Paths to Relief For Boomers in Debt
How are baby boomers who are still carrying hefty first and second mortgages going to pay them off?
Millions of homeowners refinanced during the "refi boom" of 2003 and 2004 and took out new loans with 15- or 30-year terms. Many in their late 50s and early 60s now have big mortgages with terms running for another quarter-century.
When monthly payments on those mortgages begin to weigh heavily, will boomers need to sell their houses to relieve the debt pressure? The largest banks and mortgage companies in the country are readying creative financial products to make the answer to that question a resounding no.
Tops on the list: proprietary reverse mortgages that let owners pay off their existing loans, pull out additional equity for other expenses, establish credit lines or even buy second homes -- all without producing monthly payment obligations.
In a pilot program in Arizona for its "senior equity maximizer" jumbo reverse mortgage, Bank of America found that the primary use for funds was to retire first mortgages, according to Colin McCormick, the bank's reverse-mortgage executive.
That program allows reverse mortgages to go as high as $10 million, depending on available equity in the home, the borrowers' ages and current interest rates. McCormick said the program will be rolled out nationwide later this year, probably beginning in California and Florida.
Like other reverse mortgages, Bank of America's program is available only to homeowners 62 or older. They can receive lump-sum cash payments, monthly checks and credit-line drawdowns. No monthly payments to the bank are necessary during the borrowers' lifetimes as long as they remain in their houses. At their death or the sale of the property, the balances, plus interest and fees, become due and payable to the lender.
By far the most popular reverse loan product is the home equity conversion mortgage insured by the Federal Housing Administration. The FHA's program is booming -- total loans closed in the past year alone jumped by 49 percent, to about 72,000.
However, the FHA program has a major drawback for seniors who live in high-cost markets: The agency's congressionally mandated loan limits, which top out at just less than $363,000, are too low for even median-price homes in such areas. Pending legislation to increase the FHA's limits would partly solve that problem, but it would still not reach equity-rich homeowners in many areas.
All of which leaves the door open to financial giants such as Bank of America and Countrywide Financial to offer new breeds of jumbo and super-jumbo reverse mortgages. Countrywide's proprietary "simple equity" program, launched earlier this year, is available to borrowers in 46 states, said Steve Boland, the firm's managing director of reverse mortgages.
The program has no set dollar limit, and it offers multiple options to tap home equity. Say you want to pay off your first mortgage but also take out extra cash for travel or investment. On top of that, you'd like some monthly cash to supplement your retirement income.
An example prepared by Countrywide is for the owners of a home in Ventura, Calif., worth $1.5 million that has a $220,000 first mortgage. The borrowers could pay off the $220,000 balance immediately, then take out another $100,000 in cash, create a 10-year monthly income supplement of $4,057 and still have hundreds of thousands of dollars in equity to use later if they choose -- all without selling the house.
Bank of America's McCormick said that one intriguing option for seniors is to pay off their existing mortgage by converting it to a reverse mortgage, then pull out additional money to buy a second home. To illustrate, say the owners of a $1 million house in the Northeast have a $250,000 first mortgage. They could pay it off with the first draw on a jumbo reverse mortgage, then take another $250,000 to make a 50 percent down payment on a house in Florida. They could then do a reverse mortgage on the Florida home, transferring all debt obligations to some time in the future.
There are costs to all this; they're just not collected upfront or monthly. Interest rates on reverse mortgages are higher than on traditional mortgages. Lender origination and mortgage insurance fees can be substantial, typically 4 percent on FHA loans. Countrywide and Bank of America say their fees are lower in relative terms.
Reverse mortgages are also inherently complicated for estate planning, making pre-application counseling a must for most homeowners interested in participating.
Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.