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A reverse mortgage may help refinancers
Baltimore Sun
How are baby boomers who are still carrying hefty first
and second mortgages going to pay them off?
Millions of homeowners refinanced during the "refi
boom" years of 2003-2004 and took out new
loans with 15-year or 30-year terms. Some boomers
now in their late 50s and early 60s have big mortgages
with terms running for another quarter-century.
When monthly payments on those mortgages begin to weigh
heavily, will boomers need to sell their houses to relieve
the debt pressure? The largest banks and mortgage companies
in the country are readying new financial products designed
to make the answer to that question a resounding no.
Tops on the list: Proprietary reverse mortgages that
allow owners to pay off their existing home loans, pull
out additional equity dollars for other expenses, establish
credit lines or even buy second homes - all without producing
monthly payment obligations.
In a pilot program in Arizona on its "senior equity
maximizer" jumbo reverse mortgage, Bank of America
found that "the No. 1 usage" of funds was to
retire existing first mortgages, according to Colin McCormick,
the bank's reverse-mortgage product executive.
The "maximizer" allows reverse mortgages to
go as high as $10 million, depending on available equity
in the home, the borrowers' ages, and current interest
rates. McCormick says the program is scheduled for a
phased nationwide rollout later this year, probably beginning
in California and Florida.
Like other reverse mortgages, Bank of America's program
is available solely for homeowners 62 or older, and permits
them to receive lump-sum cash payments, monthly checks
and credit-line withdrawals.
No monthly payments to the bank are necessary during
the lifetimes of the borrowers, as long as they remain
in their houses.
At their deaths or sale of the property, the accumulated
balances paid out over time, plus interest and fees,
become due and payable to the lender.
By far the most popular reverse loan product is the "home
equity conversion mortgage" insured by the Federal
Housing Administration. FHA's program is booming - total
loans closed in the last year alone rose 49 percent to
just under 72,000.
However, the FHA program has a major drawback for seniors
who live in high cost markets: FHA's congressionally
mandated loan limits, which top out just under $363,000,
are too low to handle even median-priced homes. That
problem would be remedied in part by pending legislation
increasing FHA's limits, but it would still not reach
equity-rich homeowners in dozens of areas.
All of which leaves the door wide open to financial
giants such as Bank of America and Countrywide Financial
Corp. to offer new breeds of jumbo and super-jumbo reverse
mortgages. Countrywide's proprietary "simple equity" program,
launched earlier this year, is available to borrowers
in 46 states, according to Steve Boland, the firm's managing
director of reverse mortgages.
The program has no set dollar limit and offers multiple
options to tap home equity. Say you want to pay off your
first mortgage but also take out some extra cash for
travel or investment. On top of that, you'd like some
monthly cash to supplement your retirement income.
Here's an example prepared by Countrywide for the owners
of a home in Ventura, Calif., worth $1.5 million that
has a $220,000 first mortgage. The borrowers could pay
off the $220,000 balance immediately - ending their monthly
principal and interest payment burdens - then take out
another $100,000 in cash, create a 10-year monthly income
supplement of $4,057, and still have hundreds of thousands
of dollars in equity to use later if they choose - all
without selling the house.
Bank of America's McCormick says that one intriguing
option for seniors is to pay off their existing mortgage
debt by converting it to a reverse mortgage, then pull
out additional money to acquire a second or seasonal
home for cash. To illustrate, say the owners of a $1
million house in the Northeast have a $250,000 first
mortgage. They could pay it off with the first draw on
a jumbo reverse mortgage, then take another $250,000
to make a 50 percent down payment on a house in Florida.
They could then do a Bank of America reverse mortgage
on the Florida home, transferring all debt obligations
to some time in the future.
There are costs to all this - they're just not collected
upfront or monthly. Interest rates on reverse mortgages
are higher than on traditional "forward" mortgages.
Lender origination and mortgage insurance fees can be
substantial - 4 percent typically on FHA loans - but
both Countrywide and Bank of America say their fees are
much lower in relative terms.
Reverse mortgages are also inherently complicated for
estate planning. That's why pre-application counseling
is a must for most homeowners interested in participating.
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