New York City has been in the midst of a real estate boom for the last several years. Even with the economy in recession and the lingering effects of 9/11, homeowners have seen their apartments double, even triple in value in as little as five to ten years. To tap in to the ballooning equity, New Yorkers often take out home equity loans or do a cash-out refinancing. But for homeowners over the age of 62, on a fixed income, incurring an additional monthly expense may not be an attractive option. For this group of homeowners, provided that their co-op board allows it, a reverse mortgage can utilize the home's equity and provide needed cash without ever requiring a monthly repayment.
A reverse mortgage, as the name implies, works in the opposite way of a traditional mortgage. While a traditional mortgage decreases over time as the borrower's equity increases, a reverse mortgage loan, which has no monthly payment requirement, increases over time while the borrower's equity position decreases. Taking out a reverse mortgage requires no financial records, credit history or medical reports and puts tax-free money back into the hands of the shareholder or unit owner or owners that are borrowing the money. The borrower, who must be age 62 or older, can remain in their home without having to repay the loan, which only becomes due when the home is sold or if the borrower dies or moves out.
There are currently three types of reverse mortgages available. The most popular, according to Jim Savoca of Financial Freedom Senior Funding Corporation - a lender specializing in reverse mortgages - is the Home Equity Conversion Mortgage, or HECM. The HECM is insured by the U.S. Department of Housing and Urban Development (HUD) and similar to a traditional mortgage, the proceeds are disbursed in the form of a lump sum, line of credit, automatic monthly payment, or any combination of the three.
The Fannie Mae Home Keeper is a similar product, but is not backed by HUD. The main difference between the two products is the lending guidelines. "In the New York metropolitan area homeowners generally fare better with the HECM product because HECMs have lower loan-to-value requirements," says Savoca. Both the HECM and Fannie Mae reverse mortgages are only available to owners of single-family homes and condominiums.
Until about two years ago, co-op shareholders weren't eligible for reverse mortgages, but now they can opt for what's called a Cash Account, currently only offered by Financial Freedom, which is a subsidiary of Lehman Brothers Bank, FSB. "The Cash Account not only lends to co-op shareholders, but is also the product of choice for other high-value properties, because competing products will not fund as much on high-value properties or on co-ops," says Savoca. The HUD product, believes Savoca, does not perform as well for high equity properties because HUD sets property value limits on which the loan amount is based, while the Cash Account does not set any property value limits.