Reverse mortgages aren’t right for every borrower

November 2, 2012

In a recent column, you attempted to help a retiree refinance his home. You gave him many ways to contort himself in order to become a square peg in a lender’s round hole. However, if he refinances in the manner you suggested, he’d be obligated to make mortgage payments until he’s 92!

You did not give him the simple, effective answer: The Federal Housing Administration’s insured Home Equity Conversion Mortgage, better known as a reverse mortgage.

This borrower appears to meet all the basic criteria for this financing: Both he and the co-owner are 62 years old, the home is their primary residence and they have equity in the home. Because reverse mortgages don’t require income qualification or credit score qualification, a borrower need not be worried about being employed or not.

If this borrower’s home appraised for the value he stated, he could probably get a reverse mortgage benefit large enough to refinance his current mortgage, provide enough cash to pay off his second mortgage and have no monthly payments on the home.

Please advise baby boomers to learn about all the parameters, benefits and costs of this program to determine whether it’s right for them.

Thank you for your comments and information. We’ve written quite a bit about reverse mortgages in the past and how they can benefit some homeowners.

A reverse mortgage is a loan given by a bank to a homeowner who’s 62 or older, and where the homeowner has significant equity in the home. The lender might give the borrower a lump sum or monthly payments over time. In either case, the borrower, in general, does not have to repay the loan unless he or she dies, ceases to use the home as his or her primary residence, or sells the home.

While the general information sounds nice, the costs of obtaining a reverse mortgage tend to be quite high. We’ve found that many homeowners who might otherwise qualify for a reverse mortgage might still be better off with a traditional loan.

Given the decline in real estate values, a reverse lender might lend only 50 percent of a home’s value to a borrower. That might not be enough to pay off existing loans on the home and give the borrower the lower interest rate he or she is looking for.

Finally, you are correct that refinancing an existing loan that might have been paid down over the last five, 10 or 15 years might be a mistake for many homeowners if they take out a new 30-year loan. For this reason, we usually tell borrowers not to focus on the monthly payment alone; they also need to consider the interest rate, the costs of refinancing and the length of the loan.

To truly compare loans when borrowers refinance, they need to have the lender give them the monthly payment they would have if the loan were to be amortized over its original length. For example, if the old loan would have been paid off in 2030 (in 18 years) and the owner refinances into a new 30-year loan, that would add 12 years of interest payments to the loan. Therefore, the right comparison in looking at the old and new loan is to figure out what the payment would be on the new loan if it was amortized over 18 years. The owner can then compare the new payment with the old one to see what the monthly savings would be.

Yes, baby boomers should know about reverse mortgages as well as traditional mortgages to make an informed decision about the products available to them. In some cases, some may find that continuing down the traditional mortgage path is best for them, while others may find reverse mortgages to their liking.

Ilyce R. Glink’s latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce’s radio show toll-free (800-972-8255) any Sunday from 11 a.m. to 1 p.m. Contact Ilyce and Sam through her Web site, www.thinkglink.com.

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