Some seniors with high-dollar homes are using reverse jumbo mortgages to raise cash without having to sell their property.
Diane Masucci, a Morristown, N.J.-based reverse-mortgage specialist, says she often sees younger senior couples using payments from reverse mortgages to cover high property taxes or make improvements that would allow them to stay in their homes. One New Jersey couple, both retired doctors in their early 80s, use their $5,000 monthly reverse-mortgage payments to cover home health-care costs, said Ms. Masucci, who works for Security One Lending.
With a reverse mortgage, homeowners are essentially borrowing against the equity of their homes. Lenders offer the choice of a lump-sum payout or regular payments, and no principal or interest is paid until the home is sold or the homeowner dies. At that point, the total amount borrowed, plus interest, is owed to the lender.
To qualify, borrowers must be 62 years old or older and have paid off all or most of their mortgage. Reverse mortgages require maintaining the home as the primary residence, so many seniors use it as a way to age in place, Ms. Masucci said.
A Federal Home Administration-insured reverse mortgage is called a home-equity conversion mortgage (HECM) and allows borrowers to tap into 50% or more of the their home’s equity up to a ceiling of $625,500, depending on their age. Average interest rates on HECM reverse mortgages were 4.9% in 2012.
If a borrower wants to borrow against more than $625,500 of equity, a reverse jumbo loan is required. Interest rates on these are typically 1% to 2% higher than an HECM, and borrowers are only allowed to access 25% of their equity, said Luke Stehouwer, executive vice president at Generation Mortgage, a lender based in Atlanta. For a borrower to qualify for a jumbo, Generation does consider the borrower’s credit history but doesn’t require the full financial assessment, including debt-to-income ratio, as for a regular jumbo, he added.
Reverse jumbo mortgages are rare. Generation Mortgage is the only U.S. provider and the company issues fewer than 40 annually, CEO Colin Cushman said. One reason for the dearth: the real-estate bust. “Because FHA HECM loan limits are so high, and with declining home values over the course of 2005 to 2010, there’s only a small marketplace for a jumbo mortgage product,” Mr. Cushman said.
Since reverse jumbos are limited to 25% of a home’s equity, anyone with a home valued at $2.5 million or lower (four times $625,500) will save money by going with the HECM reverse mortgage instead of a reverse jumbo, Mr. Stehouwer said.
Even when a borrower’s home is jumbo-valued, a reverse mortgage may not be right for all seniors, said Norma Garcia, a senior attorney and manager of the financial-services program of Consumers Union, the policy and advocacy arm of Consumer Reports. While she hasn’t tracked reverse jumbo mortgages, Ms. Garcia says that as many as 70% of new FHA-insured reverse-mortgage holders are taking their cash up front, with the average age of borrower at 72 years old, according to the Consumer Financial Protection Bureau, which regulates lenders.
“What this means is that people are tapping into their home equity in greater amounts at a younger age,” she added. “The concern is that as people live longer, they may be depleting their equity prematurely and not have the assets they need to pay for a nursing home or other needs to age in place at home.” Reverse mortgages also may leave less equity for heirs, Ms. Garcia said.
Other things to consider:
• FHA rules may change. The $625,500 loan limit will remain in effect until Dec. 31 but is subject to reapproval by Congress in 2014. Both the FHA and the Consumer Financial Protection Bureau have indicated that they may propose new rules to improve consumer protections for reverse-mortgage holders.
• Calculate all costs. HECM borrowers should shop around because closing fees can vary significantly among lenders, Ms. Masucci said. Also, they will have to pay both an initial mortgage-insurance payment and annual premiums on all reverse mortgages.
• Explore alternatives. Consult a financial planner to ensure you understand all rules and costs. For example, if a homeowner with a reverse mortgage neglects the property or fails to pay homeowners’ insurance or property taxes, the lender may demand early payment. Also, other financing options may be available. If a borrower wants to retrofit a home with a wheelchair ramp and bathroom grip bars, for example, some cities have low-cost grants or loans, Ms. Garcia said.