800-569-4287.
•Check out the National Council on Aging's BenefitsCheckUp.org for assistance programs that could make a reverse mortgage unnecessary.
•To find out how much you can potentially receive through a reverse mortgage, check online calculators at aarp.org or reversemortgage.org.