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You Should Worry If Dad Says He's Getting a Reverse Mortgage

By
Mortgage and Lending with SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) NMLS 223495

Many big banks and mortgage companies are pushing reverse mortgages right now.  Countrywide and others are offering classes to loan officers on how to sell (what to say, and what to avoid saying) this product to seniors.  In the first article of its kind that I've read, someone articulated what I've been telling my clients for years.  This is some of the most expensive money you will ever borrow.

The article is Reverse Mortgages Promise Seniors Cash, Advisers Urge Caution, by Bloomberg's Alexis Leondis. 

Because the equity is the homeowner's, there is no income qualification.  That's attractive to seniors on fixed and limited incomes.  But the fees can equal six percent of the value of the home, and the interest rate on the dollars that are loaned to the homeowner each month can top 13% as interest rates rise.

FHA is getting involved with these mortgages, but that's not a done deal.  So worry about those you love; this is a very expensive way to borrow money.

I'm Mike in Tucson, your preferred Tucson, Arizona mortgage lender.
Mike Jones (Tucson Mortgage Company, LLC): Loan Officer in Tucson, Pima County, Arizona
Think of me as your local expert.

Comments (52)

Donna Yates
BHGRE - Metro Brokers - Blue Ridge, GA
Blue Ridge Mountains

Mike:  great warning.  I have written on reverse mortgages too and seniors really need to understand what they are getting into and although it may be right in certain cases, it's certainly ot right in all cases.

Jun 16, 2008 11:09 AM
Michael and Cheron Lange
Solutions Real Estate - Chandler, AZ
Associate Broker, GRI

Mike......  This is good information to know.  My father is getting older, owns his home and yet we don't need someone to get ahold of him and convince him to make some unnecessary changes.  Thanks for giving us some great info.


Cheron Lange

Jun 16, 2008 12:27 PM
Ronald Gillis
Southwest Florida Notaries (Mortgage Notary Signing Agent) - Port Charlotte, FL
CNSA Southwest Florida. Notaries, Port Charlotte, 941-7-NOTARY

Mike, as a follow-up to why I get so annoyed about false comments like the one where it was said reverse mortgages are causing a lot of foreclosures and short sales, I did a little homework.  No matter how stong my belief, I like to have hard facts to back up my opinion.  In Charlotte County, FL, (which is next to Lee County and Lee is the - 2nd worst county in the country for foreclosures) for the week of June 16-20, guess how many Lis Pendens were filed on people with reverse mortgages, out of 61 different residential people?  While LP is not foreclosure, it is the first required step to foreclosure.  For the answer - See this, it might surprise you!.

Signature

Jun 25, 2008 12:46 AM
Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

Mike actually FHA does offer reverse mortgages, they have a 30 year fixed option and they cap the fees to 5% for everything (title, appraisal, etc.) Even the origination is capped. The LTV is capped and for those that are house poor (like my granparent who cannot afford her taxes and insurance) it is a fantastic option and the amount of equity needed to accomplish this is minimal. My father and my aunt do not want the house. FHA is most definitely a way to go. HUD's website http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm spells out the details and since is regulated by HUD, there is now way for a borrower to be taken advantage of.

I think more investigation is warranted - for anyone looking into this....we should always take a caveat emptor approach to anything we do, particularly as it pertains to our finances. But knowing all the pertinent information allows us to make an informed decision.

Thanks for elevating the discussion....good post

Jun 25, 2008 03:15 AM
Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

Mike....sorry to pounce here!

But I have a real problem with anyone that EVER would do a LIBOR arm on a reverse mortgage. That is simply irresponsible lending practice. Using that as an example for explaining the dangers of a reverse mortgage in a national publication is a statement of the obvious and furthermore is a weak argument to support their article claim.  I am all about buyer beware, but let's make sure we are using data that is relevant. FIXED only....period. There should be no other options!

 

Jun 25, 2008 03:36 AM
Bob Bauer
Law Offices Of Lynn Ramey - Tampa, FL

What Happens after, I have a customer faced with how to handle the property after her mother died.

Jun 25, 2008 04:04 AM
Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

Mike, et al. It was recently brought to my attention that a few of my comments were contradictory. If I was not clear in anyway, please accept my apologies.

~My statement about a fixed rate was not meant to imply there is a limit like a traditional mortgage, say 30 years. All rates for RM's is based on the customers age and life expectancy and they are amortized to age 100 in most cases.

~92% of all RM's are what are know as Home Equity Conversion Mortgages (HECM's) and most are tied to the 10 year treasury, which is a much lower index. My comment about the LIBOR index was to indicate that since it is much higher, the additional rate significantly increases the customers exposure over time and thus decreases their equity and in my opinion, it is not as good a deal.

~The rule of thumb for how much equity one can "borrow" is typically their age minus 10%  (if the customer is 75, then the lendable equity is 65%). The amortization schedules that are included in the paperwork base increases in value of 4% per annum and so the equity increases cover the interest rate  and mortage premium additions.

~The Mortgage Premium is accessed annually, however it is there to protect the customer and the lender from the value of the house decreasing under any circumstances and it is based on the appraised value at the time the mortgage is closed. So the value is fixed.

 

There is a lot more information to a reverse mortgage and I strongly recommend anyone considering one to tread lightly. They are not for everyone, but are a good alternative for the right situation.

 

Once again, please accept my sincerest apologies for any misunderstandings

To your success

Bo

Jun 25, 2008 05:10 AM
Ronald Gillis
Southwest Florida Notaries (Mortgage Notary Signing Agent) - Port Charlotte, FL
CNSA Southwest Florida. Notaries, Port Charlotte, 941-7-NOTARY

Bob, first start with, was there a husband on title & on the reverse mortgage?  If husband, and he is on title & mortgage, nothing changes, unless he wants to move.  If he is not on title or the mortgage (or he has passed away) does he or the family want to keep the home in the family or sell it?  If they want to keep it, they need to come up with a way to finance it.  Was there a life insurance policy that can be used to pay off the mortgage?  Do they have other money or financing to pay it off?  If not, then it might need to be sold.  If they do not want to keep the house, then it certainly will need to be put up for sale.  After the home is sold, any money left over goes to the husband if alive, or the estate if all are deceased.  All these are the most common choices, many other rare possibilities might occur, but it is a choice how the husband or family decide to handle the home.  Contact me directly, I will gladly help clarify most any question you might have!

Signature

Jun 25, 2008 06:15 AM
Otis Duffy
Wells Fargo - Newark, NJ

Bo, the HECM is tied to the one year CMT or the Constant Maturity and the loan does not amortize at all.  This is a negatively amortizing product and becomes due at when you reach 150.  If you reach 150, I want to know your secret!  Unfortunately their are too many proffessionals that do not understand this product, so how can we expect our seniors to?

Jun 25, 2008 02:56 PM
Wayne Frazier
Licensed Public Insurance Adjuster - Hunt Valley, MD

The biggest problem with Reverse Mortgages is utter lack of knowledge regarding the products by MANY of the professionals in the Lending Industry that think they have an expertise when ADVISING Seniors about them based on "What they've heard" or a brief article they read. Not to mention all the misinformation that the vast majority of the Seniors have.  It's absolutely mind boggling how many times I've heard "Isn't that the loan where the lender takes or steals your home." When that couldn't be further from the truth.

And Mike, for the record when you stated something such as this

" FHA is getting involved with these mortgages, but that's not a done deal.  So worry about those you love; this is a very expensive way to borrow money. "

FHA is already heavily involved. The FEDERALLY INSURED HECM is the most popular type of Reverse Mortgage. It is strictly governed to ensure that Seniors are not taken advantage of.

Reverse Mortgages aren't right for everyone, but when it makes sense,it makes a lot of sense.

The real question is how much is Piece of Mind worth? I'd venture to say when you are about to lose everything that you ever worked for in life that it would be PRICELESS.

The day you set across the table from or receive a call from a Senior crying because they CAN'T afford to stay in their home via conventional means is the day you will become a believer. I had it happen and it tears me up, but with true knowledge of Reverses, I know that I just might have the saving grace answer for them.

God Bless ALL and please take the time to really educate yourself on this product.

 

 

 

 

  

Jun 26, 2008 12:55 AM
J Perrin Cornell
Coldwell Banker Cascade Real Estate - Wenatchee, WA
Broker, ABR, VAMRES

I pretty much agree with Wayne. If my memory serves the first FHA reverse I ever saw was about 1988. They have been aroound a long time. They are expensive some WAY more than others. But they can make sense in a limited application.

Jun 26, 2008 01:14 AM
Otis Duffy
Wells Fargo - Newark, NJ

I believe the first FHA reverse mortgage was written in 1982.  They have been around for a very long time and still their is a lack of correct information out there.  I really disagree when people say it is an expensive way to borrow money.  The interest rate is 4%, should the banks give away the money for free?  The other costs that people say make it expensive is the insurance.  It is a one time insurance payment that covers your house for the rest of your life.  Its like paying a one time home owners insurance policy.  If you calculate the cost of what you paid in home owners insurance for the last ten years I am sure that it will be more than what the cost is for the reverse mortgage.

Jun 26, 2008 01:22 AM
Ronald Gillis
Southwest Florida Notaries (Mortgage Notary Signing Agent) - Port Charlotte, FL
CNSA Southwest Florida. Notaries, Port Charlotte, 941-7-NOTARY

What you see is the UP FRONT costs that are more than regular (my calculated average was 4.0% on regular mortgages & 4.3% on reverse PLUS the 2% Mortgage Ins, making it 6.3%) BUT, as you pointed out, the interest rates are much lower than many, so it may cost more up front, but then over a few years, it can actually become LESS EXPENSIVE than a regular mortgage.  One of the biggest upsurges in # of RM's was 70's & 80's, but I think more correctly it started in early 60's, but they were extremely rare back then, and not FHA backed.  I think you may be right on first FHA RM, was early 80's I believe.  RM's are not for eveyone, but for the MANY (not the few) that can benefit from them, it can be an awesome mortgage.  Like Wayne said, as a CNSA, I have actually been to some signings where the senior has broken down because of the tremendous relief.  Just today, about four hours ago, I left a signing where the man was 69 years old and was in forclosure, but now got a reverse mortgage (after 3 days of course), and gets to remain in his house the rest of his life.  Also, like Wayne said, what is the value of that?

Signature

Jun 26, 2008 04:46 AM
Mesa, Arizona Real Estate Mesa Arizona Realtor
Homes Arizona Real Estate LLC - Mesa, AZ
AzLadyInRed

Mike, great information....I knew they weren't a "good" thing to do, and my sister asked me about one recently. I just told her to speak with my l/o who would know way more about them than I did. Interesting that such high interest rates would attach to that type of a loan.

It does appear, however, to be a viable alternative for some people - especially those that are struggling because of our economy. Lots of things to look at...and consider.

Pepper

Jun 27, 2008 03:41 PM
Otis Duffy
Wells Fargo - Newark, NJ

High interest rates?  The interest rate is currently 4% and you dont have to prove income, assets, or credit.  Where can I sign up?  I forgot to mention, you dont have to pay it back until you pass or sell your home.  If people cannot see the value in that, Im not sure what program would be considered good.  Maybe if they gave the money away for free.  The bottom line is if you are going to  sell your house in the next two years then this product is not for you or you dont think you have long to live.  The product is still an option in these scenarios if you need the money and cant get it because of poor health and no income, etc.  Lets look back on this blog 2 years from now and I gaurantee everyone will be singing a different tune.

Jun 29, 2008 12:25 AM
Ronald Gillis
Southwest Florida Notaries (Mortgage Notary Signing Agent) - Port Charlotte, FL
CNSA Southwest Florida. Notaries, Port Charlotte, 941-7-NOTARY

They will be singing a different tune IF they learn the correct facts about reverse mortgages. If they continue to believe the incorrect facts and myths, then nothing will change.

Signature 

Jun 29, 2008 12:31 AM
Richard Byron Smith, NMLS #184479
Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289 - Chattanooga, TN
Mortgage Loan Officer

Reverse mortgages are the solution for many seniors. As far as the heirs, if protecting the inheritance means the elder starves and cannot afford the medicine, then considerations for the heirs seems less a priority.

Reverse mortgages are good for some and for others they are a less attractive choice.

Be wary of predatory heirs.

The home owner receives counselling, the fees are disclosed, the options are explained. There are as many protections in place as seem possible.

It is probably better for LO's to obtain a certification from FHA because the concept and mechanics are different from the forward mortgages that we all are comfortable with.

Even using the phrase forward mortgage identifies a person as a reverse mortgage lender.

Great thread, great comments. Great that it so far it has remained civil and helpful.

Ron, I am off to read your post.

Richard

Jun 29, 2008 12:50 AM
Ronald Gillis
Southwest Florida Notaries (Mortgage Notary Signing Agent) - Port Charlotte, FL
CNSA Southwest Florida. Notaries, Port Charlotte, 941-7-NOTARY

Richard, it almost sounds like 'your off to see the wizzard'.

Smiley Face Sorry, couldn't resist myself.  I do hope you find it informative and interesting!  Have a great weekend!

Signature 

Jun 29, 2008 01:10 AM
Anonymous
Wayne Frazier (Capital Mortgage)

The sad truth is, the potential heirs are the ones that usually have the biggest problem with a Reverse Mortgage. It often amazes me, they're more worried about being able to "CASH IN" in the FUTURE, than they are about thier theoretical loved ones (The Seniors), quality of life in the PRESENT.

Amazing!!!!!

Jun 29, 2008 02:38 AM
#52
Mobile Austin Notary
Apostille/Authentication/Embassy Legalization, Notary Public, Loan Signing Agent & Process Server Services - Austin, TX
www.mobileaustinnotary.com

I worry about some who are making this choice.

Rainbow of Happy

Nov 26, 2008 01:11 PM