The Perfect Reverse Mortgage

I wanted to share with you a story that will show you how a reverse mortgage has helped someone to the point that I’d like to label it “perfect” for her. The perfect reverse mortgage…

I met “Ms. Smith” at an educational meeting in Boca Raton, her eldest son joined us to learn more and to see if a reverse mortgage was right for their specific situation. Her son and I spoke at length during and again after the meeting, and I spoke to Ms. Smith several times prior to meeting her to get her loan application completed and submitted.

Her story is like many I have heard over the years. She has come to the point in her life in which she simply needs more money every month to keep her budget in line with her income.

Her husband had recently passed, and as many of you know, when a spouse passes away, the social security benefit and pension benefits disappeared as well. When you combine a massive decrease in her 401k plan, the economic meltdown in the U.S., and of course, her home value in south Florida plummeting from the height of the market, she needs help – and she needs help now!

Her children are comfortable and doing well, and they all let me know that they are not waiting for their mother’s home, nor are they waiting for the money that would result from a sale if she should pass away unexpectedly. They want their mother to live as comfortably as possible, regardless of what is “left over” for them in the end.

This is a critical piece of this case, as some pundits object to the reverse mortgage due to the fact that it decreases the amount of cash that the heirs will inherit. I have strong opinions about this. In most cases, the senior parents paid for the home, and made sure that their children were fed, educated, taught right from wrong, and also made certain that they were ready for the world when they became legal age and went out on their own. Now, in their senior years, the parents are supposed to hoard the equity in their home in order to give it to the kids instead of bettering their own lives when they need it the most?!

This is simply NUTS to me. Kids become adults, and for those adults to be in waiting for the cash that comes as a result of their parents demise is simply not something that I have respect for. Especially when the senior is suffering financially and has the ability to tap into what they have amassed.

The reverse mortgage is designed to allow the senior homeowner access to the cash that they have built up as equity in their homes, plain and simple.

The reason that I call this particular situation the “perfect reverse mortgage” is this: When you look at what the senior client wants, the history of the property, the need for money, and the desire to remain in the home for the next several years, it all adds up to a perfect need for a reverse mortgage.

WHAT SHE WANTS TO DO
Ms. Smith is a happy woman, and has very clear plans for her future. She wants to live in the home for the next 5-10 years, and when she cannot physically keep up the property, she wants to downsize to a condo near the ocean.

SIMPLE MATH
Now for the numbers involved. Mr and Mrs. Smith bought their home 37 years ago for less than $40,000. They paid off the mortgage after 25 years, and now own it free and clear. It is worth about $290,000 today. She qualifies for just over $188,000 in cash with a fixed rate FHA reverse mortgage loan. Her plan is to use about $10,000 per year for her needs. She revealed to me that she loves her home and wants to stay there for another 8-10 years.

Here is where this loan, in this case, becomes perfect in my mind. Ms. Smith is aware of the fact that congress recently approved using s HECM reverse mortgage as a purchase product for seniors. Her plan is to stay in her home as long as she is comfortable and able to maintain it and enjoy it as she does today. In ten years, she will have AT LEAST $90,000 remaining in her account from her reverse mortgage proceeds. (I am keeping it simple here, eliminating the guesswork involved with how much she can make on her money, through investments, cds, or simple interest) That means that she will have the ability to use some or all of that money to move into her next, smaller home, and never have to worry about mortgage payments. Simply put, she will put DOWN about 1/3 of the purchase price using the HECM for purchase, move in , and have no future mortgage payments, ever.

In summary, Ms. Smith gets the cash she needs to be comfortable, is guaranteed never to make a payment on the loan, is guaranteed to never be forced to move, and will have the reserve funds available in cash to downsize if and when the time comes. Her heirs are not waiting for her money, they have her best interest in mind above any financial gain.

I have seen several uneducated journalists and congress members choose to label reverse mortgages negatively in order to gain attention. I see this as irresponsible, as the majority of seniors who have one say that they would do it again in a heartbeat, and if anyone actually does their homework, they would find that Mrs Smith joins over 500,000 seniors across America who have tapped into the equity of their homes to assist them with income in their “golden years.” She also joins the 93% of seniors who agree that the reverse mortgage has improved their quality of life. Is the reverse mortgage “perfect” for every senior? I am not stating that at all, every situation is different! For Ms. Smith however, it was indeed the perfect reverse mortgage.

Most Common Uses Of A Reverse Mortgage

Reverse mortgages have become a very popular option for senior citizens. They are so common because it gives the homeowner the freedom to use the proceeds of the loan for whatever they choose. Because the homeowner has total control on how to use the proceeds of the loan, there are many different ways in which reverse home mortgages are being used.

We have included in this article some of the most common ways in which people are using reverse mortgages. Of course, there are many more ways in which you can use the money from a reverse mortgage.

Reverse Home Mortgages and Long Term Care

Many senior citizens are finding themselves in a position where they have to discover diverse ways to finance their long-run care due to the raising fees in health care. Many seniors have chosen a reverse home mortgage as a manner to fund their healthcare fees. They spend the revenue to pay for the current monthly fees or a long term care premium.

The proceeds they receive from the reverse home loan allows some senior citizens to guarantee the type of health care they deserve for as long as they needed. This is so because the FHA insurance makes sure that homeowners keep getting monthly payments for as long as they live in the house.

The money you get from a reverse home mortgage is tax exempt. Also, depending on your financial situation, your social security and Medicare benefits are usually not affected by the money you receive from the seniors reverse mortgage. To make sure, it is a good idea to talk to your CPA, ask your reverse mortgage broker or ask the counselor you are entitled to when applying for a reverse mortgage.

People use a reverse mortgage to pay for health care in one of several ways:

– To pay for unexpected or emergency medical expenses

– To pay for the monthly medical bills

– To afford the long term care insurance premium

Reverse Home Mortgage and Stopping Foreclosure

Home foreclosures are at a record high because of the current economical conditions. Foreclosures have had a direct impact in the whole society affecting all types of homeowners. Many seniors have turn to reverse mortgages as a way to protect themselves from the chance of losing their homes.

By using a reverse home loan, a senior citizen facing foreclosure on his home can turn the tables around. Instead of having to make monthly payments, the homeowner can receive monthly “income” from the bank. When you get the mortgage, the foreclosure mortgage can be paid off and the home taken off of the foreclosure procedure.

Finally, a seniors reverse mortgage can work as shield for you. As long as you live in your home, you can never be thrown out of the house. Your only responsibility is to keep the real estate and insurance payments up to date.

The main drawback to a reverse home mortgage is its high fees. Nevertheless, if you compare these fees to the possibility of losing your home, it can be well worthwhile.

Even though you can stop foreclosure by applying for a reverse mortgage, it’s advised that you talk to a professional reverse mortgage broker before choosing this alternative. A good broker specializing on reverse home mortgages should be able to tell you if this is a viable solution for you.

Reverse Mortgage as a Way to Fund Your Retirement

Some seniors are finding it hard to maintain a lifestyle they have grown accustomed; especially with the increasing life expectancy. Some are turning to reverse home mortgages to help them fund their retirement years. With a reverse mortgage, you can choose to receive monthly payments from a bank. In many cases, this funds work as a second income.

Seniors reverse mortgages work by making use of the equity in your home. You can choose to use the equity in the house by receiving a lump sum or monthly payments. Contrary to a traditional home loan, in a reverse mortgage, the bank pays you. Of course, as you receive payments, the equity in your home decreases.

For people using a reverse mortgage, the funds they receive can be used as a second income. There is no limit on the different ways you can se the money.

Also, by getting a reverse mortgage you avoid having to spend your cash in making monthly payments which in turn increase your cash flow. You can save the money you avoid paying to the bank and use it as an insurance policy.

Of course, before choosing a reverse home mortgage, talk to an experienced reverse mortgage broker specializing in this type of mortgages. In addition, if you choose a FHA insured reverse home mortgage, you are entitled to a free third-party counseling session where you can ask any questions you may have.

Using A Reverse Mortgage To Protect Your Home Value

Using your reverse mortgage to protect your home value.

Many consumers have misconceptions about these loans, often leading them to believe that these mortgages have too many drawbacks and should only be used for extreme financial hardship. Our articles addressing the myths about reverse mortgages debunk these misconceptions, however there are benefits to them that most consumers and even industry professionals are not aware of or have not considered, and at times drawbacks that have not been thought through as well. One such benefit is the tax planning options outlined earlier. Another is receiving protection from housing volatility. Yes, it’s actually possible to use a reverse mortgage to protect yourself in part from falling home prices. We will detail how this is accomplished and what the protection can and cannot do for you.

First, let’s discuss how and why a reverse mortgage offers protection from market volatility. This protection is not guarantee of home values, but rather a way of ensuring a portion of the home value is liquidated without ever having to pay back the mortgage or take a personal loss due to the reverse mortgage having a greater payoff than the home value. However there are conditions that restrict what manner of protection you get. To start with the reverse mortgage works as protection from home value losses because you pull cash out from your homes equity that you have complete control over, while never having to make a payment on the mortgage as long as you live in the home. As a result, if home values plummet you have already pulled cash out of your home, and have no obligation to make a payment on that reverse mortgage as long as you live there. You may still use or invest the money you got from the reverse mortgage, but will never be forced to move out of the home or make a mortgage payment as long as you live in the home.

Once you pass away, if the reverse mortgage balance is higher than the value of your home, your heirs may choose to turn the home over to the bank without any personal consequences or financial obligation to them. Regardless of how much the home lost value, your heirs will never have to pay the shortfall if they choose to turn the home over to the lender. You still got your cash, and if you have cash left from the mortgage may leave that to your heirs.

On the flip side, if there is equity in your home and you wish to sell or refinance it you keep the equity, not the reverse mortgage lender. The same holds true for your heirs who may choose to refinance the home and keep it or sell it and get its equity if the home value is greater than the reverse mortgage payoff. In the vast majority of the time the home still has equity remaining when the borrower passes away. For more information explaining how the equity growth works see “what will happen to my equity”

So how much protection can you get? Well it’s not a full protection of home value, but it is a partial one. The loan’s size is determined by location, age of the borrower, and the value of the home. Only a certain percentage of the home value is lent. Assuming you borrow 60% of the home value the protection offered is that you won’t lose more than 40% of the home’s value at the time you take out the reverse mortgage. Basically the loan to value of your loan dictates how much protection you have.

So what conditions apply? First, if you owe more on the home than its worth and you wish to move you would have some issues to deal with. If the sale proceeds don’t cover the loan balance you will have no obligation to pay the shortfall, however no equity will come your way and you will need to work with the lender to transfer title to them. This is a key point as reverse mortgage differs from a conventional mortgage in that the lenders only recourse is against the home only, not against the home and the person. As a result the lender cannot get a default judgment against you to pursue any losses they take. Next, once you pass away your heirs will have a choice to keep the home or turn it over to the lender. They have six months to decide and act. If they are set on keeping the home and you owe more than its value they would have to pay the shortfall. However they are free to turn the home over to the bank and pay nothing.

In all reality it is very rare for a reverse mortgage to outgrow the value of the home. In most cases the equity in the home grows and the borrower can sell anytime without any worries, and the heirs get the equity later should they decide to remain in the home. However, as recent times have shown, it is possible for home values to decline. That coupled with an increasing payoff balance on the mortgage can result in a reverse mortgage balance being higher than the home value.

Finally, why does this protection work? It seems too good to be true at first glance. It works because of the structure and backing of these loans. First, FHA insures most reverse mortgages. The FHA insurance paid at the closing of the mortgage and its ongoing service fees pays for insurance against negative equity losses to the lender. FHA insurance is a cost that shows under the term MIP on the closing statement. That fee is subtracted from your loan proceeds. Next, because you may only borrow a percentage of the home value it is rare for this insurance to pay out- but has been more commonplace in the past few years. The protection is only one benefit to reverse mortgages. Both benefits and drawbacks are present. While a reverse mortgage has many benefits, be sure to know its costs and drawbacks. This tool is not right for everyone. Talk to a professional for more information, or visit my site for a complete reverse mortgage guide.