In the year 1910, life expectancy in the U.S. was only 50 years. By the year 2000, life expectancy had increased to 73 years. The overall effect of this longevity on the population of the United States is significant. Between 1995 and 2025, the number of people who are elderly is projected to double in 21 states. The total U.S. population of those over 65 years of age is projected to grow from 12.8% to 18.5%, according to the census bureau.
While this growth is happening, the economics of America will change. Most Americans do not have significant retirement plans outside of social security. While social security income stagnates, expenses continue to rise…
The Senior Citizens League said older Americans have lost 32% of their buying power since 2000. This is because the Social Security Cost of Living Adjustment has gone up just 31% since that year, while typical expenses have jumped 73%.
The good news is that many seniors have equity in their homes which can help with retirement. According to the National Council on Aging, more than 13 million older adults have equity in their homes that they could use to help them stay independent.
Putting these numbers in perspective, it is no wonder that reverse mortgages have become more popular. What is a reverse mortgage? It is a loan that provides a homeowner over 62 years of age with cash and/or a monthly payment over time, with no repayment required until the ownership of the home is transferred either through sale or death.
Basically, the owner of the home can receive a monthly income from their home to help with living expenses without having to pay a mortgage payment. It is obvious why such a loan would be popular for those with limited/fixed incomes and have substantial equity in their homes.
The most popular reverse mortgage program is one administered by the Federal Housing Administration (FHA). The program is called the Home Equity Conversion Mortgage (HECM). Not all FHA approved lenders offer reverse mortgages. Congress increased FHA mortgage limits for reverse mortgages to a Nationwide limit of $636,100 which means that more homes qualify for the program.
The amount of money that can be obtained under a reverse mortgage will be subject to many variables including:
•The amount of equity in the home. Obviously if the home is worth $300,000 and the current mortgage amount is $290,000, there is not room to access equity.
•The amount of the current mortgage. Regardless of the value of the home, if the current mortgage is over the FHA loan limits, a FHA reverse mortgage will not be possible. This does not mean that alternatives are not available for those with larger loans and significant equity in their homes.
•The age of the homeowner. The closer the homeowner is to the age limit of 62 years of age, the longer is their life expectancy. Therefore, there may be less income available on a monthly basis.
•Interest rates. Higher market rates would also reduce available income and/or up-front cash.
New Solutions. FHA has made major changes to their Reverse Mortgage Program in recent years.
Lower mortgage insurance. FHA has lowered the initial mortgage insurance premium for those who withdraw less that 60% of the available principal limit during the first 12 months.
Purchase Program. Now a senior can purchase a home using a reverse mortgage. What does that mean? Let’s say they are downsizing. Now they can purchase their next home with less cash and still have no mortgage payment! This program is poised to be very popular in the future.
Spousal Protection. If the owner of the home dies and a non-borrowing spouse wants to remain in the home, they have that choice, though they will not have access to the proceeds.
Financial Assessment. The applicant must go through a financial assessment to see if they can afford the tax and insurance payments on the home. If they cannot, the lender is authorized to withhold money to make the payments for the homeowner.
Expect reverse mortgages to become even more popular in the future with the graying of America expected to continue and the economics expected to become tighter for our aging population. If you are a candidate, talk to your mortgage consultant so they can assess your needs.