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Friday, 02 July 2010

Reverse Mortgages – Part 2: The Basics

category_bug_journal2.gif Because there are many small details to know about reverse mortgages and enough individual questions to fill a book, I am going to start broadly and drill down in subsequent posts so that we can absorb the needed information in bites (bytes?) we can easily digest.

Let's start today with a definition.

At least once in their lives, the majority of U.S. grownups go through the process of getting a traditional mortgage to pay for the purchase of a home. We pretty much understand what it is: a bank lends the money to pay for the property; the borrower repays the loan at an agreed-upon interest rate over a set period of years.

It is not much more complicated than that.

Although there are different requirements and more caveats associated with a reverse mortgage, at its most basic level, it is just that – the reverse of a traditional (“forward”) mortgage: a bank loan, secured by your home, that gives you regular payments or a lump sum based on the value of your home at the time the reverse mortgage is made.

Interest is charged on the outstanding balance which continues to grow, due to continuing interest, even when you do not take out additional funds. But you owe nothing, make no payments until the loan is due when you permanently move out of the home through a sale or death.

Eligibility Requirements
You (or the youngest borrower, if more than one) must be at least 62 years old.

You must have sufficient equity in your home to pay off any traditional mortgage with the proceeds of the reverse mortgage, a requirement to obtaining the reverse mortgage.

That's it. Income, health, credit rating or score are not considered.

Your Obligations
You are required to keep homeowners insurance and property taxes paid and to keep the property in good repair. Failure to do so can result in the loan being called due.

Remember, you continue to hold the title to your home and no matter what rumors you've heard or what others have told you, as long as you keep up those three obligations, you cannot be thrown out of your home. Also, you pay nothing until you sell or move out and you will never owe more than the value of your home.

Types of Reverse Mortgages
Reverse mortgages come with various interest rates and differing up-front costs. Some fees may he high, but the interest low and vice versa. One kind, called proprietary, is designed for people with extremely high-value homes offered by a few banks and other lending institutions. If you are rich enough to qualify for one of these, you're on your own. In this series, I am concerned only with HECMs because that is the type I am considering.

About 95 percent of all reverse mortgages are HECMs (pronounced HECK um by those in the business), the acronym for Home Equity Conversion Mortgages – administered by the Department of Housing and Urban Development (HUD) and insured by the FHA.

The FHA insurance protects the lender if the sale price of a home (when you move out) does not cover balance of the loan. It also protects you, the borrower, so that if the lending institution that holds your reverse mortgage files for bankruptcy or otherwise stops servicing your loan, your reverse mortgage will not be affected.

HECMs are as safe and secure as traditional mortgages and you should not be afraid of them. There was a time, early in the program, when large lenders with many kinds of financial products could give you a reverse mortgage with one hand and lock you into an inappropriate annuity, for example, with the other. But that is no longer allowed.

Problems today are not with the mortgage lenders, but with how people use the proceeds from the reverse mortgages. We'll talk about this in a future installment.

Benefits of a Reverse Mortgage
These are the five most common reasons people give for taking out reverse mortgages:

  1. To pay for ongoing medical treatments, prescription drugs or a large, one-time medical bill

  2. To make home improvements, modify a home for aging needs or pay off a traditional mortgage

  3. To pay off large, high-interest debts

  4. To take a long-awaited, lavish, dream vacation

  5. To supplement Social Security and/or other monthly income

Number four seems a frivolous reason to take on large, expensive debt, but who is to say what is important to each of us.

Number five is my reason. As I explained in Part 1, the financial collapse of 2008 took a huge chunk of my savings and I don't have the stomach now to reinvest what remains, so my income is uncomfortably reduced.

For me, a reverse mortgage will provide a cushion to pay for future medical or other unforeseen needs and therefore return some of the peace of mind I lost in the 2008 crash. It also will give me some breathing room around normal expenses and, maybe, allow for some modest travel now and then which I can't otherwise afford. I don't have expensive needs so mostly, it's that peace of mind I'm going for.

Disadvantages of a Reverse Mortgage
There are good reasons to think very carefully before taking out a reverse mortgage.

If you were planning on leaving your home to the kids or grandchildren, they may not be able to afford to pay off the HECM after you die.

If you live alone and need to stay in a rehab, assisted living or nursing home for more than a year, you are required to pay off the mortgage.

Costs are high. They include all the fees you paid when you purchasedd your home (title search and insurance, FHA appraisal, document preparation, flood certification, credit report, etc.) plus an origination fee to the lender based on the appraisal of your home. The least it can be is $2,500 and there is an upper cap of $6,000. And there is the MIP - mortgage insurance premium - for the FHA mortgage insurance which is two percent of the amount of the reverse mortgage up front and, annually thereafter, one-half of one percent of the loan amount.

Usually, closing costs and fees are tacked onto the mortgage, but keep in mind that you pay interest on that money throughout the life of the loan in addition to the lender's ongoing service fe which is $30 or $35 per month.

Recently, lenders have been offering reverse mortgages with low or no origination fees and lower service fees. I'll look into this and let you know details as this series proceeds.

This is a general overview, the basic information needed to think clearly and rationally about a reverse mortgage. More next week. If I have been unclear, please leave questions in the comments. You can leave other questions too that you would like answered in future installments.

Reverse Mortgage Series
Part 1: One Reason For a Reverse Mortgage
Part 3: Finding a Lender
Part 4: Do Not Fear HECMs
Part 5: The Mandatory Counseling Session
Part 6: The Home Appraisal
Part 7: Lender Conditions


At The Elder Storytelling Place today, D. Sugar: Circa 1980



Posted by Ronni Bennett at 05:35 AM | Permalink | Email this post

Comments

Ronni, Thanks for sharing your research into HECMs. I'm following with great interest.

The high fees and interest rate are the reason I will not get a reverse mortgage as long as I can live on S.S. My kids deserve the money more than the bank does.

What is considered high enough value to be considered a proprietary mortgage?
And, if interest is always being charged against the amount borrowed, couldn't that total end up being more than the value of the home?
Appreciate your work on this.

This is a very important series - keep up the good work.

@zuleme: You will never get the full value of your home in a reverse mortgage; that's partly what keeps the amount owed from overtaking the value of the house. Not only that, the amount you can get also depends on your age -- the older you are, the more you can get. You will get a lot more money if you are 85 than you will if you are 62. And, even if you end up owing more than your home's value, you (or more likely, you heirs) will never have to repay more than your home's value. That's what the mortgage insurance is for.

I plan to get a reverse mortgage on our home as soon as I am 62. I have no children, so the issue of heirs is nil.

My husband and I have been planning on this for a good ten years now.

Good luck with yours, Ronnie.

Hi Ronnie,

Nicely done.

There is one other option on how you can receive your reverse mortgage proceeds and that is a line of credit. This way you can manage your draws based on your current need. And a nice feature built into the program is an automatic growth of the unused portion of the line of credit.

Also, as you mentioned currently there are many lenders offering reduced fees on their reverse mortgage programs.
Wells Fargo is currently offering no origination fee as well as no servicing fee on their fixed rate program and adjustable rate program.
This is a significant savings.

@Zulem, the max claim amount on a FHA HECM is 625,500. If you home value comes in more than this your calculations will be based on 625,500.

If your home values more than this you can look into a proprietary reverse mortgage. The limits on this type of reverse mortgage depends on the lender. In my experience in comparing this product the fees were generally higher.

Interesting topic. Will look forward to reading your research.

Can't second guess whatever conclusions you reach for yourself ultimately, but trust you'll do this only as a last resort. I agree with the blogger who said we'd put up with ads here should that be an option.

Caught up on the past month's posts since I started blogging again -- lots to comment on, but bulk of dialogue past so didn't bother sharing my thoughts. Too bad there aren't more PST/DST evening/night bloggers writing when I often do.

Why does the time my previous comment made read three hours later than when I posted at 1:22 AM ? Guess your blog is still on East Coast time.

Our reverse mortage is with Financial Freedom...we have had it since 2005 and the line of credit has been very useful. It was not a large one, but has kept us afloat for five years but now we are on our own and have to make sure tax and insurance obligations are top priority. BUT IT SURE BEATS MOVING!!!!

Could you please explain what the probility of a non-HECM loan has of failure. A few years ago one would never have seriously considered that their bank or mortgage company might go under...now that has changed. I think the mortgage insurance fees are outrageous. In my case the upfront Insurance cost is $4,000 plus another #4,000 in monthly payments over the next 10 years.

Thanks for posting such thorough information. Reverse mortgages have gotten a bad reputation lately, and they can certainly be risky, but they can be a vital tool for seniors struggling to afford retirement. This is one of the most unbiased sources I have come across.

Dear Ronnie:

Thanks for this blog….but you STOLE my idea, damn your eyes! Now I'm grumpy as Hell!
It's OK. I just turned 60 and I've had a hard life in in terms of health, but a lucky life in terms of money.

I'm not grumpy at you, my dear. I'm grumpy at Life and the topic at hand - AGING. I hate it! I've been a full-blown hippie all my life and I'll never grow out of that. I still wear my rose-colored glasses, fringed leather vests, Yin-Yang and Peace symbol necklaces. Tho' I've gone bald, it's a groovy variation on the standard male pattern baldness, and, actually, I dig it. At least it's not grey.

At this stage, I can not, will not accept my age. No freakin' WAY!

Gimme a minute….my mortgage commentary is coming!

I had a stellar career in news reporting going in my 30s, it was cut short when, at age 37 I suffered a ruptured cerebral hemorrhage (bleeding brain aneurysm)…see my site on this little horror☞ http://nothingyoucansee.com .

It's a fukkin bitch! Life, I mean, but the "annie" qualifies too. The goddam aneurysm was the effective End of my life. It set me up for "Mean Old Man" standing.

Now to this reverse mortgage business….

Before my journalism career I had a brief career in real estate. It was the early Eighties, and here in Vancouver, B.C. the real estate market was a roller coaster ride. Quick fortunes could be made. I caught that train at a few richly -rewarding stops, thankfully, and set myself up for life on easy money made by flipping properties! Greed is so nasty. I'm ashamed. "But everybody was doing it, Ma!"

Still, I attended to my clients' real estate needs with good will and sincerity. The grunt work in real estate is the to-ing and fro-ing, checking, and phoning, showing and advising done for your clients, and I did my best for them. I studied up on All Things Real Estate to be able to be useful to my clients.

It wasn't 100% about me! Looking out for my OWN fortune was just a ridiculously easy sideline. It took practically no effort to play the "flipping" game.

Thing is, roller coasters go UP…..then they go DOOOOWWN! Well, that was exactly the setting in which I found myself. I saw too many good, decent working people foreclosed out of their houses because suddenly their homes weren't worth the principle owing to the bank.

I advised many clients illegally : Just walk away, I said. Let the damn bank eat it. Don't look back.

They usually took my advice, as tears flowed by.

My Inner Cynic said: Hey…what's it to ME? I'll get my cut when the bank finally dumps the place using me as their agent. It was a winning game for me both ways.

But besides those unlucky clients, I had as many very fortunate clients. For them, their game was MY own game: "Buy Low, Sell High." For them, banks and mortgages were their best friends. Good for them! I always enjoyed seeing a young family play the market fast and dirty, to make out like bank robbers! Very groovy!

Here is where I have a problem with Reverse Mortgages. Your list of "Cons" is comprehensive. You've covered the territory well. Good research!

It's your second con that troubles me: What if you find yourself in poor health and need to move to a care home etc.etc.? Yessir that would be a bitch. That reverse mortgage could land a person in serious jeopardy in that scenario.

IF ONLY…you Americans could get your s**t together and put in place a universal healthcare system! Through the Clinton to the Obama years, I've looked south and all I can do is shake my head with wonderment. Here in Canada, ill health is simply not a financial crisis for citizens. Most medical services are free, here in the North. Since 1962 we've had a universal, single-payer (government) healthcare system that has seen millions of sick people through expensive medical crises, and as patients they haven't paid a single buck for the hospital stays, surgeries and medications. I myself have survived three serious medical crises requiring hospital time, surgery and bags of medications. I've never paid single penny for any of it!

So what's Canada's healthcare system got to do with Reverse Mortgages? Well, obviously, were I in a reverse mortgage and found my health deteriorating, I could get free care and stay in my home. Nothing to worry about!

I wonder if anyone has researched the Reverse Mortgage business in Canada to see if we're not that business's greener grass on the other side of the fence. I bet we are!

If I were a Big North American Bank out for reverse mortgage business, I'd look no further than right here!

OR…….are the sellers of reverse mortgages happier to have healthcare-poor American clients, people living at higher risk of default, and who will payoff more, in the long run, if things go Tilt for you?

In this analysis of the situation, aren't mortgage lenders selling reverse mortgages in AmericA just that much more greedy and predatory? Yikes!

It would be cool to research this question, wouldn't it? I know, it's an awfully cynical query I make, that American banks might have a preferred investment in blocking your nation's way to Happy Healthcare for Everybody. Can this possibly help explain why a great country like yours just can't seem to ever institute coast-to-coast socialized healthcare? Are the American One Percent much happier to see you without healthcare - and next without your home too? Ouch! That bites.

What a groovy blog you've got here. Well written, authoritative, nicely-designed. Good job!

Well, my sixty-year-old-In-Total-Denial arthritic fingers are giving me pain now, so I'll just say "Happy Trails to You.!"

Will T.
Vancouver CA.

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