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What is a Reverse Mortgage?

By Robert Jones

Mortgage and Lending with Sun American Mortgage

September 24, 2009 08:17 AM

Reverse mortgages enable eligible homeowners to access the money they have built up as equity n their homes. They are primarily designed to strengthen senior's personal and financial independence by providing funds without a monthly payment burden during their lifetime in the home. The major eligibility requirements are that the applicant must be at least 62 years of age and own and occupy a home whose mortgage has been paid in full or with a remaining balance.

For more information visit www.ReverseSecure.com.

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Martin E. Kalisker, Esq.

Natick, MA

Real Estate Law From A Practical Perspective

I did extensive research on the HECM(Home Equity Conversion Mortgage) for home purchase. Basically, it allows a senior citizens to sell their old home and obtain financing to purchase the new home. The amount of the loan is based on the value of this new home and the age of the oldest member of the household.

What I was most shocked with were the origination and administrative fees imposed on this product. Unless someone is planning to live in the home for a minimum of 9 years (under the scenario that I reviewed), it makes absolutely no sense at all to utilize this product. Even then (when the outstanding debt exceeds the value of the home), it amounts to an incredibly large average monthly payment, given that the equity in the house has been reduced to zero.

What happens when the elderly person dies or moves out? The home must be sold.

In my opinion (and I am a CPA also) - the reverse mortgage and the HECM product is not a wise decision for most people given that the fees are based on the value of the home and it doesn't matter if you pull the money out in one lump sum or in installments.

Maybe I looked at the wrong product, but I've been through the HUD website, downloaded the software and played with multiple lending scenarios. In none of the cases did it make financial sense to put a client into this product.

Sep 24, 2009 08:26 AM

Robert Jones

Sun American Mortgage - Mesa, AZ

Martin,

Thank you for your comment.

I want to point out some minor corrections on what you said about the loan amount being based on the value of the new home and the age of the oldest member of the household. The loan calculations are not based on the oldest member of the household. It's based on the younger of the two if married.

I do agree with you about the costs. The fees are more expensive than a regular mortgage, but that's because of the added benefits it provides. A reverse mortgage is designed to help the elderly tap into the equity they have in their home to make their life more comfortable. All fees and costs are deferred until both homeowners pass away, if married, sell the home or both move permanently from the home. Also, there is no due date on a reverse mortgage making it very safe and secure.

You also mentioned that the home must be sold if the person dies or moves out. That's partially true. If the homeowner or children want to keep the home, the money owed must be paid within a year, all remaining proceeds are given to the homeowner if they are alive or to the heirs if passed away. If more is owed on the home then what it could be sold, the government will pay for the excess amount.

The Reverse Mortgage program was modified earlier this year like you said where a senior could purchase a new home that is more close to family, in a more favorable climate or one that is newer and more updated. If a reverse mortgage is used for the financing to purchase the home, monthly mortgage payments are not required on the outstanding owed balance. This makes it possible for someone to purchase a higher priced home and have the same results as if they paid cash. The only responsibility of owning the home would be taxes, insurance and HOA dues if the home is located in a homeowners association. The remaining owed balance is never due if the homeowner is living in the home. Again, making the program very safe and secure.

The following are some of the benefits:

The title of the property always remains in the homeowner's name, never changing ownership.
The home can be sold at any time without a pre-payment penalty.
Employment or income is not needed to qualify.
Good credit is not required for qualification.
No monthly mortgage payment on the outstanding owed balance.
A Reverse Mortgage is only due when both homeowners pass away, sell the home or both choose to vacate the property.
A Reverse Mortgage can not go into foreclosure as long as one of the homeowner is living in the home no matter how old they may become.
Can be paid like a regular mortgage for a tax deduction or to limit the amount added to what is owed, but the best part is payments are not required.

It's nice to know you're a CPA.

Robert Jones
www.ReverseSecure.com

Sep 24, 2009 10:15 AM