By Robyn A. Friedman
City & Shore Magazine
You’ve no doubt seen the TV commercials featuring actors such as Henry Winkler, Tom Selleck and Robert Wagner touting the merits of reverse mortgages. These actors were selected because they’re considered trustworthy spokesmen for a mortgage product that can be controversial — and not always in the best interests of the borrower.
Most reverse mortgages originated today are Home Equity Conversion Mortgages (HECMs), insured by the U.S. government. These loans allow homeowners 62 or older to withdraw up to $726,525 of their equity, depending on their age, the value of the home and the current interest rate. As long as the borrower remains in the home, he or she isn’t required to make any payments on the loan. Instead, when the borrower moves or passes away, the loan becomes due.
There’s a similar product intended for luxury homeowners sitting on significant equity but who may not have a lot of cash in the bank: the jumbo reverse mortgage. These loans are not insured by the government, are purchased by private investors on the secondary market and have vastly different terms and underwriting requirements than HECMs.
“Although HECM is a solid program, it speaks to a limited subset of the total audience,” says Gregg Smith, chief executive officer of One Reverse Mortgage, a wholly owned subsidiary of Quicken Loans. “There are a slew of customers out there with property values well north of $726,525.”
One Reverse Mortgage markets a jumbo reverse mortgage product called the Home Equity Loan Optimizer, or HELO, which offers loan amounts up to $4 million. This mortgage is particularly attractive to homeowners in states like Florida and California, where home values are high.
To qualify for a HELO, borrowers need a minimum credit score of 640, at least one appraisal and must prove that they have consistently paid both property taxes and homeowners insurance on the property to be mortgaged. Current interest rates range from 5.75 percent to 7 percent.
Smith says that jumbo reverse mortgages appeal both to people who own their homes outright and want to tap equity, as well as those who want to increase their cash flow. “Instead of dipping into your retirement savings if you’ve had health care expense or whatever, you can access the equity in your home” he says.
Homeowners interested in a reverse mortgage, whether a HECM or jumbo product, should consult a financial professional to ensure they fully understand how the loan works, the fees they’ll pay and the alternatives that might be available. Fees can be high, and the loan terms can be complicated. Plus, reverse mortgages aren’t suitable for anyone who wants to leave their home to heirs.
“There are a lot of red flags,” says Ira Rheingold, executive director of the National Association of Consumer Advocates, a Washington, D.C.-based nonprofit. “Can it work for certain people? I’m sure. Will they try to market to people who would be better off using their money in a different way? Yes. There is a small percentage of people this is good for. There are a lot of risks.”