Chapel Hill News staff illustration by Sheila Lenahan
Chapel Hill News staff illustration by Sheila Lenahan
By Matt Purdy
Correspondent
Comedian Jerry Seinfeld points out that when people reach old age, everything in their lives gets smaller. "Their bodies get smaller, they sleep less time, they eat smaller meals, they move into smaller places…"
There are a number of reasons why an older individual might want to move into a smaller residence, but if the reason for downsizing is purely financial and the homeowner would otherwise prefer to stay in his or her present home, a reverse mortgage loan might be worth considering.
Reverse mortgages, and even the term "reverse mortgage" itself, can be confusing. A reverse mortgage is a unique type of home equity loan, available to homeowners age 62 and over who own, or nearly own, their home free and clear. Unlike a standard mortgage or home equity loan, no repayments or interest payments are required for as long as one of the homeowners lives in the home. Also, there are no credit or income qualifications because the loan is based entirely on equity. It is the "reverse" of a traditional mortgage in that the debt increases over time while equity decreases.
Teresa Tilley, RBC Centura Bank’s "reverse mortgage guru" based in Hickory, NC, explains that a reverse mortgage loan is "a way for a person to tap into the equity that they have in their home and use the money any way they want with no restrictions." As long as one of the borrowers lives in the home as their principle residence,there is no repayment on this loan. The property is still deeded and titled in the borrower’s name. When the loan comes due (when the homeowner moves out or dies), the borrower or his estate decides how to repay.
Reverse mortgage loans have been available since 1989, but Angelia Quint, senior mortgage officer at RBC Centura in Chapel Hill, says that she has seen a marked increase in the popularity of reverse mortgages over the past three to five years. Over that period of time, she says she has gone from handling one or two reverse mortgages a year to receiving calls about them almost weekly. She attributes this recent increase in popularity to the decline in the stock market and its negative effect 401k’s and other retirement investments.
Tilley agrees, "a typical borrower used to be a 72 year-old widow. There are no typical borrowers anymore. We’re still seeing some who are very low income, living on social security in small, meager homes, just trying to buy medications and those kinds of things. And then we are seeing those who are very well educated, very affluent, but have lost tons of money in investments. The difference in the types of people that we’ve been seeing in the last year and a half or two years has just been phenomenal."
Tilley says that RBC Centura is the only bank in North Carolina that offers reverse mortgage loans, but that they are is also offered by a number of mortgage brokers. There are two types of reverse mortgage products available, the federally-insured Home Equity Conversion Mortgage, or HECM (pronounced "heck-um" by those hip to the lending scene) and a Fannie Mae product called the Home Keeper. Tilley says that 95% of the reverse mortgages that RBC sells in North Carolina are HECM’s.
Her office, which serves as RBC’s reverse mortgage processing center for all of North Carolina, closed 127 reverse mortgage loans last year and has already closed 151 so far this year. Glenn Petheric, director of communications for the National Reverse Mortgage Lenders Assosiaion (NRMLA), says that the U.S. Department of Housing and Urban Development field office in Greensboro endorsed 280 HECM’s during the first nine months of fiscal year 2003, compared to 158 for the same period a year earliera 77 percent increase.
It takes about four to six weeks to close a reverse mortgage. Before beginning the process, North Carolina law requires potential borrowers to attend a free counseling session with a state-approved counselor. Tilley explains that this is necessary because of the complexity of the loan and the age of the borrowers. It is meant to protect both the borrower and the lender, she says.
During the session, the counselor explains the loan, explains alternatives, and gives an estimate of the amount that the customer could borrow. That amount depends on four factors: the appraised value of the property, the FHA lending limit in the county, the interest rate, and the age of the youngest borrower.
"The older you are, the more money you get," says Tilley. "These loans are based on a life expectancy of 100, so a 62 year-old person gets a lot less money than, say, a 75 year-old. There’s a huge misconception because people think that you get 100 percent of the value. What you have to understand is that interest is accruing on the value of the loan, hopefully not to exceed the value of the property." If the interest does exceed the value of the property, the difference is covered by insurancethe borrower or borrower’s estate is not responsible.
According to the reverse mortgage calculator on the NRMLA website (reversemortgage.org), a 62 year-old homeowner in Chapel Hill could, using a HECM, borrow about $87,500 against a $150,000 home, while a 75 year-old could borrow about $102,000. Based on the output of the online calculator, the maximum amount of money that a borrower could receive from a HECM in Orange County is just under $120,000.
Front-end costs for the loan are typically around $6000 include a mortgage insurance premium, the lender’s origination fee, and closing costs including appraisals, attorney fees, and title searches. For this reason, the reverse mortgage is a better deal for borrowers who remain in the home longer. Depending on the lender, some or all of the front-end costs can be financed into the loan. In addition to loan costs, the borrower should consider that he will continue to be responsible for all property taxes and maintenance of the residence.
Reverse mortgages aren’t for everyone, but for senior homeowners who need extra cash and would like to stay in their home for the long haul, it could provide a way for those who would otherwise be forced to sell to have their cake and eat it too.