Reverse mortgages become cheaper, more attractive © Creatas/Photolibrary

The Basics

Reverse mortgages: Now a better deal

Lower fees and greater flexibility are attracting homeowners who had initially rejected the loans because of high closing costs.

By The Wall Street Journal

Reverse mortgages have long been considered one of the most expensive ways to extract cash from your house. But that is changing as some of the country's biggest reverse-mortgage lenders are slicing closing costs, helping even some affluent homeowners who want to generate additional income.

These mortgages allow people who are 62 years old or older to convert their home equity into cash. Instead of a homeowner writing a check to a bank each month, the bank pays the homeowner, who can elect to receive a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves, sells the house or fails to pay property taxes or homeowners insurance. Heirs typically sell the house, pay the balance and keep whatever is left.

One of the biggest criticisms of reverse mortgages has been the fees, which can total 5% of a home's value. But the new cuts in fees mean that some homeowners can save $10,000 or more on the closing costs.

Genworth Financial, Bank of America, Wells Fargo, OneWest Bank's Financial Freedom unit and other lenders also have dropped or reduced their origination or servicing fees, or both.

Rebuilding the product

Why are lenders cutting costs now? To drum up business. From Oct. 1, 2009, to March 31, 2010, home-equity-conversion mortgage volume fell 22% from the same period a year earlier. One reason: In response to falling home values, the Department of Housing and Urban Development last October cut the amount of equity that reverse-mortgage borrowers could extract by 10%.

That meant some homeowners no longer qualified for large-enough reverse mortgages to pay off their regular mortgages -- a basic requirement for getting such loans approved. And some consumers have been dismayed by falling home values and postponed taking action.

Another factor: In the past two years, lenders have started securitizing reverse-mortgage loans by converting them into Ginnie Mae-backed bonds. Popular with investors because of their government guarantees and high yields compared with Treasurys, these bonds also have been more profitable for issuers than selling them to Fannie Mae, the main alternative, says Peter Bell, the president of the National Reverse Mortgage Lenders Association in Washington.

Mary Hobbs, 69, recently was closing on a reverse mortgage with Security One Lending of San Diego for her three-bedroom home in a retirement community in Lincoln, Calif. Her goal: to pay down her mortgage and replace some of the income she lost when a real-estate loan she had made on another property recently went bad. Because of cuts in closing costs, Hobbs will now be able to borrow an additional $10,400, bringing her loan total to almost $368,000.

MetLife dropped its reverse-mortgage origination fee and monthly servicing charges in March. Sandra Clements, one of the company's consultants, says she is hearing from better-off older homeowners who would like to tap their home equity to help fund their retirements but who previously were put off by steep closing costs.

Continued: Mortgage insurance still a big expense

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