Look Into Reverse Florida Mortgages to Capitalize on Housing Boom

The fact that nationwide home sales have picked up over the last couple months is great news for many home owners. A majority are hopinh to trade up for a bigger house, as a result, or at least borrow against their increased Florida home equity and remodel/consolidate debts.

But what if you have no plans to downsize and no desire to add Florida home loan payments to your budget - how can you benefit from your real estate wealth? Many that comprise this group would be retirees … and many retirees live in the Sunshine State. What could their future hold?

Enter the reverse mortgage - a loan that lets homeowners age 62 and older take money out of their home and never have to move out or worry about paying it back.

What is a reverse Florida mortgage?

You can think of a reverse mortgage as the mirror image of a traditional mortgage. When you borrow to buy a house, your monthly payments whittle away at your debt and build up your equity over time.

With a reverse mortgage, however, you gradually take that equity out and increase your home’s debt. The bank doesn’t collect the principal and interest until you or your heirs sell.

Although reverse mortgages still represent only a small fraction of Florida home loans, demand for these once obscure financial products has grown exponentially. Last year more than 43,000 homeowners took out a reverse mortgage. In 1990 about 150 did.

“We used to joke that more stories were written about reverse mortgages than loans originated,” says Bronwyn Belling, a reverse mortgage specialist for the AARP Foundation.

The demand for reverse Florida home loans

Today real-estate-rich retirees are taking out reverse mortgages to pump up their income, fund home improvements or refinance debts. Still, these loans are not without serious drawbacks - complexity and high costs among them.

Read on to learn about the pros and cons of such a home loan. For certain individuals, it may be ideal. For other, the confusion and price could be too much to deal with.

With a reverse mortgage, it’s possible to withdraw roughly half the value of your home. For example, a 70-year-old owner of a $200,000 house could take out $113,000 at today’s rates or opt for a $700 monthly payment for life. You don’t need good credit, a high income or ample savings to qualify.

How much you can borrow comes down to four factors:

1. The value of your house
2. Where you live
3. Current interest rates
4. Your age (Younger homeowners qualify for smaller loans because a longer life span means more years for interest to accrue - and more risk that the bank will lose money.)

If you are thinking about a Florida home loan of this nature, here are three goals to keep in mind related to it:

Monthly income: A reverse mortgage means a regular check to supplement your pension, investments or Social Security - a small one for life or a bigger one for just a few years. You might consider drawing down your home equity early in retirement so that you can put off taking a pension or Social Security and collect richer payments when you do.

A credit line: The most popular and potentially least expensive way to take out a reverse mortgage is through a line of credit. You pay interest only on the money you withdraw, and the amount you can tap in the future keeps growing as you age.
Debt management: If you bought a home late in life or had to dip into home equity to fund big expenses like college tuition, you could very well find yourself still paying off a mortgage deep into retirement. Refinancing into a reverse mortgage can erase that monthly payment.
While there are many benefits to putting your Florida mortgage in reverse, there are two big reasons not to. They are:

The cost: You could be charged as much as $10,000 to take out a $200,000 reverse mortgage after you cover the 2% lender’s origination fee, 2% mandatory mortgage insurance and miscellaneous costs such as title insurance, an appraisal and even repairs. You’ll also owe 0.5% of the loan balance in mortgage insurance premiums every year.

You may consider these fees a small price to pay for the ability to hold on to your home and preserve your standard of living. (And the costs may not seem so bad compared with the 5% to 6% brokerage commission you’d have to pay if you sold your house.)

But if you think you may downsize in a couple of years anyway or will need to move to an assisted-living facility, a reverse mortgage probably isn’t your best option for cash, says Barbara Stucki, project manager of the National Council on the Aging’s reverse mortgage initiative.

“Because these loans have sizable up-front costs,” she says, “your time frame is critical.” Instead, consider a cash-out refinancing or Florida home equity loan to tide you over until you sell.

The future: Someday your mortgage has to be paid off, either in cash or when the house is sold. Although mortgage insurance ensures that you or your heirs won’t owe more than your house is worth, it’s entirely possible to drain your home’s equity, leaving your children with little or nothing.

One reason is that when the Florida home loan comes due, the bill is for what you borrowed plus fees and interest, and rates on reverse mortgages are NOT fixed. The annual rate, recently 8.3%, is the rate on a one-year Treasury bill plus 3.1 percentage points and 0.5 points for insurance. Over the life of the loan, your rate can’t rise more than five points. At today’s rate, a homeowner who borrows $100,000 would owe $222,000 in interest and principal in 10 years.

If leaving your home or money to the next generation is important, think twice. Another option for cash is to sell the house to your children and rent it back.

How to shop for a reverse Florida home loan

If you decide a reverse mortgage is right for you, you have still more decisions to make, including what loan program to use. The U.S. Department of Housing and Urban Development’s home-equity conversion mortgage (HECM) is the only reverse mortgage insured by the federal government, but loan values are capped based on typical home prices in your area.

If you own a valuable house, you may be better off with a loan from Fannie Mae or from a private lender such as Financial Freedom.

When you shop, you have one thing going for you: Because reverse mortgages are so confusing, you have to meet with a counselor before you can apply. That person will spell out the pros and cons, as well as the alternatives. We recommend this step before choosing your ideal Florida home loan.