How are baby boomers who are still carrying hefty first and second mortgages going to pay them off?
Millions of homeowners refinanced during the “refi boom” years of 2003-04 and took out new loans with 15- or 30-year terms. Some boomers now in their late 50s and early 60s have big mortgages with terms running for another quarter-century.
When monthly payments on those mortgages begin to weigh heavily, will boomers need to sell their houses to relieve the debt pressure? The largest banks and mortgage companies in the country are readying creative new financial products designed to make the answer to that question a resounding “no!”
Tops on the list: proprietary reverse mortgages that allow owners to pay off their existing home loans, pull out additional equity dollars for other expenses, establish credit lines or even buy second homes — all without producing monthly payment obligations.
In a pilot program in Arizona on its “Senior Equity Maximizer” jumbo reverse mortgage, Bank of America found that “the No. 1 usage” of funds was to retire existing first mortgages, said Colin McCormick, the bank’s reverse-mortgage product executive.
The “maximizer” allows reverse mortgages to go as high as $10 million, depending on available equity in the home, the borrowers’ ages and current interest rates. McCormick says the program is scheduled for a phased nationwide rollout later this year, probably beginning in California and Florida.
Like other reverse mortgages, Bank of America’s program is available solely for homeowners 62 or older and permits them to receive lump-sum cash payments, monthly checks and credit-line drawdowns. No monthly payments to the bank are necessary during the lifetimes of the borrowers, as long as they remain in their houses. At their death or sale of the property, the accumulated balances paid out over time plus interest and fees become due and payable to the lender.
By far the most popular reverse loan product is the “Home Equity Conversion Mortgage” insured by the Federal Housing Administration. FHA’s program is booming — total loans closed in the last year alone jumped by 49 percent to just under 72,000. However, the FHA program has a major drawback for seniors who live in high-cost markets: FHA’s congressionally mandated loan limits, which top out just under $363,000, are too low to handle even median-priced homes. That problem would be remedied in part by pending legislation, but it would still not reach equity-rich homeowners in dozens of areas.
All of which leaves the door wide open to financial giants such as Bank of America and Countrywide Financial Corp. to offer new breeds of jumbo and super-jumbo reverse mortgages. Countrywide’s proprietary “Simple Equity” program, launched earlier this year, is available to borrowers in 46 states, according to Steve Boland, the firm’s managing director of reverse mortgages.
The program has no set dollar limit and offers multiple options to tap home equity. Say you want to pay off your first mortgage but also take out some extra cash for travel or investment. And you’d like some cash to supplement your retirement income.
Here’s an example prepared by Countrywide for the owners of a home in Ventura, Calif., worth $1.5 million that has a $220,000 first mortgage. The borrowers could pay off the $220,000 balance immediately — ending their monthly principal and interest payment burdens — then take out another $100,000 in cash, create a 10-year monthly income supplement of $4,057 and still have hundreds of thousands of dollars in equity to use later if they choose — all without selling the house.
Bank of America’s McCormick says that one intriguing option for seniors is to pay off their existing mortgage debt by converting it to a reverse mortgage, then pull out additional money to acquire a second or seasonal home for cash. To illustrate, say the owners of a $1 million house in the Northeast have a $250,000 first mortgage. They could pay it off with the first draw on a jumbo reverse mortgage, then take another $250,000 to make a 50 percent down payment on a house in Florida. They could then do a Bank of America reverse mortgage on the Florida home, transferring all debt obligations to some time in the future.
There are costs to all this — they’re just not collected up front or monthly. Interest rates on reverse mortgages are higher than on traditional “forward” mortgages. Lender origination and mortgage insurance fees can be substantial — 4 percent typically on FHA loans — but both Countrywide and Bank of America say their fees are much lower in relative terms.
Ken Harney is a real estate columnist with the Washington Post.