Baby boomers may have more reverse mortgage options today than in the past, but they still need to “do their homework,” writes a Kiplinger magazine article published in its September 2012 issue.
Looking into the trend of younger borrowers tending toward fixed-rate, lump-sum reverse mortgages, Kiplinger notes the newer, Home Equity Conversion Mortgage (HECM) Saver, and explains the credit line growth concept as what may be a preferable option for some.
“… younger borrowers taking lump-sum loans could lead to big problems. In 10 or 20 years, with the compounding of interest, little or no home equity could remain. Many borrowers may not be able to raise enough funds from a home sale to move to a retirement community or an assisted-living facility. Or they could run into trouble if they’re short on cash for health expenses, home repairs or property taxes in later years — traditional uses of late-in-life reverse mortgages. “There may be some folks who will struggle,” says Megan Thibos, a policy analyst at the Consumer Financial Protection Bureau and author of its report.
For extra cash, a borrower could refinance the existing reverse mortgage, says Peter Bell, president of the National Reverse Mortgage Lenders Association. But more money may be available only if the home value rises or interest rates drop. The borrower’s older age would help provide a boost.
Besides wanting the payout, many younger borrowers are choosing a lump sum because it offers a fixed interest rate. The line of credit and monthly-draw options require an adjustable rate, which generally comes with a 10% cap.
According to All Reverse Mortgage’s online calculator, a 62-year-old borrower with a $400,000 home could take a fixed-rate Standard loan with no fees at an interest rate of 4.99% and get a lump sum of $250,000. After nearly $12,000 in fees are wrapped in the loan amount, the same borrower could get a credit line of $238,050 at an initial adjustable 2.48% rate.
But while a fixed-rate loan may be fine for a regular mortgage, the interest on a reverse mortgage eats into home equity. With a fixed-rate reverse mortgage, the lump-sum loan starts accruing interest from the start. On the $250,000 lump-sum example above, in ten years that balance will climb to $465,841. Assuming 3% home price appreciation, that would leave about $72,000 in equity based on the home’s $537,566 value. In 20 years, the loan balance would reach $868,031, exceeding the home’s $722,444 value.
Borrowers may be better off with the adjustable-rate loan and its flexible payout. With the line of credit, you only accrue interest on the amount you tap. Any unused amount grows at the loan’s rate….
Written by Elizabeth Ecker