As baby boomers age, a reverse mortgage has become the solution they need. Reuters reports that, according to Inside Mortgage Finance, consumers took out $15.3 billion in reverse mortgage loans in 2013. This is up 20% the from the year before. With 77 million baby boomers retiring, it is believed further growth in this type of loan could be expected in coming years.
For this large number of Baby Boomers reverse mortgages are expected to gain popularity as a means of covering living expenses. Which means later on when/if the homes are passed on to children, the children will then be responsible to pay the mortgage. A reverse mortgage, is a loan. Homeowners, age 62 or older, borrow against the equity in their home and do not have to make any payments until they sell the home or die, which helps these homeowners from monthly payments. But, interest and monthly insurance premiums are charged throughout the life of the loan, and the total becomes due when the borrower dies or moves out of the house.
The government agency that guarantees these loans, the U.S. Federal Housing Administration, found reverse mortgages to be risky investments. Losses on reverse mortgages were a big reason for the agency's $1.7 billion taxpayer bailout - and some experts worry it could end up in similar trouble again. "The FHA is at risk from these loans, and the taxpayers are at risk too," said James Bothwell, a consultant and former chief operating officer of the Federal Home Loan Bank system. "As with any mortgage product, there is risk to financing a loan, but we have made, and continue to make, significant efforts to mitigate that risk," both when making loans and when recovering money at the end of the loan, said Melanie Roussell, a spokeswoman for U.S. Department of Housing and Urban Development. The FHA is part of the department.
What makes these loans dangerous for lenders and the government also makes them attractive for borrowers: a homeowner who is at least 62 years old gets a lump sum of money, a line of credit, or monthly income from their reverse mortgage, and potentially does not have to repay the loan for decades. During those years, the loan accumulates interest, which is currently just above 5.5% for a fixed-rate loan. When it is time to pay off the loan, the home may not be worth enough to cover the debt, leaving the FHA with losses. Since reverse mortgage lending volume is still small compared to the $9.4 trillion U.S. mortgage market, the risk to the financial system is manageable, analysts said.
Regular mortgages are made based on the borrower's ability to repay, with foreclosure and sale of the home in case the borrower defaults. For reverse mortgages, the collateral-the home, is just about all the lender can rely on. Home prices, which are still below their 2006 peaks, have been rising in the past couple of years, and economists do not see much risk of a significant drop in the near future.
To help lower its risk, in April 2013 the FHA limited the amount a homeowner can borrow as a lump sum to 60% in the first year, up to the maximum cap of $625,500. The limit used to be 100%. The FHA is also creating new rules that will require lenders to make sure a borrower can pay for taxes, insurance, and upkeep on their home.
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Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Max Broock in Birmingham, Michigan. See what past clients have to say about Stephanie Lang. Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate. you would like information on homes for sale, or are first time home buyer not working with a Realtor and would like to schedule a consultation with a qualified Oakland County and Macomb County Realtor, please complete the Lang Premier Properties contact form to have a real estate agent contact you.