It may sound hard to believe, but one part of the mortgage market is hot: reverse mortgages. And that's giving older homeowners more options to tap the equity in their homes but also opening the door to more confusion and mistakes.
Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain-vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments or a line of credit.
Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts. One lender has reduced the minimum age requirement to 60; others are making loans on second homes and vacation rentals. "Jumbo" reverse mortgages for houses valued at as much as $10 million are becoming more common.
The product is evolving from meeting basic needs to fulfilling the desires of a new generation of retirees, from funding a vacation getaway or a recreational vehicle to renting a Paris pied-a-terre. The new options, though, mean more potential for confusion among consumers and a bigger chance that they could miss out on getting the best loan for their situation.
And as home prices fall around the country, some homeowners stand to be disappointed.
"We're seeing people apply for a reverse mortgage and find out their home is worth 5 percent less than they thought," says Jeff Taylor, vice president of Wells Fargo & Co.'s senior product group in Greensboro, N.C.
With so many competing offers to choose from, homeowners could easily wind up paying more in fees and interest rates than they should. Fees are typically steep more than 5 percent of the home's value and most borrowing limits are capped based on where the homeowner lives. Fees are paid upfront or financed, while interest rates affect how much of your equity the lender ultimately takes.
Reverse mortgage lenders traditionally have charged variable interest rates; now, fixed rates are available, but they may cost you more, says Barbara Stucki, director of the National Council on Aging's home-equity initiative.
Taking out a reverse mortgage to travel or spoil grandchildren is a far cry from just a few years ago, when such products generally were considered loans of last resort for seniors to avoid foreclosure or simply cover living costs, such as prescription drugs or hospital bills.
In the past, the reverse-mortgage market has been constrained by having one main buyer, Fannie Mae. But a half-dozen investment banks, including units of Lehman Brothers Holdings Inc. and Bank of America, have started buying reverse mortgages in the past few years, with plans eventually to package and sell them.
On Thursday, Ginnie Mae, the federal agency charged with making real-estate investment more attractive to institutional investors, said it's rolling out a standardized government bond issue backed by reverse mortgages a key step in creating a secondary market that could help lower borrowers' costs and increase the loans' availability.
The result: The reverse-mortgage business is booming. Though reverse mortgages represent less than 1 percent of the overall U.S. home-loan market, valued at about $10 trillion, the number of federally backed reverse mortgages surged 41 percent in the year ended Sept. 30, according to the Department of Housing and Urban Development.