Earlier this year, Cecil and Ann White found themselves facing a difficult decision. The home they were renting was up for sale, and they had to either buy it or find a new place to live.
Worried about repeating their situation, they didn't want to rent again, but a traditional mortgage was not an option because they did not meet all the requirements.
When their financial consultant, Tracy Bush, suggested a reverse mortgage, it opened up the opportunity to own a home and save money without a 30-year mortgage.
“My wife said, 'That sounds too good to be true,'” said Cecil White, but “I've tried to see any negatives from it and I don't see any.”
Thanks to increased government regulations and involvement, reverse mortgages have become an increasingly viable option for seniors, Bush said. He rarely recommended them until recently, but sees much less risk involved now.
“They have evolved a lot in the last five years,” said Bush. “It's a lot better process than it ever has been.”
And as the housing market in Frederick County shows strong signs of recovery, higher home values are driving more seniors to seek reverse mortgages, said housing counselor Joseph Baldi, of the Frederick Community Action Agency.
“With the economy having taken the hit that it took a couple years ago with equity falling, the reverse mortgages were much more difficult to do,” Baldi said. “It started to come back, so now we're seeing a few more calls on HECMs.”
A HECM, or Home Equity Conversion Mortgage, is the most common type of reverse mortgage.
HECMs are federally insured, backed by the U.S. Dept. of Housing and Urban Development, and account for most of the reverse mortgages in the United States. In order to qualify for a HECM, applicants must be at least 62 years old, live at the collateral property as a primary residence and meet with a department-approved counselor, such as Baldi.
While applicants must have a sufficient financial standing with the federal government, there is currently no credit requirement.
Conditions of the HECM are likely to change, however, because the Federal Housing Administration recently got congressional approval to alter the programs. One possible change is the addition of a required financial assessment.
Reverse mortgages are essentially what they sound like — they take the money that someone has already spent or will spend to pay off their home, and gives it back to them, creating a new loan. In most situations, the borrower can wait to pay back the loan until they no longer live in their home.
If done right, a reverse mortgage provides needed income for the senior, who can fully pay back the loan upon selling the house. Under a federally insured HECM, the owners are protected from paying back more than the house is worth at the time of repayment.
“It cannot be a detriment at all,” White said.
All he has to do is continue paying property taxes, homeowners insurance and homeowners association fees, which cost less than he was previously paying for rent.
While the popularity of reverse mortgages is increasing, they are still not as mainstream as some other loan and retirement planning options.
Paula Blundell, of the Frederick County Senior Recreation Council, said she surveyed 90 council members and none of them said they had a reverse mortgage.
As for herself, Blundell said she had never even considered the option, having heard stories about people who got trapped in their reverse mortgage or left heirs with debt.
“Right now, it doesn't sound too promising with what we know about it,” she said.
But with a federally insured HECM, Baldi said, those risks should not exist. Even with the protections, however, the program is not without its costs.
If a senior wants to leave heirs with a large estate, a reverse mortgage may not be the best plan. Since the value of the home is used as equity on the loan, the borrower, or the heir if the borrower has died, would have to pay off the loan to keep the property, or sell the house.
"A best-case scenario is that the property sells in excess of the reverse mortgage lien (or conventional lien) on the property," said Angela Dredden, a HECM retirement specialist for Security1 Lending. This would allow the borrower or heir to have some money left after paying off the loan and related fees.
Borrowers also need some capital up front to even get the loan. For an HECM, they must pay a loan origination fee, which can be expensive, Baldi said.
In a case such as the Whites, who purchased a house using a reverse mortgage, the applicant also needs enough money to make a down payment. Baldi has advised customers who chose this path to homeownership, he said.
“Just be really sure it's the right program for you,” he said, “because it is expensive, but it can be an excellent program.”
So far, the Whites are happy with their financial decision and their 3,000-square-foot home in Frederick.
“It's very pleasant,” Cecil White said. “We're set now, we don't have to worry about the rent.”