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.