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.