Reverse Mortgages – Designed To Stay

Seniors Can Now Be Financially Secure

Expenses are mounting and you are living on a fixed income.
Decisions need to be made. Do we sell the family home and downsize into a smaller home or take the equity and move into a retirement community or into an apartment?

The home is Security!

Next to losing a spouse or a close family member, the next most emotionally challenging experience for a senior is to give up their independence by selling their home. Seniors have typically raised their families and experienced life, both its pleasures and problems in the sanctuary of their homes. What are seniors to do when struggling to meet their living expenses, yet don’t want to leave their homes? Adult children are often beside themselves when considering the limited financial options available to them for assisting their aging parents.

Examine the Numbers

Is it wise for senior homeowners with substantial equity in their homes to downsize?

Today we experiencing what is called “a buyer’s market”. In this type of real estate market there are fewer buyers and a larger inventory of available homes. Therefore, because of less demand, one can expect a lower sales price and higher selling fees due to the increased marketing costs and time taking to sell a home. Many real estate agents have increased their commission fees to offset their higher expenses, these fees can now commonly range anywhere from 5% to 6% to sell a home in California. That means a real estate agent will charge a seller around $30,000 to $36,000 in commissions fees to sell an average $600,000 home in the Los Angeles area. Added to these commission fees are closing costs and possible state and federal capital gains tax for any net profit over $500,000 for married homeowners, or capital gains tax for net profit over $250,000 for a single homeowner.

Since 1978, California seniors have also long benefited from Proposition 13, the state law keeping property tax base low. If a senior is planning on downsizing to a smaller home, Proposition 13 can now be a double-edge sword. Unless the homeowner can meet the restrictions imposed by Proposition 60 or can find a property in a neighboring county where there is a reciprocal property tax agreement, or plans a move out of the state, that senior will most likely be buying his new home at a tax base of 1% or more of the selling price. Therefore, downsizing to a home purchased for $300,000 will render a new tax base of at least $3,000.00 per year. Clearly, if the homeowner is planning to move into a rented apartment or an assisted living environment, increased property taxes are not an issue; although, future real estate appreciation would be lost when moving from an owned home into a rented property.
By the time the senior homeowner pays all the costs to sell their home in commission fees, transaction fees, closing costs, capital gains taxes, moving expenses and the possibly higher property taxes on the new house, plus endure the emotional price of leaving their family home, is selling the family home truly worth it?

Buying More Time

A real financial option that a senior homeowner should consider is a government insured Home Equity Conversion Mortgage (HECM) also commonly referred to as a Reverse Mortgage. A Reverse Mortgage allows senior homeowners access to their homes equity without the need to sell their property or worrying about monthly mortgage payments.

Weighing In

It is safe to say that senior homeowners will probably never hear any positive comments about Reverse Mortgages from their neighborhood real estate agent, nor from most bankers or mortgage representatives for that matter. In fact, these people intentionally try to scare seniors away from obtaining Reverse Mortgages! They do this by telling seniors that they will lose there home to the bank. That statement – is false! Why? Banks don’t want your home; they make money by lending money, not owning single family homes. It also costs banks a tremendous amount of money to repossess a home, as these repossessions and property disposals are often handled by third parties which only increases the banks costs in the process. The real reason these bankers and mortgage brokers discourage senior homeowners away from Reverse Mortgages is that they usually do not sell Reverse Mortgages, or uneducated about Reverse Mortgages. More typically, bankers and real estate agents are more concerned about their own financial self-interests. Unless a home is sold or refinanced, real estate agents and loan representatives do not make money, period!

Facts About Reverse Mortgages
With a Reverse Mortgage the following are true:

Usually for about ½ the cost of selling a home, a Reverse Mortgage will save a homeowner thousands of dollars over downsizing into a smaller home or an apartment – that’s thousands of dollars in your pocket! Also, with a Reverse Mortgage, the title deed of a home does not change hands – it remains the possession of the homeowner(s).

No monthly mortgage payments to make with a Reverse Mortgage. It is true; there are absolutely no monthly mortgage payments to make on the money borrowed. Seniors can also sell their home anytime they choose. Should a homeowner pass away; the property goes to your spouse or to the estate as specified in your will or trust. And with proper estate planning, the home passes to the spouse whom remains living in the home and enjoys the continued benefits of the Reverse Mortgage. Only upon the sale of the home, or the death of the last homeowner, is the loan due and payable at which time the bank will be reimburse for the principle and accrued interest on the loan. If inherited, the heirs then decide to either keep the home and pay-off the reverse mortgage loan balance, or sell the home and keep any proceeds after the loan and sales expenses are paid-off.

Is a Reverse Mortgage safe? Yes – and for added safety, Reverse Mortgage counseling is required by the FHA. The counseling is generally done over the phone that takes approximately 15 minutes to a half hour. The government wants to make sure that seniors are fully educated about the program before making a decision. HECM Reverse Mortgages are also government insured non-recourse loans. That means if you or your spouse should live past 100 years old or older, or should the loan amount ever exceed the value of the property, after the home is sold, the government insurance then takes care of the difference – seniors and/or their heirs are not responsible for the unpaid balance of the loan.

Seniors 62 and older can usually obtain a Reverse Mortgage. If a senior is at least 62 years old and owns their own home or who has substantial equity in their primary residence, they can commonly qualify for a reverse mortgage with relative ease. There are only a few FHA restrictions that prevent seniors 62 years or older from acquiring a Reverse Mortgage.

First, there are no income requirements. Secondly, there are very few credit requirements that need to be met to qualify for a Reverse Mortgage. Additionally, there is no need to worry about losing or any reduction in Social Security or Medicare benefits. A Reverse Mortgage is a loan and is not considered additional income, so there are no taxes, and Social Security and Medicare payments remain in tact.

Out-of-pocket expenses for a Reverse Mortgage typically run about $300.00 to $500.00 for a FHA home appraisal and credit report. The balance of the loan origination and settlement fees are normally applied to the beginning loan balance. After several years of home appreciation the increase in home equity often helps to off-set these original loan fees.

Reverse Mortgage regulations require that any pre-existing first or second trust deeds be paid-off. This frees up the cash that a senior was spending on their current mortgage and allows this money to be used to meet other increased living expenses. Any money not used to payoff a pre-existing mortgage can then be taken as tenure monthly payments, line of credit or a lump sum cash payment, or any combination thereof. And, the money can be used for any purpose the homeowner(s) deems necessary, including paying-off high interest rate credit cards, augmenting a savings account or even to take a deserved vacation.

How much money are we talking about? Reverse Mortgage benefits are based on the FHA formula which includes the HECM 203-b limit for your area; current adjustable interest rate at the time of closing, age of the youngest homeowner, the home’s location and current FHA appraised home value. The actual loan proceeds for monthly tenure payments, line of credit, and lump sum payment are less the cost of current liens and mortgage payoff, loan and serving fees, and any costs of bring a home up to the FHA minimum property standards. Bottom line, senior homeowners may get hundreds of dollars or even a thousand dollars per month or more, or a lump sum of cash, or line of credit, etc. Because of the above noted variables, it is best to talk with a Reverse Mortgage specialist to identify how much money you can receive.

My Reverse Mortgage Costs How Much?

As a short term financing tool, reverse mortgages are an expensive proposition. However when used long-term, those expenses are spread throughout the life of the loan, making a reverse mortgage a viable solution to supplement retirement income, pay off a mortgage and have extra cash available to enjoy life to the fullest without the worry of mortgage payments. So, what costs are involved and why do the fees seem so high?

When looking at a reverse mortgage estimate, one will find that fees are broken down into three categories; loan origination fee, HUD Mortgage Insurance Premium (MIP), and other costs. Fees are based on the home value or lending limit, whichever is less. Currently, due to the passing of the American Recovery Act of 2009, the national reverse mortgage lending limit is $625,500. These fees are further broken down on the Good Faith Estimate (GFE).  

To begin, the loan origination fee is the fee that is paid to whomever originates your reverse mortgage for you. That person should be a reverse mortgage specialist and will help guide you through the entire reverse mortgage process. The origination fee is heavily regulated by HUD/FHA. The guidelines for the origination fee are that originators can charge 2 percent of the first $200,000 of appraised value or lending limit (whichever is less), and 1 percent of any portion thereafter, with a maximum of $6,000 and a floor of $2,500. For example, a home valued at $300,000, would have a maximum origination fee of $5,000.  

The next fee to explore is the upfront HUD Mortgage Insurance Premium (MIP), which is paid to HUD/FHA. This fee, although high, is the main reason in which the Home Equity Conversion Mortgage (HECM) Program is able to exist. The amount of the fee is 2 percent of the lesser of the home value or lending limit. For example a $300,000 home would have an upfront MIP of $6,000. This fee works in a couple ways. First, it’s like an insurance policy for the lender. Reverse Mortgages are considered “non-recourse” loans, which means the homeowner can never owe more than the value of their home. Since the loan balances are growing rather than shrinking like traditional mortgages, it is possible that the amount owed could be greater than the home’s value. If that were the case and a maturity event occurred, the lender would recover their loss with the pool of money created by the upfront MIP. Secondly, the MIP helps protect the borrower as well. Let’s say for some reason, the borrowers reverse mortgage lender went out of business. HUD would step up and make sure that all funds available to the borrower, whether it be a line of credit or monthly payment, would still be available to that borrower. It’s a necessary evil that helps stimulate the appetite of investors looking to invest in reverse mortgages.  

The last set of fees seen on the reverse mortgage estimates page is other fees. This refers to typical loan costs, such as title, escrow, appraisal, notary, etc. These fees are paid to the third parties involved who help with certain parts of the transaction. Lenders require title and escrow to make a smooth transaction and to make sure that all previous liens, if any, are satisfied prior to establishing a new reverse mortgage on the property. In addition, the lender wants to verify the home value, which is why an appraiser will visit the property and provide the lender with his/her best estimate of value based on the condition of the property as well as comparable properties in the area.  

In addition to actual hard, upfront fees incurred on the loan, other costs include the interest rate that is paid, the ongoing 0.5% HUD MIP fee and monthly service fees. These items will be explored in our next article: Relevancy of Rates on Reverse Mortgage Costs.

In conclusion, reverse mortgages are designed for senior homeowners who want to stay in their home long-term. Although certain situations may dictate the reverse mortgage as a viable short-term solution, however it’s best to consider a reverse mortgage as a long-term loan. When looking into a reverse mortgage, make sure the reverse mortgage professional that you’re working with fully explains all fees involved. It is of paramount importance to not only understand how the reverse mortgage works, but also all fees involved.

Could a Reverse Mortgage Be a Retirement Solution for You

Reverse Mortgage Pros and Cons

Understanding reverse mortgage pros and cons is becoming more important what with America’s population aging, home prices falling, the stock market crash of 2008 still not having been recovered from, the value of the dollar diminishing and a whole host of other financial concerns, it is likely that now more than ever the answer to the question “how are we going to live the life we hoped for?” may be found in the reverse mortgage. This often misunderstood and sometimes feared product could just be the difference between being comfortable in retirement and not retiring at all.

Let’s take the reverse mortgage head on and look at the pros and cons. By reviewing the advantages and disadvantages of the reverse mortgage you will not only gain a better understanding of the powerful impact it could have on your life, but you should be able to set aside any fears you have had in the past. With a little counseling from a qualified expert you should then be able to determine without a doubt if the reverse mortgage is the right move for you.

I like to focus on the positive. So let’s look at reverse mortgage pros first.

• It allows you to convert home equity into non-taxable income without having to sell your home
• The reverse mortgage allows many people whose home is their largest asset to convert that highly illiquid and passive asset to a very liquid asset that can be actively invested.
• With a reverse mortgage you never have to pay the loan back as long as you live in the property as your primary residence, keep the home maintained, and pay your taxes, insurance and HOA dues (if applicable).
• This one’s the biggie; you will never…never under any circumstances, owe more than your home is worth. Neither will your heirs in the event you leave the home to them in your estate.
• Here’s another biggie; you will never again have a mortgage payment.
• Something many people don’t understand is that you can actually sell your home or even refinance out of a reverse mortgage in the future. Obviously you will need enough equity or cash on hand for either situation, and in the event you wish to refinance you would likely need to qualify for the new loan.
• This is a grossly underutilized retirement tool: you can place a reverse mortgage on an owner occupied income property of up to four units.
• You can use the proceeds of the loan to make maintenance repairs to your home to get it up to FHA appraisal standards.
• The loan is paid in full, along with any capital gains upon the homeowner’s death. This is an effective way to defer capital gains to death and possibly completely remove them from the estate.
• There are no income or credit requirements* for a reverse mortgage.
• You can purchase a new home with a reverse mortgage. Again, without income or credit requirements.
• The note has no recourse. This means the lender cannot seek assets other than the available equity in the home for repayment of the loan. Again, the borrower and their heirs will never owe more than the home is worth.
• That being said, in a falling equity environment, the lender is the only party with asset devaluation risk.
• In many cases you will not only rid yourself of your current mortgage payment, but you may actually have the ability to structure the loan to pay you a monthly amount.
• Cash flow from the reverse mortgage will not affect social security and Medicare.
• There are no prepayments penalties
• Finally, all closing costs can be paid for with proceeds from the loan assuming there is sufficient equity to do so.

*While there are no restrictions regarding credit scores or history you cannot complete a reverse mortgage and have an outstanding federal lien or judgment. The government must be paid in full before or at closing.

O.K. Now for the negatives; there are some, although generally speaking, the reverse mortgage is either a great option for you and has very few drawbacks or it is simply not the right option. Here we go:

• As with any loan, there are costs associated with the reverse mortgage. These are generally in line with those of a conventional or FHA refinance and they are considerably lower than those of selling your home.
• Interest accrued on a reverse mortgage cannot be deducted until the loan has been paid in full.
• While there are no income or credit requirements for the loan, the borrower does need to have enough equity in the home to facilitate the mortgage. This is a rough estimate and by no means should it be used to disqualify yourself, but generally the home owner should have 30% give or take 5% equity in the home. In other words, if your current loan balance is higher than 70% of the value of your home there will need to be additional cash brought to the table.
• The home owner still needs to pay property taxes, home owner’s insurance, and any applicable HOA fees after taking out their reverse. I’m reaching here. It’s not really a con but it is something of which you should be aware.
• The home will need to be appraised and while you can escrow for some items to be repaired, a home in disrepair could be unqualified or could fall short on the necessary equity for closing.
• There is a mortgage insurance expense with a reverse mortgage as it is a HUD loan. This effectively increases the interest rate on your loan.
• There is an age requirement. The youngest homeowner must be 62 years of age or older to qualify. The calculation used to determine the amount of your loan is based on the youngest owner.
• A reverse mortgage may affect needs based programs other than Social Security and Medicare. It would be worth a phone call to your case worker if you are a recipient just to be on the safe side.
• On purchases there are no seller contributions allowed.
• Finally, the loan will reduce the equity in your home.

After reviewing the lists of advantages and disadvantages for reverse mortgage loans if you think it might be an option for you your next step would be to contact a reputable lender in your area. Then you will be given contact information for a couple of local counseling agencies that will act as a third party information source. The process is pretty simple and may just be the best thing you ever did for your retirement plan.