For older Americans with outstanding debt on their home who are considering a reverse mortgage, the product may not be a viable option, says USA Today in a recent article.
Fielding a question about whether a reverse mortgage would be a good option for a 73-year-old who owes $940,000 on a property valued at $1.65 million, finance journalist Robert Powell says: “Unfortunately, a [Home Equity Conversion Mortgage] HECM probably wouldn’t help you in your situation.”
HECMs, available through a Federal Housing Administration (FHA)-approved lender, only apply against up to $625,500 of the home’s value, and only a percentage of that can be borrowed.
For a 73-year-old, that percentage is about 58%, Michael Kitces, publisher of The Kitces Report and director of research with Pinnacle Advisory Group in Columbia, Md., tells Powell.
Another factor to consider is that reverse mortgages must be the first and only lien on the property.
“That means you’d have to pay your $940,000 mortgage down by almost $600,000 of principal just to try to refinance the remainder into a HECM reverse mortgage,” Powell says.
Also available to home owners are jumbo mortgages, which are not insured by the FHA. However, like HECMs they do have limits.
“You could only access up to 25% of your home equity,” says John Salter, an associate professor in the personal financial planning department at Texas Tech University. “So, in your case, you’d be able to take out only $400,000 – so it’s not much of a better situation.”
In addition, there’s only one jumbo reverse mortgage firm in the United States — and the Atlanta, Ga.-based lender does a relatively small volume.
Read the full article here.
Written by Cassandra Dowell