"Should I wait to do a reverse mortgage"? I get this question all the time from senior homeowners considering a reverse mortgage. The answer is: "It depends..."
I then ask the borrower, do you need it now? If the answer is "yes", then waiting may not be to your advantage. Yet convincing these folks that it is in their best interest to move forward NOW is a very difficult task. Of course, I realize that I have a built-in bias - I make my living originating reverse mortgages. However, I have a responsibility to help these folks understand that they may not have a better opportunity in their lifetime.
Before we address why it may not benefit a borrower to wait, let's talk about why folks are taking a wait and see attitude about reverse mortgages. Partly it is because we just came through a lending limit limbo while we all anxiously awaited HUD's decision on the new national lending limit that was signed into law with HR 3221, the housing bill. Even when the legislation passed, the interpretation as to the new limit was vague at best and it took weeks before HUD finally announced on October 2nd that there will be one national lending limit of $417,000. So anyone with a higher valued home wanted to make sure they got the most from their reverse mortgage. I don't blame them. They were wise to wait.
What is ironic is that the folks who have home values that would not benefit from the increase in the limit were also sitting on the sidelines waiting to see what the new limit would be. Why was that? I think it is partly because they didn't understand that the new limit would not impact the amount of equity they could access. Or perhaps they were waiting for lower fees. Although, unless they have a home valued over $300,000, the new law that reduces the origination fee won't affect them either. But, these folks just didn't understand all that, nor should they. They aren't reverse mortgages specialists.
But now that HUD announced the lending limit and is tentatively shooting for a November 1st effective date, many folks are still putting off taking out the reverse mortgage that they need so badly.
Perhaps they think that by waiting they will get more money down the road? I hate to disabuse them of that notion, but the fact is that by waiting they are risking further declines in the value of their home and an increase in the interest rates that affect the reverse mortgage.
To understand how this works, consider that there is a formula for calculating the amount of equity that can be considered for a reverse mortgage. The formula includes three very important variables: 1) The age of the younger borrower, 2) the value of the home up to the lending limit, and 3) an interest rate that we reverse mortgage specialists call the expected rate which is based on the 10-yr. T bill or the Libor as an index. When any one of these variables changes, the amount of proceeds can be impacted. For example, if the home value drops, the amount of money the borrower gets is less. If the expected interest rate increases, the borrower will get less money.
Let's say a borrower has a home valued at $300,000 and this borrower is 72 yrs. old. At the time the borrower signs the loan application, the expected interest rate, which is based on the 10-yr. T-Bill is 5.4%. Once the calculations are performed, this borrower is eligible for $195,500.
What if this borrower waits and the expected interest rate rises to 5.59%? If the value of the home is still $300,000, the borrower is now eligible for $192,000, $3000 less. Maybe that is no big deal, but what if the borrower has a mortgage of $194,000? By waiting, he is now $2000 "short" and will have to bring in that money to close the loan (all liens, mortgages, etc. MUST be paid off with the reverse mortgage proceeds). So waiting, especially for a borrower who needs the entire reverse mortgage proceeds to pay off their existing mortgage, can leave that borrower short-to-close.
Now, what if while this borrower was waiting, the home value fell to $290,000? If the expected interest rate stayed at 5.4%, this borrower is now eligible for only $188,000! This is a huge risk to take, especially if there is an existing mortgage to pay off. Home values are predicted to continue declining throughout 2009.
What is most likely to happen is that this borrower will be hit with a double whammy - the home value will fall AND the expected rate will rise. What if the home value falls to $290,000 and the expected rate rises to 5.59%? Now the borrower is only eligible for $185,400, almost $10,000 less than he would have gotten had he not waited.
Of course, again, it depends on what the borrower's needs are. If they don't have a pressing need such as paying off an existing mortgage or a need for income to make ends meet, then maybe the loss of access to the extra $10,000 won't make a difference to them and there is no need for urgency.
But there is another argument for not waiting to do a reverse mortgage that is often overlooked and that is quality of life and the time we have left on this earth. I call this "lost life opportunity". What if because of a lack of money the borrowers miss out on the opportunity to visit family in another state, to eat out more often, to take all the grandkids to the movies, and just simply be able to pay all the monthly bills without robbing Peter to pay Paul - how do you put a price on that? Reverse mortgages aren't always about numbers and dollars and cents - they are about what the money will DO for us. No amount of waiting will ever make up for these lost opportunities.
So back to my original question: Why do people put off doing something what is in their best interest, other than a lack of understanding of how the reverse mortgage works, as explained above?
I believe it is simply fear. Fear of making a decision because it may be the WRONG decision. And this fear comes out in spades when society in general is in turmoil and the only thing that is certain is uncertainty itself. Fear creates paralysis. Even though rationally it may be in a person's best interest to make a decision and move forward, inaction tends to be the human response to fear. When there are perceived threats, our biology tells us to sit quietly, don't draw attention to yourself, and don't move in any direction (thus the "deer in the headlights" syndrome).
And there is plenty of fear to go around. Credit crunches, Wall Street woes, bank failures, declining markets, foreclosures on every corner - it is enough to make a person want to go to bed and stay there until everything is normal again (which is an illusion!).
My advice to my senior clients is that we have to overcome this emotional paralysis and try to make decisions based on logic and reason. The reverse mortgage program is just as safe as it was a year ago or twenty years ago when it first became insured by the FHA. The program is still highly regulated, has built-in guarantees, and is insured by the full weight of the government. None of that has changed. What has changed are our economic situations, our home values, and an increase in the climate of fear.
Another question I get from seniors is "What if I need the equity in later years and I have used it all up with a reverse mortgage?" My response to them is this:
First of all, what are "later years"? The average reverse mortgage borrower is 72 yrs. old. That seems late enough for me. How much longer should they live a life of sacrifice waiting for some unknown need for equity in the future? Now seems to be a good time to start living life. Life is short.
As for "using up" all the equity, if the distribution of funds is set up correctly, there should be money left on a growing line of credit. In fact, many of my clients use the reverse to "lock in" some equity and preserve it for future years. That way, if home values plummet, they are guaranteed the equity in their line of credit.
Also consider that many borrowers use some of their reverse mortgage proceeds to pay off existing liens, as we discussed earlier, thereby freeing up cash flow. The house payment they no longer have to make could be saved or invested for a "rainy day" if that is a concern for them.
Equity is really an illusion. As we have so painfully seen in recent months, equity can come and it can go based on market conditions. Who's to say that the senior will even have a substantial amount of equity in their home in the future? Even if they did, we are back to how are they going to access it. Short of selling the home, they will most likely get a reverse mortgage.
This concern, that there may not be equity in future years "when they need it", is based, I think, on fears that they may need funds for long term care or need to sell and move into assisted living.
Let's think about this: Even if they did not do a reverse mortgage, there isn't enough equity in the average person's home to cover very many years of paying for assisted living or other long-term care facilities anyway! Once their funds run out, if they don't have a long-term care insurance policy, they will have to apply for Medicaid to pick up the slack. So the equity they could have used a few years ago, to make life more enjoyable, is used up anyway!
So, why not use the equity now, set up a line of credit, pay off existing mortgages, and use some of the proceeds to purchase a long-term care insurance policy? (I realize this is not always realistic based on health and age, but a person in their 60's and perhaps early 70's, should consider this as an option).
The unused balance on a reverse mortgage line of credit grows each month and can literally double in 10 years. Many reverse mortgage borrowers are setting these up to use for in-home care when and if they should need it.
Every borrower's situation is different. Anyone considering a reverse mortgage must get all the facts and rely on the advice of not only a reverse mortgage specialist like myself, but also get unbiased professional advice from someone who also understands reverse mortgages. While waiting sometimes make sense in certain cases, for the most part, very little will be gained by waiting. And remember, there is nothing to fear but fear itself.
I am thrilled to announce that my new company, Reverse Mortgage Training Solutions (RMTS) is now available to train anyone who wants to become a reverse mortgage originator. Good quality training is sorely lacking and RMTS will fill that void.
Reverse mortgages are a high-demand niche market that is growing exponentially with the aging of America. Older adults are facing financial hardships that the reverse mortgage could help solve. RMTS training programs equip new and existing loan officers transitioning into reverse mortgages with the tools and resources to position themselves as the local expert on reverse mortgages.
RMTS offers four distinct training products and services for new & experienced reverse mortgage originators and for companies who need to train their loan officers. The RMTS suite of products includes:
RMTS COMPLETE! Coming soon! This is a comprehensive online course for loan officers, mortgage brokers and anyone who wants a career as a reverse mortgage loan consultant. The course is self-paced so that the very busy loan officer can fit it into their schedule. It consists of 4 modules with approximately ten hours of interactive, engaging instruction in everything needed to be successful in the reverse mortgage industry including product knowledge, marketing strategies, and sales training. Sylvia has layered the course with an ethical approach to working with seniors as well as sharing her real-world experience, having originated over 375 reverse mortgages herself.
RMTS DIRECT! Available now! RMTS offers cost-effective, onsite, customized workshops for small to mid-sized lenders who do not have the resources or expertise to train their loan officers in reverse mortgages. RMTS workshops are interactive, challenging - and downright fun! Pick and choose from three core subject areas. Take each workshop as is, or create your own by mixing and matching topics based on your team's needs.
RMTS LIVE! Available now! Join us for focused webinars aimed at providing reverse mortgage consultants real-world training and information on specific topics that cover sales & marketing, product knowledge, and how to successfully work with seniors. All of the RMTS LIVE! webinar events will be hosted and conducted by reverse mortgage industry expert, Dr. Sylvia Williams, CSA.
RMTS CLUB!is a ‘members only' website that will be available for a low annual fee. The club will offer a variety of benefits to include the first module of the RMTS LIVE! course for free, industry updates, monthly newsletter filled with sales and marketing tips, discounts on webinars, marketing materials, a job board, and much, much more!
If you want more information, please contact me at: Sylvia@reversemortgagetrainingsolutions.com
I got an email asking me about the HECM limits and I thought my response might be helpful to some of you:
Sylvia - Do you have any idea when the national loan max is going to be applied to Reverses? Also, do you have any info on the applicable percentage that will be applied against this amount based on the customers' ages? Clearly, we can't use the calculator for this so I was hoping you had that info or a way to get it. I have two clients now looking at the reverse product and I cannot tell what they will have available. One couples' ages are 67 and 64 and the others' are 70 and 67. FHA is no help at all, and as much as I know about this product I still cannot find a good referral source that I can trust. Both clients are in New York and the property values will each exceed the $417k. Many thanks,___
My response:
Hi ____: Yes, this is SO frustrating! The national limit could be at least $417,000. As NRMLA stated, HUD's lawyers have not resolved whether the bill creates a single national loan limit at $417,000 or $625,500; or area limits at 115% of area median home value, with a floor of $417,000 and a cap of $625,500. There is also mixed information regarding how long it will take HUD to issue a Mortgagee Letter to implement the increase, ranging from October 1, 2008 to January 1, 2009. Even if the limit increases to $625,000, the county where the subject property is located will need to qualify for this increase. With recent drops in home values, many counties will not benefit from the increase. I don't know your market, but I imagine most of NY will be considered a higher valued area.
Did you know that you can run scenarios up to home values of $544,185 by entering a Hawaiian zip code such as 96746 into your RM calculator? Just remember to adjust the origination fee. For values higher than the $544,185, you will need to manually calculate. As for the percentage, who knows what HUD will do. I am manually basing the amount on the same percentages that exist now. But, I suspect that the formula will adjust the percentage down with higher values.
Here is what I said in regards to a provision in the legislation HR3221: "It is about time that someone restricted the cross selling of financial products and annuities to seniors. These are for the most part inappropriate products and have given reverse mortgages a bad name. It was not so much the reverse mortgage itself, but the inappropriate use of the proceeds that created the bad press."
Here is an email I got:
Dear Dr.: I am curious why you feel that cross selling is incorrect? If you had an eighty year old Aunt Alice living in a $100,000 home and no real savings and barely making it, why would you not want her to get a RM with the housefixed up, purchase a $10,000 Medicaid Approved Pre-Need Funeral Plan for her and Uncle Henry who has early stages of a serious illness with no more than five years to live? Let's together respectfully analyze this situation and see what are the best options for them.
Here is how I responded:
Dear___,
Are you a reverse mortgage consultant? I sure don't have any issues with the Aunt Alice in your scenario getting a reverse mortgage to fix up her home and perhaps have some extra to live on. And, if the $10,000 Pre-Need plan makes sense, I don't have a problem with that, either.
However, I do have a problem with selling seniors unneeded financial products just to make an extra commission. I find that annuities - in most cases - are not appropriate in that they tie up the senior's money, create taxable income, and sometimes provide less income than the tenure option. But it sure does create a nice commission for the insurance agent! (And by the way, I am a CA licensed life agent).
However, I might have been hasty in my blanket statement and should have taken more time to explain what I meant. My real point was that selling annuities to seniors has created some major bad press over the years and that it was not the reverse mortgage per se that was the culprit, but the inappropriate use of the proceeds. I do recognize that not all investments are bad. But I do believe the senior should get unbiased financial advice. Thanks for writing to me!
I commented on how my client would benefit from the increase in the lending limit to $417,000. I explained that with the current lending limit of $372,790, they would be $50,000 short of being able to pay off their existing mortgage and that with the new limit, they could access enough equity to just cover the mortgage. I was so looking forward to telling them!
Well, I didn't calculate correctly. Because our reverse mortgage calculators do not yet reflect the new lending limit (HUD has yet to give their blessings with a Mortgagee Letter), I did a quick calculation but failed to take into account that not all of the increase will flow to the bottom line.
It appears that my borrower will only have access to an additional$35,000 of that increase, not the entire increase, leaving them still short by $25,000. That is much better, but if you don't have $25,000 it might as well be $50,000!
Here is my new calculation: With the current limit, the Principal limit is approximately $242,000 which is 66% of the limit of $362,790. Applying that same percentage to $417,000, I get a principal limit of $275,000. Then of course, the service set-aside of approximately $5000 (this is not a fee, but it is an equity reserve) is deducted plus approximately $15,000 in fees, leaving the borrower with a net principal limit of $255,000. With a mortgage of $275,000 to pay off, they are still short. Sigh....
I always own up to my mistakes and I really appreciate those of you who pointed this out to me. That's what I get for being in a hurry!
Today, July 26th, the Senate passed HR 3221, Foreclosure Prevention Act of 2008, also known as the "FHA Modernization Act" and the President is expected to sign it immediately.
This bill provides for needed housing reform in general but has direct impact on the HECM (Home Equity Conversion Mortgage) specifically.
The bill will establish one national FHA lending limit for HECM's at $417,000. (The limit will be increased for high cost areas to $625,500 on January 1st, 2009). Currently the highest FHA lending limit is $362,790. What this legislation means for senior borrowers is that they can now access more of their equity. For example, I have 69 yr. old clients who can barely make their house payment. Their mortgage balance is $275,000. Their home is worth approximately $450,000. With the current county lending limit of $362,790, they are only eligible for $224,500 which won't cover their mortgage. They are what we call in the industry "short-to-close" by about $50,000.
Now, with the increased lending limit of $417,000 they have access to an extra $54,000 of their equity which will be enough to pay off their mortgage. They are going to be thrilled!
The increase in the lending limit is a real blessing for some folks. However, it won't make a bit of difference if the value of the home is under the current lending limit. For example, if a borrower has a home value of $350,000 in a county with a lending limit of $362,790, no extra equity is available. However, if that same home is in a county with a county lending limit of $206,000, the increase in the lending limit will free up $144,000 more that they can access! This legislation is a HUGE benefit in counties with lower lending limits but higher priced homes.
The other benefits to seniors are:
HECM for home purchase
Co-op product provisions
Origination fees of 2% on the initial $200,000 in maximum claim amount and 1% on the balance thereafter with a cap of $6,000
Prohibitions on requiring the purchase of annuities and other financial products.
Restrictions around cross selling financial products.
Requirements on counseling protocols, funding and practices that promote independence and quality in counseling.
It is about time that someone restricted the cross selling of financial products and annuities to seniors. These are for the most part inappropriate products and have given reverse mortgages a bad name. It was not so much the reverse mortgage itself, but the inappropriate use of the proceeds that created the bad press.
The reduction in fees has been a long time coming! The origination fee is now capped at $6000. Prior to this bill, the maximum origination fee was $7255. Now seniors can access more equity at a lower cost. We are making progress!
The reverse mortgage industry is sizzling. Each year there is an increase in the number of reverse mortgages originated. A bulge of some 80 million baby boomers is currently moving through the population heading toward the retirement years. The vast majority of baby boomers are homeowners, many of them with substantial equity. Many will consider tapping into the equity in their homes to help pay for retirement. It is predicted that one in five mortgage loans by 2015 will be a reverse mortgage.
Perhaps you are considering a career change and think you want to be a reverse mortgage consultant. Before you jump into it, please take the time to consider what it takes. If you are transitioning from the "forward" mortgage side to reverses, you will have to completely change your mindset and how you do business. Working with seniors is a totally different experience than what you might be used to. (I will give you one hint as to the main trait you will need to work on and that is ‘patience".)
In other words, do you have the right stuff? There are some basic skills and traits that you must have in order to succeed in reverse mortgages.
Successful reverse mortgage consultants have these traits in common:
*Personal integrity *Patience *Genuine caring and interest in others *Good old-fashioned Likeability
You will also have to become an expert in your field. You must have a complete understanding of reverse mortgage products and how they can help your clients. Anything less and you will be crushed by the competition. Anything less, and you will not be serving the best interests of seniors who so badly need your guidance, advice, and expertise.
You must always, always, always put the senior's interests before your own. Because reverse mortgages are so popular, I fear that many will see this as an opportunity to make a quick buck rather than as the long-term career opportunity it is. With that opportunity comes a moral and ethical responsibility to serve our senior clients well. We also have the responsibility to protect our industry by always following the rules and never cutting corners. Our industry is being scrutinized like no other industry, as it should.
In addition to the above traits, you will need these skills:
You must be detail-oriented. You will be working with numbers, documents, and lots of information. If you are sloppy with the details you may impede the progress of the loan. Your borrower will be unhappy, your processor will be unhappy, and YOU will be unhappy. If you are not the detail type, then seriously consider hiring someone to help you with administrative details.
You must be organized. You will need systems in place. Again, you may need to hire someone if you cannot stay organized yourself.
You must build referral networks This means involvement in your community, meeting and greeting people, joining networking groups and other community organizations. Successful reverse mortgage consultants are "out there".
You must be an educator. More than any other loan product, the reverse mortgage requires that your senior borrower deeply understand the loan and how it works. Forget that you are "selling" - you are providing a solution to a senior. Seniors do not want to be "sold". Your job is to teach, to educate, and to explain.
Take time to reflect and do some self-assessment. Ask yourself; do I really have what it takes to be good at this? Do I want it bad enough to make improvements in my personality and in my habits? Be honest with yourself. If your motivation for doing reverse mortgages is the money only, you will soon find that you are not happy in your new career.
There is some confusion regarding the status of the county lending limit increases for HECMs (Home Equity Conversion Mortgages), also know as reverse mortgages.
The recent FHA temporary loan limit increases are NOT applicable to HECM's. The Economic Stimulus bill only created temporary higher limits through the end of this year for "forward" mortgages, not reverse mortgages. The Economic Stimulus package specifically excluded HECM from all of its provisions
The House of Representatives passed its version of the FHA Modernization bill in July 2007 and the Senate passed its version in December. The two versions differ in a few areas (other than HECM issues) and the differences must be resolved in a House-Senate "conference committee." Once a bill is formally adopted by the Conference Committee, it will be sent to both chambers of Congress for approval before it is sent to the President for his signature. The bill includes these provisions:
A single national loan limit at the conventional limit (currently $417,000);
HECM for home purchase;
HECM for coops;
A limitation on HECM origination fees at 1.5% of the maximum claim amount;
Broader provisions regarding manufactured homes, that would, in essence, allow HECMs on manufactured homes where the lots are held as condominiums.
Increasing the national limit will allow many reverse mortgage borrowers the ability to access more of their equity. Currently the highest national lending limit for HECMs is $362,790. When I am speaking to a prospective borrower who has a home value above the county lending limit, I inform them that if they wait a while longer, they may be able to access more equity.
Until the FHA Modernization bill is finalized, it is very misleading for lenders to send out marketing letters telling consumers that Congress has raised the HECM loan limits to $417,000 and promoting refinancing of existing loans. Congress has not yet enacted the higher limit. It is false and misleading to state the higher limits as something that has been done. I have seen a couple of marketing pieces that are touting the higher limits as if they are already in place. That simply is not true.
No one knows for sure exactly when Congress will complete this bill -- and what the final version will actually include. It could be next week, next month or three months from now. Stay tuned....
I pride myself on staying in touch with my reverse mortgage clients. Even years after the loan has closed, clients have ongoing questions and I am always available for them. They often comment that it is so refreshing to call the same phone number knowing I will be there!
My clients also send their friends to me for information. I started writing down some of the questions I get. Because of the declining values we have been experiencing, a lot of questions revolve around equity and how values impact the reverse mortgage.
So here are some typical questions (with my answers) that my clients and prospective clients have been asking:
Q: I am 69 yrs. old and behind in my mortgage payments. My loan balance is higher than the value of my home. My son is telling me to do a short sale. I don't want to move. Would a reverse mortgage help me? Help!
A: Using reverse mortgage proceeds to "settle" with a lender is becoming more and more common. Rather than a short "sale" it is a short "refinance". The lender has to be willing to accept less than the amount owed. But in many cases, it is to the lenders advantage to take the settlement rather than incur the costs of foreclosing on the home. If they are willing to do this, you will no longer have any mortgage payments at all. It can be a win-win.
Q: My mother is 72 and has an Option Arm loan that is resetting soon. She will not be able to afford the payments. Can a reverse mortgage help her?
A: Paying off existing mortgages, especially risky adjustable loans, is one of the very best uses for a reverse mortgage. Your Mom's loan balance and home value are two variables used to calculate how much reverse mortgage money she can get. If the loan balance is not too high and there is still some equity in the home, a reverse mortgage may be the solution.
Q: I have had a reverse mortgage for two years and love not making a house payment anymore. However, my home is too big for me and I am considering selling it. Will I be able to get another reverse mortgage on my next house?
A: If the figures make sense, you are absolutely entitled to another reverse mortgage. Very soon there will be a reverse mortgage that can actually be used to purchase a home. It is part of the FHA Modernization Bill which we expect to pass any time now.
Q: My value has decreased dramatically. How will that impact the reverse mortgage I took out last year?
A: It will not affect your reverse mortgage one iota. The terms that you entered into when you signed your loan documents are in force and nothing can change them. Even if you were to lose ALL equity, you can remain in your home the rest of your life and never have to make a payment to the lender.
Q: We are having a tough time making our mortgage payments, but I was told that we could not qualify for a reverse mortgage because our mortgage balance is too high. Is there anything we can do?
A: You may be in a situation that we call "short to close", meaning that the reverse mortgage proceeds are not enough to cover your existing mortgage balance. If that is the case, we need to determine how "short" you are. If you have funds in another account like a retirement account or a CD, you could use those funds to pay the shortfall and eliminate your mortgage. Another solution is to see if one of your adult children has any equity in their home and can take out an equity line of credit to help you make up the difference. Then you would make the payment for your son or daughter. That payment would be substantially less than the mortgage payment you are making now.
Q: I have a line of credit with my reverse mortgage that is guaranteed to grow each year. Now that values have fallen, will that line of credit be reduced?
A. No, again you have a contract that states the amount of your line of credit and the growth rate attributed to it. Even if your home value falls below your line of credit, you are guaranteed the line of credit amount plus growth. Smart borrowers took out their reverse mortgages when they had lots of equity and have essentially "locked" in their equity with a reverse mortgage.
Q: I keep hearing that "County lending limits" are going up. What does that mean for me with a reverse mortgage?
A: FHA HECMs (Home Equity Conversion Mortgage) limit the amount considered for a reverse mortgage based on the FHA County Lending limits, which vary by county. Currently the highest anywhere is $362,790. The FHA Modernization Bill will raise limits, possibly to one national standard of $417,000. What that means for new reverse mortgage borrowers is that if their home is valued above the current limit in their county, the ceiling is raised on the limit for them, freeing up more equity to borrow. For existing reverse mortgage borrowers, it means that they could possibly refinance their reverse mortgage to access more equity.
Q: I have been thinking about a reverse mortgage, but now that my home value is less, won't I get a lot less money on the reverse?
A. The amount of equity you are eligible for is based on a calculation that includes the age of the younger borrower (if there are two borrowers), current interest rates (based on the 10 yr. T Bill plus a margin) and the value of the home or the county lending limit, whichever is lower. Because values are down, yes, you are right - you will have access to less equity. But does that mean you should wait? It depends.... how badly do you need the money now? What are you using it for? How old are you and how important is it to use the funds for a better quality of life now? Only you can make that decision. However, if you do choose to get a reverse mortgage now, it is possible that as your home value increases, you will be able to refinance your reverse mortgage into another reverse mortgage and access more equity down the road.
Q: I already have a reverse mortgage, which I used to pay off my forward mortgage. I also set up a small line of credit but it is now depleted. I need more money. Can I refinance my reverse mortgage?
A: That depends on the value of your home and how big your reverse mortgage loan balance is that must be paid off. If your home value has flattened or fallen since you took out the reverse, it is possible that you simply don't have enough equity to refinance. You may have to wait a year or two. Check with a good reverse mortgage consultant to see if refinancing makes sense for you.
Q: I have had my reverse mortgage for 3 years now, but I have no equity in my home. Will I lose my home?
A: No way! The FHA insures reverse mortgages. Your home is yours until you leave it permanently, even if you are "upside down", meaning you owe more than the home is worth. When you finally leave the home, the FHA insurance will pay the difference if the value is less than the loan balance.
Q: How will my heirs pay back the reverse mortgage?
A: When the last borrower either moves out or "moves up" (dies), the loan is due. Your heirs have some choices. They can sell the home and pay the reverse loan balance out of the proceeds. Any remaining equity is theirs. Or, if they want to keep the home, they can secure regular financing and pay off the loan. In the event that the loan balance is higher than the value of the home, the heirs can simply walk away and let the FHA and lender take care of it. All reverse mortgages are non-recourse loans which means that only the value of the home can be used to satisfy the loan. If the loan balance is more than the home is worth, and even if your heirs had millions in the bank, they will never be asked to pay back the lender.
Q: How long will my kids have to settle the loan when I am gone?
A: Most lenders will work with your heirs and give them up to one year to sell the home. The lender does not want to take the home back.
Q: When we took out our reverse mortgage, we weren't too concerned about leaving the home to our daughter. But now, circumstances have changed and our daughter lives with us. She is going to want to keep the home, but the loan balance is growing bigger and bigger. She is making good money now, but what if she is not working and cannot refinance the home when we die? What can we do?
A: First off, a lot of things can change between now and the time you leave the home permanently. Your daughter may be in a different "place" in life entirely. However, if you want to limit the growth of the reverse mortgage balance, and your daughter has income, why not have her pay the interest on the loan each month? That would be like her buying the house now. It is perfectly OK to pay down a reverse mortgage.
Q; I was told that I am stuck in my home when I take out a reverse mortgage and that I cannot sell it. Is that true?
A: Nothing could be farther from the truth! You have total control over your home and you retain title. You can sell anytime you wish. However, when you do sell, the loan balance must be paid back, usually from the sale proceeds. Any remaining equity is yours to keep. This is no different than if you had a forward mortgage and sold your home.
Q: I am getting a monthly payment from my reverse mortgage. If my equity runs out, will the payment stop?
A: No, it will not stop, even if you have zero equity in your home. The monthly payment, called tenure, is a lifetime guaranteed monthly payment. It is one of the payment options of a reverse mortgage. You will receive it as long as you live in your home.
Q: What if I take out a reverse mortgage now and need my equity in future years?
A: This is not a simple question to answer without knowing all of your circumstances. However, you must weigh the benefit to you now versus possible future benefits. What do you need the money for now? If you are experiencing hardship and stress, the equity could be used now to ease your life. Also, ask yourself, what could I possibly need the equity for in the future? Is it to buy another home? If so, you might want to consider moving now. Is it to pay for long-term care? If so, the only way to tap into your equity would be to sell your home. How much would you get on the sale? Would it be enough to pay for assisted living? In most situations there simply isn't enough equity available to sustain a long-term care event. So, you would probably go on Medicaid. But, before doing that, you would have to "spend-down" your assets including your home equity (if you are single). So by "holding onto" your equity, what have you gained? Again, this requires very careful analysis of YOUR situation.
Q: I want to take all of my reverse mortgage proceeds as a lump sum and put it in the bank. I have been advised not to do that. But why?
A: The reason this is not a good financial move is that once you draw out all proceeds, interest starts accruing on the balance. Unless you can put that money where it earns more than the interest charged on it, it does not make good financial sense. You have the option of leaving it on a line of credit with the lender and drawing from it any time you need it. And, the balance on the line of credit grows bigger over time.
Q: I have been approached by an insurance agent who is trying to sell me an annuity. I have approximately $90,000 coming to me from my reverse mortgage (after paying off a small mortgage I took out to refinance several years ago). He says that I will make more money by investing the $90,000 into an annuity. I am 83 years old.
A: RUN!!! Do NOT under any circumstances use your reverse mortgage proceeds to purchase any investment, especially an annuity, without solid, impartial, unbiased financial advice. This insurance salesman is going to make a BIG commission on selling you the annuity. You do NOT need an annuity at your age. Your money will be tied up for years and years. What if you need it? The whole point of doing the reverse mortgage was to secure some funds for a "rainy day". Please do not even consider this. If you need monthly cash flow, look into structuring you reverse mortgage so that it pays you a monthly income.
Q: Aren't reverse mortgages extremely expensive?
A: I would ask you "compared to what?" Selling your home is expensive also. Making house payments is expensive. Yes, the upfront closing fees can run $15,000 to $16,000, but a good portion of those fees pays for the FHA mortgage insurance premium. If you were to remove that part, the remaining cost is not too different than regular loan refinance costs.
Q: Reverse mortgages sound too good to be true. Is there a catch?
A: No catch. They truly are a wonderful financial tool in the right circumstances. However, they are not appropriate for everyone and you need to do your homework before getting one.
Here's an interesting article in today's Wall Street Journal about how a reverse mortgage can help seniors who are facing foreclosure to keep their homes. This is not news to me -- I have pulled many seniors from foreclosure with a reverse mortgage. But what is new is that with the glut of bank-owned homes on the market, more lenders may be willing to entertain reverse mortgage payoffs even though the reverse mortgage proceeds do not cover the existing lien.
"If there's a way to settle the debt that nets the investor more than it would get if there was a foreclosure and a sale, then the servicer would look at it," says Thomas Kelly, a spokesman for J.P. Morgan Chase & Co.
Sylvia Williams, Ed.D/CSA
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