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REVERSE MORTGAGE LOANS

A reverse mortgage loan is designed for seniors age 62 and older.  It allows you to access cash with no monthly mortgage payments. The cash can be used for home renovations, medical bills, or even living expenses.  You will be able to defer payments until you die, sell, or move out of the home.

This type of mortgage can be a key component of your retirement planning, it can provide financial help for now and for the future.

Home equity is a large source of wealth for retirement-age adults.  According to the National Reverse Mortgage Lenders Association, homeowners 62 and older held $3.5 trillion in home equity in the third quarter of 2017. We will discuss how you can tap into that wealth without having to sell your home.

Equity is an asset that you can use only when you sell your home and downsize, or when you borrow against it.  This is where reverse mortgages come into play for retirees with limited cash-flow and assets. It is for those older adults whose net-worth is tied up in their home’s equity.

Quick facts about reverse mortgages

  1. Designed if you are a senior age 62 and older.
  2. Allows equity in your home to be converted into cash income with no monthly mortgage payments.
  3. Most are insured by the government.  A trustworthy mortgage specialist is important to find because there are reverse mortgage scams that target seniors.
  4. Can be beneficial for some, but a very poor financial decision for others.  The pros and cons have to be measured to see if this is a good financial decision for you.

How Does a Reverse Mortgage Work?

In a reverse mortgage the home works as collateral.  When the homeowner moves or dies, the profit from the home’s sale is directed to the lender to cover the loan’s principal, interest, private mortgage insurance, and fees.

Any profit remaining after paying the loan goes to the borrower if he/she is still alive.  Or to his/her estate if the person has died. The borrower’s family may also choose to pay off the mortgage in order to keep the home.

The IRS considers the money obtained from a reverse mortgage as a loan advance, not income.  It is therefore not taxable.

This type of loan is called reverse mortgage because instead of making payments each month, you will receive payments from the lender.  In general, the older you are, the more equity you may have in your home and the more money you can take out.

You will not be required to pay back the loan until the home is sold or otherwise vacated.  Neither will you need to make any monthly payments at all as long as you’re living in the home.  Lenders do require you to stay current on general maintenance, homeowners insurance, property taxes, and any other home expenses such as association fees if applicable to you

Types of reverse mortgages

As you consider a reverse mortgage, We will help you choose which one is right for you.  There are currently three types of reverse mortgages:

  1. Single-purpose Reverse Mortgages can only be used for one purpose specified by the lender, such as covering expenses of home repairs or property taxes.  It is the least expensive option and is offered by state and local government agencies, as well as non-profit organizations. Although not offered everywhere, most homeowners with low or moderate income can qualify for these loans.
  2. Proprietary Reverse Mortgages are also referred as “jumbo” reverse mortgages.  They are designed for homeowners with properties ineligible for FHA financing. This is the case when the home’s value is greater than $1 million, the property is a non-FHA approved condominium, or it is a planned unit development (PUD). These mortgages are privately insured and offered exclusively by certain lenders.
  3. Home Equity Conversion Mortgage (HECM) is the most commonly used type of reverse mortgage.

HECMs are offered by private lenders and can be used for any purpose.  Created, regulated, and insured by HUD, the U.S. Department of Housing and Urban Development.

As a requirement to apply for a HECM you must complete counseling with an independent government-approved housing counseling agency.  The counselor is required to explain the loan’s financial implications and costs. Options other than a HECM must also be discussed with you along with details of overall costs and financial benefits of each option.

To approve a HECM, lenders don’t have a specific income requirement.  They do take a close look at your ability to stay afloat with expenses to maintain the property.  Depending on your financial capabilities, the lender may decide to set money aside from the loan proceeds to pay for costs like property taxes, homeowner’s insurance, and other costs involved in maintaining your home.

The HECM allows you to choose several payment options:

  • A single disbursement option usually offers less money than other HECM options and is only available with a fixed-rate loan.
  • A “term” option gives you fixed monthly cash advances for a specific time.
  • A “tenure” option offers fixed monthly cash advances for as long as you live in your home.
  • A line of credit lets you withdraw from the loan proceeds at any time in the amount of your choice for as long as you have funds in your line of credit.  The interest on the loan is limited because you’ll owe interest on the credit used.
  • A combination of a single disbursement, monthly payments, and a line of credit.

You are not locked to a particular payment option.  There is flexibility to change your payment option by paying a small fee.

In the HECM program you generally receive larger loan advances at a lower total cost than proprietary loans.  There is a limit on how much funds you can take out the first year, this amount is called “initial principal limit.”

In general, during the first year you can take out approximately 60% of your initial principal limit.

Pros of a reverse mortgage

  • You can have a more comfortable retirement after age 62 with this loan option.
  • You are able to retain the title to your home and live in it as long as you would like.  As with any loan, you need to keep your homeowner’s obligations involved with maintenance and property expenses.
  • You can choose from various payment options or a combination of those options.  There is flexibility of how you can manage the cashflow depending on your needs.
  • Reverse mortgages use your home as collateral, you will not have to make monthly mortgage payments.  You can use the funds to pay off your existing mortgage and liberate yourself from the monthly expense of a mortgage payment.  You will still have to pay the required monthly expenses to upkeep the home.
  • Minimal out-of-pocket expenses for closing costs and ongoing fees such as FHA mortgage insurance premium (MIP).  These costs can be financed with the reverse mortgage loan.
  • Loan proceeds are not considered taxable income.  My CPA background allows me to advise you on what to expect when you file your taxes.
  • Will not affect your Social Security or Medicare benefits.  My financial background will guide you on the potential monetary implications a reverse mortgage may have on your life.
  • A reverse mortgage is a non-recourse loan.  Neither you nor your family will be liable for any amount of the mortgage that is above the value of your home when the loan is repaid.
  • You can access even more loan proceeds in the future if your home increases in value by doing a refinance deal.
  • Once the loan is repaid, the remaining equity belongs to you or your family.

Cons of a reverse mortgage

  • As interest on the loan and fees accumulate, it increases the loan balance over time.
  • The more equity is used, the less you will leave to your family.  If you leave the home to your family, they will have to repay the loan balance in order to keep the property.  The loan is usually paid off by the sale of the home.
  • Higher fees are possible compared to a traditional loan.  We work with various lenders and can find lower-cost options.
  • Your eligibility for needs-based government programs such as Medicaid or Supplemental Security Income (SSI) may be affected.  You will have to consult your benefits specialist to discuss implications of doing a reverse mortgage.
  • The loan will become due if you fail to meet loan and home maintenance obligations, such as paying property taxes, insurance, homeowners association fees (if applicable), and maintaining the property.
  • A reverse mortgage must be repaid when a “maturity event” occurs, such as the last surviving borrower or non-borrowing spouse dies.  Also when the home is no longer the borrower’s main residence, or he/she vacates the home for more than 12 months for medical reasons or 6 months for non-medical reasons.

Avoid Reverse Mortgage Scams

Scams are popular with this loan option because of the demographic involved with reverse mortgages.  The older population may have cognitive impairments that can make them vulnerable to becoming easy prey.  There are also seniors that find themselves in desperate situations and seek financial salvation.

Dishonest vendors and construction contractors have targeted seniors by helping them acquire a reverse mortgage to pay for home remodeling projects.  The promised quality work is not delivered and the money is practically stolen.

Another concern is family, caregivers, and financial advisors who take advantage of seniors by using their power of attorney to reverse mortgage the home and steal the proceeds.  The predator is frequently someone you know.

There have also been cases where seniors are convinced to buy an annuity or life insurance policy with the proceeds from the reverse mortgage, only to benefit the financial vendor.

Tips from the Federal Bureau of Investigation

To help seniors avoid reverse mortgage fraud, the Federal Bureau of Investigation created a list of tips to follow.  We have added them here verbatim:

  • Do not respond to unsolicited advertisements.
  • Be suspicious of anyone claiming that you can own a home with no down payment.
  • Do not sign anything that you do not fully understand.
  • Do not accept payment from individuals for a home you did not purchase.
  • Seek out your own reverse mortgage counselor.

Although it may be hard to seek the help of authorities, if you have been a victim or suspect someone of committing fraud, it is important to report the case.  You may be able to recover your losses and help others avoid to become victims of the same situation.

Avoid foreclosure with reverse mortgages

Another issue seniors have to look out for is the risk of foreclosure when doing a reverse mortgage.  Although you are not responsible for making monthly payments and you cannot default on the loan, if you don’t meet the other obligations the lender can foreclose on your home.

The lender uses your home as collateral.  It is up to you to keep it in good condition in order to maintain its value.  If the home falls into despair and its fair market value plummets, the lender will not be able to sale it and recoup the full loan amount it has provided in the mortgage.

The home also needs to stay current on property taxes and homeowners insurance.  The lender requires these items to be paid to protect its interest in the home. If you don’t pay taxes, local authorities can seize your home.  Or if there’s a fire without insurance and the property is destroyed, the lender won’t be able to use your home as collateral.

As long as you keep your end of the bargain, you won’t be at risk of foreclosure.  This is why lenders take a detailed look at your financial abilities before approving the loan.  Financial counseling should help you determine if you are financially able to cover your obligations.  We will review the numbers with you in detail so that you know what to expect.

The bottom line

A reverse mortgage can be a great tool for your retirement planning.  You can benefit greatly as long as you are well informed and work with a professional to analyze your case thoroughly.  You must understand how the loan works and the trade-offs involved.

Even with counselors and trustworthy lenders, this type of loan can be a complicated financial product.  We will take you by the hand and explain all the implications of this mortgage option. We have assisted seniors to make sound financial decisions and find peace of mind.