Foreclosures are up, and it looks like they won't be coming down anytime soon.
Troubled homeowners have a few options to stave off foreclosure, and Congress is looking at creating others. But older homeowners, age 62 and up, for years have had a tool that's sometimes overlooked: a reverse mortgage.
This allows you to take out a loan against your home to pay off your existing mortgage and remain in the house as long as you want. You don't have to repay the reverse mortgage until you move out or die. At that time, the house is sold and the lender repaid.
Reverse mortgages can be an expensive form of borrowing, and you must have some equity built up in the house to get one. But for older, cash-strapped homeowners headed toward foreclosure, the reverse mortgage can be the answer.
"It's one of the best uses of reverse mortgages," says Donald Redfoot, strategic policy adviser for AARP Public Policy Institute.
Lucy Hull of Overland Park, Kan., says a reverse mortgage saved the house she has lived in for 30 years.
Hull, 68, refinanced last year to get money to remodel her house. She went from a fixed-rate to an adjustable-rate mortgage. It wasn't long before the widow, living on Social Security and a pension, fell behind on mortgage payments. Her lender told her it planned to foreclose.
That's when Hull saw a TV commercial on reverse mortgages. She called.
The amount you can borrow with a reverse mortgage depends on your age and the house's value. The proceeds of the reverse mortgage go first toward paying off any existing mortgage, and what's left is paid to you.
Hull's house appraised at $122,000, and she owed nearly $74,000 on it, says Eric Bachman, chief executive of Golden Gateway Finance, a reverse mortgage broker that helped Hull get her loan. The largest reverse mortgage loan the broker could find for her was about $71,000 - or $3,000 shy of what she owed on the existing mortgage debt.
Faced with possibly having to spend thousands more than that to foreclose and put the home up for sale, Hull's lender agreed to eat the shortfall, Bachman says. Other lenders might not be so forgiving, of course. But now Hull no longer has to worry about monthly mortgage payments.
"It gave me peace of mind," she says. "I plan on staying here until I die."
Reverse mortgages are complicated. So much so, that would-be borrowers are required to undergo counseling before taking one out that's backed up by federal insurance.
Most reverse mortgages today are made through the Home Equity Conversion Mortgage program. These loans are insured by the federal government. (Private lenders offer their own version of reverse mortgages, and the rules vary.)
Here's briefly how the HECM loans work:
You must be at least 62 years old. The house must be your principal residence. The amount you receive is tied to your age, the value of your house and prevailing interest rates.
Because of the federal insurance, there's a cap on the amount of home value that's used when calculating the loan. The cap is based on where you live. The highest amount is $362,790, which is the cap in Baltimore.
Once your existing mortgage is paid off with the reverse mortgage, any money left over is paid to you. You can take it, say, as a lump sum, a line of credit that you can draw on when needed or as a monthly payment for as long as you remain in the house.
You still own the house. With that comes the usual responsibilities - upkeep, homeowner's insurance and paying property taxes.
Fail to do this, and the lender can demand repayment early.
Of course, you don't get something for nothing.
Fees can be stiff, especially if you only stay in the home for a few years.
You will owe an origination fee to the lender that's capped at 2 percent of the home's value. Plus, you must pay closing costs, federal mortgage insurance and monthly servicing fees. All these costs can be rolled into your loan balance, so you don't have to pay for them out-of-pocket.
A 74-year-old woman with a $300,000 home, for example, would owe $15,000 in upfront fees and another $15,000 in fees over the course of her life, says AARP's Redfoot. That doesn't include the interest that's also accruing on the loan.
Once you die or move, the house will be sold and the proceeds used to pay off the lender. The lender will collect all the cash paid out over the years along with the accruing interest.
If the house sells for more than what you owe, you or your survivors can keep what's left. If it sells for less, you or your heirs don't have to make up the shortfall. That's what the mortgage insurance is for.
To figure out how much you could receive in a reverse mortgage, go to AARP's online calculator at www.rmaarp.com.
The number of companies marketing reverse mortgages has exploded in recent years. Congress is worried about the unethical sales practices of some players - such as persuading seniors to use reverse mortgage money to buy annuities - and held a hearing on the matter late last year.
The bottom line: proceed with caution.
If you're facing foreclosure and think a reverse mortgage could be the solution, contact a government-approved housing counselor. A counselor can determine whether you're eligible for a reverse mortgage, explain the details and costs, and walk you through your options.
"If facing foreclosure ... time is of the essence," says Chloe Williams, director of housing counseling at Druid Heights Community Development Corp. It can take 45 to 90 days to get a reverse mortgage, she says.
To find a counselor near you, call 800-569-4287. Baltimore residents can call 311 for a referral.
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