Under U.S. Department of Housing and Urban Development (HUD) rules, HECM participants can withdraw a portion of their home equity in one lump sum, an equity line of credit, or various forms of monthly annuities. They make no payments while they live in their home unless they elect to. The money loaned plus interest and origination fees becomes due only when HECM participants move or die and their home is sold. To add a safety buffer, homeowners considering a government-insured reverse mortgage meet with an FHA-approved counselor to fully understand the program's ramifications.
That sounds pretty good, and it is. And yet, The New York Times recently published a widely-read, alarming, and in my view misleading story on FHA-insured mortgages ominously headlined, "A Risky Lifeline for the Elderly is Costing Some Their Homes." The focus of the story was two widows facing eviction from homes on which HECM reverse mortgages had been taken, after their husbands died. The reader could easily infer that subprime-style trickery was to blame, but, in fact, there was no trickery at all: the widows in The Times story were not on their homes' HECM agreements, so they were obliged to pay off the loan or move when their husbands died. Had they signed the HECMs along with their spouses, they could have remained in their homes with no payments required. With due respect to a grand institution, The Times got this one wrong. If publicity like this scares older homeowners away from a solid, useful financial resource, that will be a public disservice.
Given the events of the past five years, it's understandable that non-experts might be leery of anything having to do with mortgages. But for qualifying seniors, now really is a great time to consider a government-insured reverse mortgage, and here's why: Seniors can get more money out of their homes now then they will when interest rates, now at historic lows, begin to rise again.
The amount older homeowners can draw from their homes is determined by their ages, the assessed value of their home, its rate of value appreciation and the HECM interest rate. In calculating withdrawable amounts, HUD assumes an unchanging fixed appreciation rate of 4 percent a year and a market interest rate on which it has set a floor of 5 percent. When the market rate rises above the 5 percent floor, as it will at some point, the "draw" homeowners can take from their homes will diminish.
That even The New York Times could get it wrong on HECMs underscores an important point. Seniors should understand all the options available on FHA-insured reverse mortgages, and how these might or might not meet their needs, before contacting a lender -- because the interest of lenders is not completely aligned with that of borrowers. Lenders make more money when borrowers select cash withdrawals than when they select credit lines or annuities, whereas most seniors do better with credit lines or annuities.
Until recently, there was no place for borrowers to go for this information. The calculators on lender web sites and on HUD's web site do not provide comparative information on the different options. While the counselors that borrowers are required to consult before they sign on with a lender are unbiased and neutral, borrowers see them only after they select a lender, and the counselors are barred from expressing a preference about loan options.
But borrowers can now find what they need on my site -- a set of 10 inter-related calculators that provide comparative data on 10 reverse mortgage options and combinations of options. This includes the future status of the transaction, including outstanding debt and unused credit line, every year until the homeowner reaches age 100.
Properly armed with a firm understanding of the reverse mortgage option that best meets their needs, homeowners 62 or older who have earned substantial equity in their homes can benefit richly from government-insured reverse mortgages. They and their loved ones owe it to themselves to investigate the possibilities without fear.
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