Tom Kelly: The comparative expense of a reverse mortgage

Jeff Taylor, the former longtime leader of Wells Fargo’s reverse mortgage division, had a stock answer when applicants declined a reverse because they felt the rates and fees were simply too high. Taylor had done the research for his own mother and decided the reverse was the best strategy to keep his mother comfortable in her later years.

“Too high compared to what?” Taylor would say. “Selling your home, paying the closing costs and then attempting to find another acceptable place? Have you ever tried to find a senior an acceptable place, especially if that person is a member of your family? If you did, good luck on being able to afford it.”

I thought about that answer the other day when the stock market took another 400-point hit. Older friends immediately considered selling some precious, long-held shares even though their preference was to retain them. Paying the capital-gains tax, they reasoned, simply came with the territory. They would not, however, consider a reverse mortgage as a viable option to help supplement their income even though the funds would come to them tax-free.

Among the findings in an AARP study was that 66.6 percent of the 5,027 respondents at or approaching retirement age have had to tap into their retirement savings accounts during the past three years. A quarter of those polled had exhausted their personal savings, making them even less prepared for retirement.

If those older borrowers had taken out a reverse mortgage three years ago, chances are they would not have exhausted their personal savings or tapped into their retirement accounts as much. They could have had a lump sum reverse mortgage, a monthly draw, a line of credit or any combination of those, yet have made no payments.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home. The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.

The biggest lift to reverse mortgage credibility came in 1989 when the Federal Housing Administration agreed to insure the Home Equity Conversion Mortgage, orHECM, which not only allowed owners 62 or older to stay in their homes for as long as they wish, but it also protected the owner in the event the lender went out of business.

The Housing and Economic Recovery Act approved the HECM for purchase program, allowing older homeowners to make a large down payment on a new home and then utilize the reverse mortgage as permanent financing.

The same law reduced the maximum loan origination fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value (maximum $679,950) and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.

In addition, the Mortgage Insurance Premium, or MIP, is a fee paid by the borrower to the Federal Housing Administration, an agency of the federal government, to provide certain protections for both the lender and the borrower. The MIP equals 2 percent of the home’s appraised value or FHA lending limit, whichever number is less.

Look at the cost of obtaining a reverse mortgage this way: Let’s assume the cost is equal to the capital-gains tax you paid on your stock. With the reverse mortgage, however, you retain your stocks and your home most likely continues to appreciate, offsetting the interest on the reverse mortgage.

The homeowner can never owe more on the reverse mortgage than the value of the home. If the home continues to go down or the senior spends more than the home is worth, the senior will never have to come out of pocket to repay the lender.

Never owing more than the value of the home is one of the reverse mortgage’s “four nevers.” The three others are payments are never required, the use of funds are never restricted and the lender never takes title to the property.

Most seniors want to age in place – stay in the home they have now. How do you put a price tag on the anxiety of leaving their longtime home and the fear of finding a new one that meets their needs and expectations? Reverse mortgage funds can help them stay put and close to their friends, church and familiar environment. The program is not only an alternative to moving but also an option to selling stocks and bonds.