Reverse Mortgages Are Now Less Costly

(Dow Jones) Upfront fees on reverse mortgages have fallen substantially in recent months, giving homeowners interested in this product a new challenge: how to best compare offers to find the best one.

"Quite a few of the lenders now have reduced the origination fees," said Barbara Stucki, vice president of home equity initiatives for the National Council on Aging. "Some of them are getting rid of the origination fees. Some are willing to pay some of the mortgage-insurance premium fees upfront."

It's an important development for reverse mortgages, which have in the past faced criticism for charging high upfront costs, said Peter Bell, president of the National Reverse Mortgage Lenders Association.

Stay In Your Home

A reverse mortgage allows homeowners to tap their home's equity while they remain in the house. The amount available to the homeowner depends on his or her age and the home's appraised value, among other things. Payments can be made in a lump sum or in regular installments, or a home equity line of credit can be established, according to the Department of Housing and Urban Development's website.

Reverse mortgages are available to homeowners who are at least 62 years old and own their homes outright or have a substantial amount of home equity, according to the HUD website. The vast majority of reverse mortgages are insured by the Federal Housing Administration through the Home Equity Conversion Mortgage program.

The reduced fees on reverse mortgages are a result of another important industry development: investor demand for securities backed by those mortgages, Bell said. These securities are backed by Ginnie Mae, based on a reverse mortgage insured by the FHA, he said, and with that combination, "you have a very secure investment."

Investors are willing to pay a premium for that kind of safety with a higher yield. Lenders are essentially passing on some of that premium to borrowers in the form of lower fees, he said.

The origination fee is often a few thousand dollars, with a $6,000 maximum, Bell said. The upfront mortgage-insurance premium is 2% of the lesser of your home's value or the FHA's HECM mortgage limit for the area, according to HUD's website. Some lenders are covering all or part of these costs.

That means more work for prospective borrowers to compare loans. One lender might reduce the origination fee, another might waive the origination fee but raise the interest rate, and another could change the servicing fee, Bell said.

"Consumers need to get the full details of the offer from the lender, and [they] need to analyze them and compare them," he said. Counseling, which is required to qualify for the FHA HECM program, also can help borrowers sort through their options.

Falling House Values

With declining home values, people might be less inclined to take out a reverse mortgage these days because the equity in their home has taken a hit, said Stucki. Typically, people like to tap their home's equity when they have a lot of it.

It's important to note that those who took out a reverse mortgage when home prices were at a peak won't see changes to that loan--even if their home value has fallen substantially.

"We've seen instances ... where people already have higher balances than the value of their house," said Jeff Lewis, chairman of Atlanta-based Generation Mortgage Co.

That's not a problem for the borrower. When the loan comes due--often when the homeowner either sells the home or dies--the amount owed will never exceed the value of the home due to the FHA insurance.

But falling house values have prompted some recent changes to the program. Last year, HUD put in place a 10% reduction in borrowing limits for FHA-insured reverse mortgages, reducing the amount of equity a homeowner can tap, Stucki said. This year may bring more changes, including another possible reduction in borrowing limits and an increase in mortgage-insurance premiums, Bell said.

Reasons To Reverse

Historically, people have sought reverse mortgages as a way to make ends meet, as they balance the costs of health care, housing and other basic needs in their retirement years.

But in today's housing market, it has become more common to see people using them to eliminate monthly mortgage payments, Bell said.

"We have people who, in a more normal environment, might have sold their home and moved to a different type of housing. ... But since they can't sell their home in this environment, they're using a reverse mortgage to sustain themselves in the home until they can sell it," he said.

Some distressed homeowners also are finding relief in reverse mortgages. "For others at risk of foreclosure, it could be a lifesaver," Stucki said. "They could risk losing the house, and if they can defer mortgage payments, that makes sense."

Still, a reverse mortgage isn't right for everyone. For one, it probably makes the most sense for people planning on staying in their homes for more than a few years, Lewis said. "If this is a short-term financing situation, you might have other options that you can consider."

On top of the mandatory counseling for an FHA-insured reverse mortgage, Stucki said it's not a bad idea to go through pre-lender counseling as well; she advises searching for a HUD-approved HECM reverse mortgage counselor at hud.gov. She also recommends walking through the National Council on Aging's BenefitsCheckUp.org site, which helps seniors find financial assistance in their areas, sometimes eliminating the need for the extra funds.