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.
Reverse mortgages allow people who are 62 years old and older to convert their home equity into cash. Instead of the homeowner writing a check to the 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 homeowner’s 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.
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 cut the amount of equity that reverse-mortgage borrowers could extract by 10% last October.
That meant some homeowners no longer qualified for a large-enough reverse mortgage to pay off their regular mortgage—a basic requirement for getting such a loan 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, president of the National Reverse Mortgage Lenders Association in Washington.
Mary Hobbs, 69, is 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, Ms. Hobbs will now be able to borrow an extra $10,400, bringing her loan total to almost $368,000.
Inc. MET +0.36%
dropped its reverse-mortgage origination fee and monthly servicing charges in March. One of the firm’s consultants, Sandra Clements, 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.
Origination fees are allowed to run as high as $6,000, by federal law, while the monthly servicing fee is typically charged up front as the “present value” of those costs for a number of years set by the lender. One big expense for homeowners remains: mortgage insurance, which HUD requires for most products.
So far, the cuts in fees apply mainly to one type of reverse mortgage: the plain-vanilla fixed-rate “home-equity conversion mortgage,” which is backed by the Federal Housing Administration and is paid out to the borrower as a lump sum. That product accounts for about 60% of reverse mortgages, Mr. Bell says.
At least one lender, Wells Fargo, is giving borrowers a break on origination and monthly servicing fees for adjustable-rate reverse mortgages, which allow homeowners to tap their home equity as they need it. Other lenders are cutting interest rates on such loans.
For example, Financial Freedom has lowered its rate by 0.75 percentage point, to just over 2%. The fee cuts could continue. Bank of America, for example, is studying “options to address some of the other costs associated with the loans,” says Steve Boland, the bank’s reverse-mortgage executive.
Consumers should consider more than closing costs in deciding whether a reverse mortgage works for them, and if so, which type. One drawback of a fixed-rate reverse mortgage is that you have to draw down the entire loan amount up front and pay interest on the entire amount across the life of the loan.
“It used to be that all of the costs were up front, and you could see them. Now, more of the costs are being included in the interest rate, more like a conventional mortgage,” says Barbara Stucki, the National Council on Aging’s vice president for home-equity initiatives. If you don’t need a large amount up front, you may be better off with an adjustable-rate loan. (Rates on fixed-rate loans are generally more than 5%; variable rates are hovering just above 2%.)
Before you start talking to lenders, consider consulting a HUD-certified reverse-mortgage counselor to learn more about the options and mechanics. Until the end of April, the National Council on Aging and other nonprofit groups are offering free counseling to homeowners regardless of their income.
You can find a directory of reverse-mortgage counselors at hud.gov. Click on “Talk to a Housing Counselor,” and then “Search online for a housing counseling agency near you.”