Buried in the new Housing Bill (The Housing and Economic Recovery Act) is some very good news for seniors whose main asset is the family home. The new law makes it easier and less expensive for seniors to access the cash value of their homes on a tax-free basis through a Reverse Mortgage. And it expands the amount that can be borrowed.
Let me make it clear that Reverse Mortgages had nothing to do with the mortgage mess! They are a safe and easy way for homeowners age 62 and older to maintain control and ownership, while tapping their home equity for tax-free cash.
Now there will be a higher borrowing level on FHA reverse mortgages — with $625,000 of home value as a cap and a $417,000 borrowing limit. And fees will be capped at 2 percent of the first $200,000 borrowed, and 1 percent on the balance — with an absolute maximum of $6,000 in fees.
These rules apply to FHA mortgages, which insure the lender against the possibility that the homeowners will stick around far longer than anticipated! Other lenders provide "jumbo" reverse mortgages for higher amounts, taking larger fees to offset their risk. But there is no risk to the homeowner, who gets the money — and the house — for as long as they choose to live there.
A reverse mortgage may be the perfect answer for seniors who want to stay in their homes but have a cash flow problem. They can get a monthly stream of tax-free income, or a lump sum, and it's tax-free. Their ability to access the equity in their home does not depend on their ability to repay, as in the case of a home equity loan. In fact, the Reverse Mortgage is not repaid until they move and sell the home, or until they die and their heirs either sell or refinance the home.
The most important aspect of a Reverse Mortgage is that the homeowner retains title to the home, and can never be forced to move out — no matter how long he or she lives, or how much equity he or she pulls out of the home over the years through monthly checks from a Reverse Mortgage! And they — or their heirs — can never end up owing more than the house is worth, no matter how much money is withdrawn over the years!
The amount the homeowner can withdraw depends on several factors: the value of the home, the amount of any remaining mortgage, the age of the homeowner(s), and the current level of interest rates.
In the past few years, a variety of banks and financial firms have created their own reverse mortgage products. Standard FHA reverse mortgages typically provide a monthly check, or a combination of a lump sum and a line of credit that can be drawn down whenever there is a need for cash. Other products are designed to let seniors with more expensive homes withdraw a larger lump sum, and deposit the cash in their own money market account. Each has its own costs, fees and interest rates — making them difficult to compare. Until now.
Now there's a terrific new way for seniors to compare the various specific products, costs and interest charges to find the best offering for their situation
At www.GoldenGateway.com — a website devoted to Reverse Mortgages, there is a unique calculator designed to compare actual products and actual withdrawal amounts. All you do is input your age, (and that of your co-borrower) as well as your Zipcode and estimated home value, as well as the amount of your current mortgage, if any.
The online calculator will instantly show you all the products for which you are eligible. You can see how much you could get from various lenders in the form of a lump sum, or a monthly check, a line of credit or a combination. The choices are clearly explained.
Best of all, the calculator projects exactly where you will stand financially in 5, 10, 15 or 20 years! You pick the time horizon, and with a click you'll see how much you'll have borrowed out of your equity using each product.
Even better, the calculator projects how much interest you'll have paid, how much you'll have paid in fees — and how much equity will remain in your home at that point in the future.
Yes, housing prices will rise again over the next 10 or 15 years, offsetting some or all of your Reverse Mortgage withdrawals. You can calculate based on a 2 percent annual appreciation, or with a click of your mouse raise that to a more realistic 4 or 6 percent, or more. So while you're taking equity out, the house is likely to be appreciating, leaving something for your heirs — or for your use if you decide to sell and move to a smaller home.
As you view the numbers, you can call Golden Gateway toll-free and get an explanation of the terms and comparisons. This unique service gathers information from all the major providers of Reverse Mortgages and helps you find the product that best suits your needs — or those of your parents!
They'll help you with the application process. They'll even show seniors who want to downsize and sell their old, larger home how to use a Reverse Mortgage to help pay for a new smaller home — freeing up cash from the sale of the original home.
Think of a reverse mortgage as the key to a vault. It unlocks the equity in your home, allowing you to stay in your home or even downsize — without going into debt, and without being dependent on your children. Done right, it will make you (or your parents) feel great. How do I know? I arranged one for my dad. Now I get to enjoy his independence as much as he does! And that's The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. Her new book, "The Savage Number: How Much Money Do You Make?" has just been published. To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.