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It may sound hard to believe, but one part of the mortgage market is hot: reverse mortgages. That's giving older homeowners more options to tap the equity in their homes but also opening the door to more confusion and mistakes.
Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain-vanilla government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or another lender in exchange for a lump sum, monthly payments or a line of credit.
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Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts. One lender has reduced the minimum age requirement to 60; others are making loans on second homes and vacation rentals. "Jumbo" reverse mortgages, for houses valued at as much as $10 million, are becoming more common.
With a reverse mortgage, instead of the borrower making payments to the lender, the lender makes a payment or payments to the borrower. The borrower keeps control of the house and doesn't have to repay the money as long as he or she lives there. When the homeowner dies or moves out, the loan is typically paid off by selling the house, and any money left over goes to the homeowner or the homeowner's estate.
A better life in retirementThe product is evolving from meeting basic needs to fulfilling the desires of a new generation of retirees, from funding a vacation getaway or recreational vehicle to renting a Paris pied-à-terre. The new options, though, mean more potential for confusion among consumers and a bigger chance that they could miss out on getting the best loans for their situations.
And as home prices fall around the country, some homeowners stand to be disappointed. "We're seeing people apply for a reverse mortgage and find out their home is worth 5% less than they thought," says Jeff Taylor, the vice president of Wells Fargo's senior products group in Greensboro, N.C.
With so many competing offers to choose from, homeowners could easily wind up paying more in fees and interest rates than they should. Fees are typically steep -- more than 5% of the home's value -- and most borrowing limits are capped based on where the homeowner lives. Fees are paid upfront or financed, while interest rates affect how much of your equity the lender ultimately takes.
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Reverse-mortgage lenders traditionally have charged variable interest rates. Now, fixed rates are available, but they may cost you more, says Barbara Stucki, the director of the National Council on Aging's home-equity initiative.
Because of all the choices, homeowners need to be "a lot more strategic" in how they shop for reverse mortgages, Stucki says, factoring in how they want to take the payments and how much money they want to take upfront.
The boom in reverse mortgages helped Ronald Prast, a 74-year-old Phoenix retiree. When he first applied two years ago, he was told by a loan officer that he wasn't a good candidate; government rules would have allowed him to cash out only a small portion of the value of his half-million-dollar home. But last November, when Bank of America introduced a reverse mortgage that allows homeowners to borrow as much as 65% of a property's value, up to $10 million, Prast and his wife, Carolann, quickly signed up.
The couple's house, for which they paid $105,000 in 1981, was appraised at $540,000, Prast says. They used an initial draw of $208,000 to pay off their outstanding mortgage, a home-equity loan, one year's property tax and loan fees, freeing $21,000 a year formerly used to make mortgage payments for travel and indulgences such as paying for a granddaughter's semester in Australia. They also have a credit line worth $75,000 that they are setting aside for medical expenses.
"We were comfortably well off, and we wanted to release some of the funds we had tied up in our home," Carolann Prast says.
Taking out a reverse mortgage to travel or spoil grandchildren is a far cry from just a few years ago, when such products generally were considered loans of last resort for seniors to avoid foreclosure or simply cover living costs such as prescription drugs or hospital bills.