Reverse Mortgage Changes Allow You to Tap Home Equity
NEW YORK ( MainStreet) If you watch much cable, you've certainly seen the ads. A familiar television presence who is getting on in years, like Fred Thompson or Henry Winkler, appears on screen to explain earnestly how you can tap your home's equity right now with something called a reverse mortgage. By taking out one of these government-insured loans, they say, you get instant access to the value of your home. You also remain the owner and can continue to live there.
While hundreds of thousands have signed up during the five decades that reverse mortgages have been around, the program has not been free of criticism. A variety of misconceptions have also been spawned by the offer's almost too-good-to-be-true premise. As a result, many who might benefit have shied away.
To make matters more confusing, the Department of Housing and Urban Development, which oversees the whole thing, recently announced new rules for the program that will go into effect on Sept. 30.
With the housing market easing out of its doldrums, the disapproval, misunderstandings and imminent changes have made more and more people wonder whether reverse mortgages are indeed a viable option in tight economic circumstances. Sources inside and outside the industry insist they are, noting that while not for everyone they can still be of critical assistance to those in need.
From Portland to Reagan to Thompson
To help the widow of his high school football coach keep the home she was in danger of losing, a banker in Portland, Maine, created the first reverse mortgage in 1961. A few banks around the country followed suit and began offering loans with a similar aim by the 1970s.
But the concept then, as now was confusing, and the product slow to catch on.
Its unprotected and wildly variable nature did catch the eye of Congress, which recognized the need for such loans as well as for government-backed insurance and uniform lending practices. In 1988 President Ronald Reagan signed the resultant FHA Reverse Mortgage bill into law, and the first loans were issued a year later.
These new reverse mortgages attracted increasing attention throughout the 1990s and have continued to grow in appeal, albeit slowly. Tightening financial times since the onset of the Great Recession, the weak housing market that accompanied it and the rapidly growing retirement-age population hurt most by it have once again put them in the spotlight and led to the presence of Thompson and Winkler, who are edging their way into the national conversation.
How the loans work and what's changing
The new rules cut back somewhat on the amount of a home's value that can be accessed, and set new limits on the amount that can be withdrawn in the first year. And while practically anyone who is at least 62 and owns his home can still qualify, that too is set to change next year when borrowers will need to prove they can pay property taxes and insurance for the life of the loan. Those that can't will have to earmark some of their reverse mortgage proceeds for that purpose.