Pamela Yip: Be cautious of reverse mortgage option
Line of credit sought in Proposition 7 is a tool to use carefully
Since 2001, Texans have been able to take out reverse mortgages on their homes, allowing seniors especially to tap the home equity they've built up over the years.
If voters pass Proposition 7 on the Nov. 8 ballot, the Texas Constitution would be further amended to authorize a line of credit for such loans.
When talk first arose that Texans would be asked to consider this, I wrote a column expressing concerns that some consumers may dig a deep financial hole for themselves if they don't fully understand the ins and outs of using a line of credit.
I still feel that way, but if the experience so far with reverse mortgages in Texas holds true, the state's seniors should exhibit the same type of financial prudence with the line of credit.
Reverse mortgages are enormously popular in Texas.
Less than five years since the first reverse mortgage in Texas was originated, our state ranks third in the nation in total reverse mortgage loan volume, according to the Texas Association of Reverse Mortgage Lenders.
"Texas is the fastest-growing reverse mortgage market in the country," said W. Scott Norman, president of the Texas group of reverse mortgage lenders.
Reverse mortgages allow homeowners 62 or older to convert their home equity into cash while still living in their houses.
The mortgages are called reverse because the lender pays the borrower instead of the borrower making payments to the lender.
The borrower retains control of the home and doesn't have to repay the lender as long as he or she lives in the house.
When the homeowner dies or moves out, the lender is repaid, with interest, from the sale of the home, and any money left over goes to the homeowner or his or her estate.
Age counts
A reverse mortgage is based on the value of your home, current interest rates and your age.
The older you are, the more equity you will be able to tap because, based on life expectancy data, the lender is likely to get repaid more quickly.
Taking out a reverse mortgage doesn't mean you're selling your home to the lender, and the lender doesn't necessarily get your home when you die.
In Texas, those who take out a reverse mortgage may receive the money in three ways: a lump sum, monthly payments for as long as the borrower lives in the house, or monthly payments for a set period.
"Overall, it's been a good thing vs. the pitfalls that could happen in some instances," said Suzanne Cobb, director of the guardianship and money management program at the Senior Source in Dallas.
"It's helped them pay additional medical expenses and care-giving expenses," she said. "It's helped them get debt-free so they can live on the income they have coming in."
Some wrinkles
The wrinkles that have shown up have occurred among seniors who chose the lump sum, Ms. Cobb said.
"A majority of people were choosing the lump sum payment up front, and in some instances, the money got spent, given to family members, and then when they needed the money, they didn't have it anymore," she said.
"People tended to take the lump sum because they'd have the money, but once they had the large amount of money, they're open to relatives asking for money or they may be wanting to help their kids."
Another alternative
A line of credit would provide another alternative to that.
"This Proposition 7 is a really good thing because that's going to give them the opportunity to access only the money that they need to access," Ms. Cobb said.
"For a lot of seniors getting ready to retire or who have gone into retirement, being able to take out a reverse mortgage and get that line of credit and just take enough out to pay off the mortgage is just enough for them to live comfortably and not have to access it anymore."
Supporters of the amendment have put in additional consumer protections:
•Lenders wouldn't be able to use credit cards or preprinted solicitation checks to entice elderly homeowners to tap their line of credit. Instead, borrowers must contact the bank personally to arrange for the loan.
•Lenders couldn't unilaterally change the terms of the line of credit.
•Consumers wouldn't be charged to access their line of credit, although there are fees to originate the loan.
Loans locked in
Recently, the reverse mortgage industry put in an additional protection that locks in the loan amount on federally insured reverse mortgages.
Previously, nothing was locked in until the closing date. You could receive a higher or lower loan amount, depending on the prevailing interest rate on the closing date.
The so-called "principal limit lock" locks in the amount of loan proceeds for up to 60 days from the application date.
If interest rates fall between the date of application and closing, the homeowner can choose the lower of the two rates and receive more money than what originally was quoted.
If the loan closes after the 60-day lock expires, the prevailing interest rate on the actual closing date is used, regardless of whether it's higher or lower.
"Interest rate fluctuations over the past several years have benefited some reverse mortgage borrowers, but hurt others," said Peter Bell, president of the National Reverse Mortgage Lenders Association. "This principal limit lock protects borrowers in a rising-rate environment, yet lets them benefit if rates are lower at the time of closing."
Source: Dallas News
