Reverse Mortgages California

The LIBOR index, a commonly used benchmark for the cost of money for lenders, has increased by almost 1% over the last month, pushing up the reverse mortgage interest rates for Libor-based products.

Here's reverse mortgage interest rates as of today:

HECM Reverse Mortgage rate: 3.38% (Index is the 1 Year CMT at 1.88% plus a margin of 1.5%)

Fixed rate Reverse Mortgage - HECM:  6.67% to 6.81% (depending on the bank)

Bank of America Independence Plan 360 jumbo reverse mortgage and Independence Plan 210 jumbo reverse mortgage: Suspended. See yesterday's post.

Cash Account Advantage jumbo reverse mortgage: 6.58% (Index is 6 month LIBOR at 3.08% [rounded] plus margin of 3.5%)

These rates are do not constitute an APR and do not include closing costs. Please contact your lender for a reverse mortgage quote.

First it was Countrywide, and now its parent, Bank of America has officially suspended their jumbo reverse mortgage program.

The leading jumbo reverse mortgage lender emailed its lending partners today with the announcement. It appears that nationwide declining property values and the resultant lack of investor interest in mortgages has killed the program, at least until secondary market conditions improve.

Fortunately, Financial Freedom has made no such announcement regarding their jumbo reverse mortgage product. And there are still a few other smaller players offer their proprietary reverse mortgage programs. Of course, Fannie Mae is still funding the FHA Home Equity Conversion Mortgage (HECM), but theses conforming loan amounts are limited by the home value cap of $362,790 in most high-value counties.

This development will hurt the California reverse mortgages market because there are thousands seniors who own homes whose values exceed the FHA HECM limit. And when a leading reverse mortgage lender such as Bank of America shuts down their program, it means that others are likely to follow suit.

The reverse mortgage and the pay-option mortgage are two surprisingly similar home mortgage options that are both worth considering by senior homeowners wishing to tap into their home equity.  Many seniors in recent years have used the option-ARM to access cash from their home equity, which results in far lower monthly payments for the same loan amount than those of the traditional 30 years fixed rate mortgages. Others have opted for a reverse mortgage to accomplish the same goal of accessing their home equity, but without the requirement of any monthly principle or interest payments. Given these loans' similar function to access home equity with a low or no payment burden, which loan is better for seniors?

A good place to start this discussion is with a definition of each type of loan. A reverse mortgage is a home loan for people over the age of 62 that enables them pull out some of their home equity as cash.  This money can be used for any purpose that they want. A defining element of this mortgage for seniors is that it never requires a monthly mortgage payment for the life of the loan. The loan may be kept until the homeowner(s) either sell the home or permanently move out. Essentially, a reverse mortgage is similar to a line of credit, in that it has a credit limit and the ability to take cash out and put it back in. The senior does not pay the monthly interest that accrues, but instead the interest gets added to the principle balance.  The lender actually cannot ask the homeowner for any payments for as long as they live in the home. When the home is sold or the loan is refinanced, the total amount borrowed (principle plus interest), is repaid to the lender.

Now for a definition of the pay-option mortgage. You may hear of it referred to by a number of different names, such as "option ARM", "pick-a-payment", "negative amortization loan", or "deferred-interest loan" among others. The pay-option mortgage has no age requirements so a homeowner of any age may take out this loan.  Like the reverse mortgage, a homeowner may pull out a lump sum of equity (no credit lines), while taking on only a relatively small mortgage payment.  You can usually expect a mortgage payment between 2% and 5% annually of the loan balance, but paid monthly (take 2% to 5% and divide by 12). However, that payment does not equal the interest rate on the loan, which may be 6% to 12%. For example, if the payment is 5% and the interest rate is 8% (a common scenario), then the interest that is not being paid is 3% (8% minus 5%).  Similar to a reverse mortgage, the lender allows that 3% of unpaid interest to be added to the principle balance of the loan, and repaid at a later date. Thus, even though payments are being made, the loan balance grows over time. But the loan balance is not allowed to grow indefinitely. Once it reaches 110% to 115% of the original loan balance (depending on the lender), a full mortgage payment must be made.

There are several factors to consider when comparing the reverse mortgage to the pay-option mortgage. If the senior intends to live in their home for many years to come but does not have an abundance of income, then the pay-option mortgage would be a poor choice. It would be like waiting for a bomb - it is only a matter of time until the low monthly mortgage payment would be replaced by a much bigger monthly payment. In this scenario, the reverse mortgage would be a better choice since it carries the guarantee of no mortgage payments for as long as the homeowner lives in the home.

The pay-option mortgage is more difficult to qualify for than the reverse mortgage because it requires documentation of good income, assets (other than home equity) and credit score. The reverse mortgage does not require any of those items.  Caution: An overly eager broker might point out that your pay-option mortgage only requires these items to be "stated" on the forms by the borrower. If in your case "stating" ample amounts of income or assets means "lying", despite what your broker might say, such an action carries potential loan-fraud consequences.

In most cases, a reverse mortgage will cost far less than a pay-option mortgage.  Although the closing costs will probably be similar amounts, the interest rates for pay-option mortgages are 1% to 3% higher. More important, is the fact that you must take all the money immediately as one lump sum with the pay-option mortgage rather than taking it out when you need it, as in the case with a reverse mortgage credit line arrangement. Having a line of credit allows the loan interest to accrue against a smaller balance, because you are keeping the mortgage balance lower for a longer period of time. The only offsetting factor in favor of the pay-option mortgage is that a portion of the interest is being paid each month.

Seniors are well advised to consider a reverse mortgage before committing to an pay-option mortgage.  The pay-option mortgage tends to best serve working people who need to free up some monthly cash flow for a period of time and are willing to trade some of their equity for that privilege. But in most cases, reverse mortgages for seniors are a far better long-term choice.

Rates have jumped this week for the fixed rate HECM (0.3%) on the LIBOR-based programs (0.33%)

The following are today's reverse mortgage interest rates for the most popular reverse mortgage products:

HECM Reverse Mortgage rate: 3.17% (Index is the 1 Year CMT at 1.67% plus a margin of 1.5%)

Fixed rate Reverse Mortgage - HECM:  6.30% to 6.81% (depending on the lender)

Independence Plan 360 jumbo reverse mortgage: 6.62125% (Index is the 6 month LIBOR at 3.02125 plus a margin of 3.6%)

Independence Plan 210 jumbo reverse mortgage: 5.12125% (Index is 6 month LIBOR at 3.02125 plus a margin of 2.10%)

Cash Account Advantage jumbo reverse mortgage: 6.52% (Index is 6 month LIBOR at 3.02% [rounded] plus margin of 3.5%)

These rates are do not constitute an APR and do not include closing costs. Please contact your lender for a reverse mortgage quote.

To be a senior homeowner in California is, for the most part, fortunate.  As we all know, many seniors who have owned a home in California for a long time have seen massive increases in their home equity.  Their employer pensions may have been cut, their social security alone may not be what they hoped, and stock market investments may have faltered, but the value of their homes is very often two or three times more than what they paid for it.

Until the reverse mortgage, a huge pile of home equity did not do the senior a lot of good.  Most seniors found the only two ways of tapping into it to be unattractive: sell their beloved home and move somewhere unfamiliar or take out a new mortgage against their home saddling themselves with monthly payments.

For most seniors their home is not only a possession, but important to their sense of security, comfort and pride - to give it up just to have money to live on often seems wrong to them.  Cashing out some of their home equity with a new mortgage seems to be a risky proposition for most seniors, at best.  What happens when they run out of money and can no longer afford the mortgage payments? Their options are few and unwelcome: sell the home or be foreclosed upon.

Now consider the arrival of the reverse mortgage in California. The name may initially sound scary to some seniors, but when investigated, many find it to be the perfect solution. Without selling their home or taking on a mortgage payment, the reverse mortgage allows seniors to receive a portion of their home equity in cash. This enables the senior to continue living in their own their home, have the cash they need to live on, and all without any new debt payments. For these reasons, the reverse mortgage can be a much better solution than selling their home or obtaining a new traditional mortgage.

As the need for additional retirement money has grown among the California senior population, the popularity of reverse mortgages in California has increased by 658% from 2003 to 2006. However, the moderation of recent statistics suggests that an educational challenge still remains. Many seniors are under the false impression that obtaining a reverse mortgage means that they will lose some control over their home or that the lender will take their home at some point in the future. They often feel that there are somehow jeopardizing their home by taking on a reverse mortgage. Fortunately, nothing could be further from the truth.

On the contrary, the California reverse mortgage lender must guarantee to the senior that they will not have to make a mortgage payment for as long as they live in their home. The senior is guaranteed security in their home by having the money from a reverse mortgage to use for any purpose. With minimal obligations on the senior's part, the lender cannot do anything to affect their continued home ownership and occupancy. As seniors learn how these facts contribute to their sense of security, comfort and independence, the popularity of the reverse mortgage in California and other states will continue to grow.

In the world of reverse mortgages, there are basically two types of programs. Government-backed reverse mortgages and jumbo reverse mortgages, also known as proprietary reverse mortgages. The latter are so called because they are designed and funded by individual banks. Given their conservative loan to value ratios, they generally only make financial sense when used on a home whose value far exceeds the FHA limits.

The past two years has seen many new proprietary reverse mortgage programs enter the marketplace. Countrywide bank entered the fray last year, offering both the government-backed reverse mortgages and their own jumbo reverse mortgage. But earlier this week, they eliminated their jumbo program. Their decision must have been driven by investor sentiment in their stock and of course, mortgage-backed securities in general. Loan volume was probably not the issue since Countrywide rocketed up the ranks to become the top lender for reverse mortgage loan volume for the month of March.

They will probably continue to offer the FHA Reverse Mortgage, known as the Home Equity Conversion Mortgage or "HECM". (Don't you love the LONG names the government has to give everything?) The HECM is sold to Fannie Mae, though the lender usually retains the servicing, so there is no lack of funds available for the program.

The loss of Countrywide's program to California reverse mortgages will be felt across the state. Limiting choices to fewer programs means that the exisiting programs will be in greater demand, likely resulting in less favorable terms. Still, there remains ample choices for California seniors seeking a reverse mortgage.

I'll continue to report developments in the reverse mortgage business here on this blog. Thanks for stopping by!

I thought this might be helpful. I will regularly post interest rate updates on this blog.

The following are today's reverse mortgage interest rates for the most popular reverse mortgage products:

HECM Reverse Mortgage rate: 3.13% (Index is the 1 Year CMT at 1.63% plus a margin of 1.5%)

Fixed rate Reverse Mortgage - HECM:  6.05% to 6.81% (depending on the lender)

Independence Plan 360 jumbo reverse mortgage: 6.28688% (Index is the 6 month LIBOR at 2.68688 plus a margin of 3.6%)

Independence Plan 210 jumbo reverse mortgage: 4.78688% (Index is 6 month LIBOR at 2.68688 plus a margin of 2.10%)

Cash Account Advantage jumbo reverse mortgage: 6.21% (Index is 6 month LIBOR at 2.71% [rounded] plus margin of 3.5%)

Interest rates are not an APR and do not include closing costs. Please contact your lender for a reverse mortgage quote.

If you asked a senior citizen about the most important issue facing them during retirement, there one response you'd probably hear over and over is: "I want to remain independent in my home." Many of them have lived in California for a long time, which means everything that they know and that is familiar to them is here.

Read into that statement a little and you will see that one of the major underlying factors is that seniors must have the finances to cover the costs related to remaining independent in their home. If the senior's health declines, they probably will be faced with a lot of expenses. They may need money to make their Medicare co-payments, pay for prescription drugs, make changes to their home to improve their mobility, or to hire an in-home care. The high cost of living in California drives up the cost of in-home care, among other products and services, making our state one of the most expensive.

For California reverse mortgages, where seniors often have plenty of equity but may have little in the way of savings or income, this type of program may be the answer.

Fortunately, seniors in California have more equity to tap into with a reverse mortgage than the seniors in other many states. The appreciation of California real estate in recent times and the desirability of California as a place to retire, has given seniors here a unique advantage. They probably have a lot of equity as long as they did not already tap into it through refinancing.

Of course, the main advantage of reverse mortgages over a traditional loan is that, since reverse mortgages do not require any monthly payments, the money that the senior receives from the lender does not create any new debt service burden. Equally as important, the bank must also allow the senior not to repay the money for as long as they live in the home, maintain it in basic livable condition, and pay their property taxes and insurance. With these benefits, it is clear that reverse mortgages in California can contribute tremendously to the ability of seniors to remain independent in their homes.