Seniors face double whammy
The lead story in The Daily Telegraph (a London-based newspaper) September 28, 2010 reported some remarks of the deputy governor of the Bank of England under the headline, "Savers told to stop moaning and start spending". It's hard to imagine the equivalent official over here (the number two at the Federal Reserve) using such blunt language, but it's also difficult to avoid the impression that that's precisely the message the top brass at the Fed and the Treasury wish they could convey.
A week or two before that piece appeared, our own New York Times ran a similarly depressing feature about the difficulties older people are encountering in finding work. About a million people aged 55+ years have now been unemployed for six months or more. That's about half the 2.2 million individuals in this age group who are currently out of work.
So seniors who were relying on a savings nest egg for their retirement have a much lower income than they were expecting. And their chances of topping up that income with a job are remote. A double whammy indeed, and one that for many is a triple when falling home values are added into the equation.
Reverse mortgages--what are they?
According to the Federal Housing Administration (FHA):
[A reverse mortgage] allows older home owners to tap into their equity to cover living expenses and health care costs while continuing to live in their home without having to make the mortgage payments that are required with a traditional mortgage or equity loan.
Too good to be true? Well, in some ways it is. The mortgage loan obviously isn't free, and--because you're not paying back any of the principal debt or any interest as you go along--the total amount owed mounts up. But, as long as you keep up with property taxes and home insurance, you can stay in your home without making payments until you decide to move or until you die. Only then will it be necessary for the mortgage including interest and fees to be repaid.
Of course, that could make a big hole in your estate, and many people talk through their plans with their heirs before signing up for a reverse mortgage.
Reverse mortgages no longer so expensive
Not long ago, reverse mortgages were widely regarded as too costly. But 2010 saw the market change somewhat and become more competitive. Back in April, for example, The New York Times told readers that some of the best mortgage lenders were waiving origination fees and some other charges.
Later in the year (September 22, 2010), the U.S. Department of Housing and Urban Development unveiled a new version of its Home Equity Conversion Mortgage. This allows those who require smaller reverse mortgages to pay much lower upfront mortgage insurance premiums (MIPs).
Instead of the usual two percent of the value of the property (not just the loan amount, which makes this so expensive), the upfront MIP has been slashed to just .01 percent. That's just $40 instead of $8,000 to borrow against a $400,000 home.
Shop around for the best mortgage lenders
Arguably, it's even more important to take care when comparing reverse mortgage quotes than those for traditional home loans. Your loan balance increases over time, so a mistake could be compounded over the years. Choosing one of the best mortgage lenders (one with a reputation for fair dealing) is almost as important as finding the most competitive rates.
If you choose one of the FHA's Home Equity Conversion Mortgages, it's obligatory to have a counselling session with an advisor. Be sure to take full advantage of this, and to ask any and every question you can think of. This is one transaction that it's essential to enter into with your eyes wide open.