Q: In your recent column in the Oregonian, you attempted to help a retiree’s attempt to refinance. You gave him many ways to contort himself in order to become a square peg in lending’s round hole. However, if he refinances in the manner you suggest, he will be obligated to pay mortgage payments on his home until he is 92!
You did not give him the simple, effective answer: FHA’s insured Home Equity Conversion Mortgage, better known as a Reverse Mortgage.
This borrower appears to meet all the basic criteria for this financing: both homeowners are 62 years old, the home is their primary residence and they have equity in their home. Reverse mortgages do not require income qualification nor credit score qualification. This means a borrower need not be worried about being employed or not.
If this borrower’s home appraised for the value he stated, he could likely get a reverse mortgage benefit amount large enough to refinance his current mortgage plus get enough cash to pay off his second home mortgage and have no monthly payments on his primary residence.
Please advise Baby Boomers to learn about all of the parameters, benefits and costs of this program to determine whether it is right for them.
A: Thank you for your comments and information. We have written quite a bit about reverse mortgages in the past and how they may benefit some homeowners.
Reverse mortgages are loans that are given by a bank to a homeowner that is 62 years or older, where the homeowner has significant equity in the home. The lender may give a lump sum to the borrower or could give the borrower a monthly payment over time. In either case, the borrower, in general, does not have to repay the loan unless he or she dies, ceases to use the home as his or her primary residence or sells the home.
So, while the general information sounds nice, the costs of obtaining a reverse mortgage tend to be quite high. We have found that many homeowners that might otherwise qualify for a reverse mortgage may still be better off with a traditional loan.
Given the decline in real estate values, a reverse lender might only lend 50 percent of a home’s value to a borrower. That amount may not be enough to pay off existing loans on the home and give the borrower the lower interest rate he or she is looking for.
Finally, you are correct that refinancing an existing loan that may have been paid down over the last five, ten or fifteen years might be a mistake for many homeowners if they take out a new 30-year loan. For this reason, we usually tell borrowers not to focus on the monthly payment alone; they also need to focus on the interest rate, the costs of refinancing and the length of the loan.
To truly compare loans when borrowers refinance, they need to have the lender give them the monthly payment that they would have if the loan were to be amortized over the original length of the loan. For example, if the old loan would have been paid off in 2030 (in 18 years) and you refinance now into a new 30-year loan, you will add 12 years of interest payments to your loan. Therefore, the right comparison in looking at the old and new loan is to figure out what the payment would be on the new loan if you amortized it over 18 years. You then can compare the new payment with the old one to see how much your monthly savings will be.
Yes, Baby Boomers should know about reverse mortgages as well as traditional mortgages to make an informed decision about the products available to them. In some cases, some may find that continuing down the traditional mortgage path is best for them, while others may find reverse mortgages to their liking.
Thanks for writing.