Are reverse mortgages the way to go for clients needing regular retirement income, especially now that stock prices and interest rates are down at the same time?
The professional jury is still split on that.
Supporters say a reverse mortgage, which is a loan against a house that can be taken in regular distributions, is a simple way to tap needed funds for retirement income purposes. But two advisors who were contacted about this are less enthusiastic. While a reverse mortgage is an option, they say, it is costly one and only a last resort.
Industry results show that the number of reverse mortgages is increasing. For instance, December 2008 statistics from the Department of Housing and Urban Development show that home equity conversion mortgages, a type of reverse mortgage, had a 6.4% calendar year increase to 115,176 loans, according to the National Reverse Mortgage Lenders Association, Washington.
Those who work with reverse mortgages say the products can offer a viable way for seniors to make sure they have regular access to funds.
With a tighter credit market, other options such as a home equity loan are harder to come by, points out Karen Kennedy, a reverse mortgage specialist with Griffin Financial Mortgage, Dallas.
And, she says, falling housing prices are actually a good argument for taking out a reverse mortgage. The reason, according to Kennedy, is that an applicant is locking in the value of a home with the reverse mortgage.
Gibran Nicholas, founder, chairman and chief executive officer with the CMPS Institute, a training program for mortgage professionals in Ann Arbor, Mich., concurs. “It is more important to jump in more quickly to do a reverse mortgage right now,” he says.
Nicholas says the number of reverse mortgages will increase because a new law, the Housing and Economic Recovery Act of 2008, H.R. 3221, makes it easier to obtain such mortgages. The law signed by former President George Bush on July 30, 2008.
Now, reverse loans have a national limit of up to $625,500 compared to previous lower limits that varied depending on the cost of homes in a particular area.
According to Nicholas, the stimulus plan also makes it possible to get reverse mortgages on home purchase transactions.
So, a senior who has a 2-story house and needs a single-level home, can purchase the home and then get a reverse mortgage on the new residence, he says. This makes it possible to meet one’s needs and also potentially to turn the old home into a rental until market conditions improve and the old residence can be sold, he adds.
When housing prices start to climb again, a reverse mortgage holder could refinance and get a new reverse mortgage that will reflect the higher home value. It may be possible to cut closing costs if a new appraisal is not needed or if it is the same lender, Nicholas adds.
But, Nicholas says, given today’s powerful combination of foreclosures and job losses, it may be a year or more before housing prices begin to rebound.
Even so, he says reverse mortgages may be more available than home equity lines of credit which he maintains are being impacted by tight credit.
Nicholas warns that any seniors applying for reverse mortgages should check the credentials of the broker. Many mortgage brokers have been forced to add on this line of business due to the housing crisis, but the brokers have never offered the products before, he explains.
Marta Shen, a certified financial planner with Spring Street Financial, Atlanta, offers a different perspective on reverse mortgages. “In my experience, a reverse mortgage is typically not the first priority. By and large, I’m not thrilled with them.”
Shen says she would look into other options, including a home equity loan or assistance from family members, before recommending that a client apply for a reverse mortgage.
The reason is the cost, she says. And, Shen maintains, the nation is in the midst of a financial crisis, not the start of it, so home prices may be on the rebound. In such a case, if a reverse mortgage option was chosen by a client, then it might be better to wait if possible, she says.
Even, if a client did get a new reverse mortgage, there might be costs such as additional points that would apply, Shen contends. Costs add up, she says.
The only reverse mortgage she says she has seen in her practice is one that the parents of a client had taken out. Her client and their siblings expressed regret that the parents had not come to them first for help, Shen says.
Debra Neiman, a certified financial planner with Neiman & Associates Financial Services, LLC, Arlington, Mass., says that a reverse mortgage is an option if “someone doesn’t have other sources of income and is literally sitting on an asset pool.”
She too cites cost as the key issue, citing appraisal and initiation costs. Neiman says she has heard of families stepping up to help out and forming what amounts to a reverse mortgage established by the family. Such cases would not have application costs but rather just the appraisal cost, she contends. Neiman also points to the option of a home equity loan.
Concerning the idea of locking in a reverse mortgage and then taking out a new reverse mortgage when the housing market improves, Neiman says the need to create income and following housing prices are 2 different issues. “You can’t time the market. You don’t know when the market will bottom.”
That issue is separate from the need and creation of an income stream, Neiman asserts.
Also, home prices very much depend on the area one lives in, Neiman points out. She says she has heard anecdotally from 2 sources that home prices in Cambridge, Mass. have actually increased.