I just did a hypothetical reverse mortgage calculation using this calculator. For the calculation I used a birthdate for the husband of January 1, 1945 and June 25, 1945 for the wife. I also assumed the house was worth $200,000 and that there were no other loans on the property. Here’s the quote I got:
This note was attached to the bottom of the results:
These estimates are based on current HECM interest rates, maximum origination and servicing fees, and an approximate national average closing cost total. Interest rates are current for the week of February 12th. Actual loan amounts available depend on the rates in effect when a loan is closed, and the actual origination fee and closing costs charged. They also depend on the appraised value of your home and current equity limits in each program. These estimates reflect Fannie Mae’s current equity limit and the HUD equity limits as of February 10, which are subject to change during the year.
About two-thirds of the way down you’ll see the breakdown of the fees. According to these numbers, the fees would run you over $16,341 or 8.1% of the value of the house, which seems to be high compared to the 6% – 7% range I have been reading about in various articles. I’m also not quite sure why they must charge for mortgage insurance since the homeowner is not allowed to borrow anywhere close to the 80% mark that usually determines the need for private mortgage insurance on a standard mortgage. I’m also not sure why there has to be an additional “service fee set-aside” since the lender is already getting $4,000.
One thing to note is that if you decide to take a line of credit and don’t use it all, the balance grows. Take a look at this graphic to see what I mean:
So, if the couple in this example took out a reverse mortgage for $110,259 but didn’t touch it for 5 years, they would have over $135,000 available in 5 years.
I’m trying to be fair in my analysis but I have to say that the fees seem high to me. I’m not necessarily against using this product but I think I would reserve my use for emergencies or as a last resort. I certainly wouldn’t use it to take a vacation. That just doesn’t seem prudent to me.
Remember back in November when I posted Reverse Mortages: The Next Subprime Mess? Well, the March 2008 issue of Kiplinger’s has a similar article titled A New Mortgage Mess on the Way?
Something to look out for:
…as the industry grows, some see eerie parallels to the subprime mess roiling the country. Could reverse loans become the mortgage scandal of the next decade?
Complaints include misleading marketing tactics and, worse, pressure to buy inappropriate investment or insurance products with the proceeds of the loan. “People can end up in predatory situations,” says Barbara Stucki, a home-equity expert at the National Council on Aging.
Peter Bell, president of the National Reverse Mortgage Lenders Association, says the bad actors are fringe players, not the headliners of the industry. “We’re seeing some of the subprime players coming into our market,” he says. His group is investigating direct-mail pieces that look like official government notices but are actually just loan pitches, and others that promise huge commissions for salespeople who bundle annuities with reverse loans.
A study recently released by AARP finds that nearly one in ten reverse-loan borrowers had other financial products recommended to them by lenders — usually investments, annuities or long-term-care insurance.
I don’t see this becoming a mortgage crisis but I do think that people need to approach these products with caution, especially if the salesperson is trying to push other products.
I’ll admit that I don’t know everything there is to know about reverse mortgages. I have read some things on the internet as well as some articles in various magazines. I will say that the product could make sense for some people. But, one thing that troubles me is that I haven’t been able to find any examples of how these products work in the real world. In other words, I want to see the math before I weigh in with my opinion.
Oh, and if you’re interested, while researching reverse mortgages, I put together a list of resources in del.icio.us (del.icio.us/JLtheP/reverse_mortgages). I’ll add to that list as I find more resources.
Read the following paragraphs from an article titled Reverse Mortgages: The Choices Expand ($) that was in today’s Wall Street Journal:
In the past, the reverse-mortgage market has been constrained by having one main buyer, Fannie Mae. But a half-dozen investment banks, including units of Lehman Brothers Holdings Inc. and Bank of America, have started buying reverse mortgages in the past few years, with plans eventually to package and sell them.
On Thursday, Ginnie Mae, the federal agency charged with making real-estate investment more attractive to institutional investors, said it’s rolling out a standardized government bond issue backed by reverse mortgages — a key step in creating a secondary market that could help lower borrowers’ costs and increase the loans’ availability.
The result: The reverse-mortgage business is booming. Though reverse mortgages represent less than 1% of the overall U.S. home-loan market, valued at about $10 trillion, the number of federally backed reverse mortgages surged 41% in the year ended Sept. 30, according to the Department of Housing and Urban Development.
I don’t know about you but this concerns me. Isn’t the packaging of mortgages and selling them to investors one of the reasons we got into the subprime mess? Could the same thing happen to the reverse mortgage market? I can imagine that as demand from brokerage firms and investment banks for reverse mortgages increases, standards will be lowered, and we’ll see all sorts of shady practices take place.
The point of the article is that new reverse mortgage products are becoming available for people to use, which should be a good thing. However, like everything else, when you add lots of choices, making a decision as to which product to use can be confusing and difficult. It will be interesting to see how this plays out.