Archive for July, 2009
If you have ever been across the pond to the UK, you might have heard of the latest industry popping up known as equity release.What is equity release and what relevance does it have to reverse mortgages?
Well for those not in the know, a reverse mortgage is exactly the same concept as a lifetime mortgage, the mainstay of the equity release market.
The term ‘reverse’ comes from the fact that anyone seeking this kind of mortgage is a property owner already so is not looking to buy. Instead they are seeking to release the tied up equity in their home, effectively going back down the equity ladder. For more information check out equity release TV
One of the most important things to think about when it comes to your reverse mortgage is the calculation of the mortgage rate or the interest that you may have to pay on the amount of money that you borrow. The interest rate you pay will depend on two important factors:
Whether the loan is a federally insured HECM reverse mortgage
Whether the loan is a “private” non-federally insured reverse mortgage
If the former, the interest rate is tied in with the one year US Treasury security rate.
If the latter, the interest rate is usually set by the private lender.
So why choose the latter? Simply because HECM reverse mortgages are capped at 2% of the property value – allowing little leeway for those requiring a large sum of money.
With the interest rates for HECM tied into the government set security rate, one might immediately question why anyone would choose non-HECM at the risk of incurring more costs.
However, private reverse mortgages are just as desired and successful as their government backed predecessors. As with anything government backed, HECM reverse mortgages lack flexibility in their options. Given the initial costs of setting up a reverse mortgage, the government cap at 2% of the property value can make what seemed cheap comparatively expensive; particularly when you factor in the important requirement that a reverse mortgage be the only secured debt on the property.
Take the following example:
Homeowner A with a $200,000 property and $8,000 secured loans looks to take out some equity to fund their grandchild’s college fees.
The HECM maximum would be $4000.
Not enough to clear the secured debts.
Now the same example using non-HECM
Homeowner A takes 20% of their property value ($40,000), rids themselves of the secured loans that can often incur high monthly payments, and is left with $32,000 for their original and worthy purpose – to help fund their grandchild’s college fees.
For those looking to take out a small percentage of their property, or for those with a property of substantial value, HECM is the way forward. For all others, the private options look far more attractive.