Reverse mortgages on the rebound? Lending strategy growing in Nevada County according to a local realtor
If an individual is 62 or older and lives in their home, that person can take out a reverse mortgage or Home Equity Conversion Mortgage.
That’s when home equity is traded for cash without a homeowner actually selling their home.
The numbers of elders partaking in this plan has increased in the county, said Kim Wydra, loan originator with Primary Residential Mortgage, Incorporated.
The trend is also taking place nationally, according to a New York Times report.
HOW IT WORKS
If an individual partakes in a reverse mortgage, that person gets money in the form of a loan from the bank, said Suzanne Voter, reverse mortgage specialist with Finance of America. The individual has a choice of getting a lump sum of money, a monthly check or receiving a line of credit.
“They are taking the equity they earned in their home and making it an income for themselves,” said Voter, adding that the amount received is based on life expectancy and the appraised value of a home.
“The younger you are, the less money you are going to get,” she said.
While house payments aren’t required under the plan, an individual can still default on their home if they stop paying property taxes, home-owners insurance, a homeowners association or if they stop living in their home, said Voter. Additionally, homeowners are still responsible for paying off their mortgage.
The move can be risky for a bank. For instance, if the home depreciates in value the bank loses on the deal, said Voter. What’s more, if the resident dies and there is not enough equity to pay off the mortgage, the bank must eat the difference.
To hedge their bets, banks charge a Mortgage Insurance Premium for the reverse mortgage, whereby homeowners pays up to two percent over time on their loan based on the person’s life expectancy, home value and loan amount, said Voter.
Consequently, removing equity from one’s home may adversely effect heirs. Voter said that is “tough tomatoes,” as, in that case, it’s the parent or guardian who owns their assets. Additionally, the homeowner may be desperate for cash.
“The problem is, many times the parents don’t have money to feed themselves,” she said.
The Federal Trade Commission has warned people against taking out a reverse mortgage since the individual could wind up with fewer assets, and even lose their property.
For these reasons, Teresa Dietrich, former president of the Nevada County Association of Realtors, had not viewed the borrowing strategy favorably.
“Many seniors lost their homes during the downturn in the market because the reverse mortgage they had stopped funding because they had reached the ceiling value, the homeowner did not realize that they needed to pay the insurance and taxes themselves and got behind. I have had to modify several mortgages for seniors who got behind,” wrote Dietrich in an email to The Union.
In September of 2014, about 10 percent of reverse mortgage borrowers nationally “defaulted on their loans,” were in jeopardy of losing their homes or had lost them already, according to a CNN report.
During that year and later during 2017, the Department of Housing and Urban Development tightened regulations around reverse mortgages to protect homeowners. Rule changes included limits on the amount a borrower could take from their home, according to the Washington Post.
Additionally, banks had to ensure homeowners could pay taxes and insurance bills, and that they couldn’t extract as much money as they pleased until after the first year of receiving loans, said Wydra.
The heirs are also no longer harmed with a home that depreciated in value or a mortgage that hasn’t been fully paid, said Wydra. If the house is sold, the profits are theirs to keep, and if an heir sells the house for less than what is owed, the debt is forgiven by the bank.
Due to these added safeguards that didn’t exist before the Great Recession, Dietrich is now more understanding of the borrowing strategy.
“With the increased costs of living, fixed income, and now increased homeowners insurance I can see why seniors want to tap into equity to maintain their lifestyle,” she wrote.
Wydra said reverse mortgages are not necessarily for seniors who don’t need the money.
“Some of them have the income (so) they feel like it’s not making enough money for them,” she said.
Voter said homeowners can cancel their decision to go through with a reverse mortgage before it goes on the record three days after verbally agreeing to the deal.
“(It’s) kind of like a cooling off period,” she said.
Contact Sam Corey at 530-477-4219 or at firstname.lastname@example.org.
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