Reverse Mortgages – Second in the Series of Articles
The initial reverse mortgage article spawned the expected responses; some based on bitterness toward lenders and some weighed down with misconception. Here’s chapter two.
Palm Coast, Florida – March 7, 2009 – After the sub prime meltdown and Wall Street scandals, the mortgage and banking industries suffered a decline in prestige (intentionally understated). People, including myself, are a lot more skeptical. A certain degree of skepticism is a good thing, but skepticism without knowledge can also lead to bad decisions. For most people, buying a home is the single largest expense they incur during their lifetime (excepting those who go through a divorce). Yet many spend more time researching a plasma HD TV purchase than they do understanding a real estate transaction.
A lot has changed in the lending industry over the years; not all of it for the best. One area that has suffered is loan origination. I learned a long time ago when managing sales people that they are very good at figuring out the compensation plan and using it to maximize their income. An effective compensation plan is one that is aligned with a company’s goals and mission statement. In the "old days," the person originating the loan worked for the bank that was going to hold and service the loan. The goal was to balance customer service with sound lending guidelines. Appraisers were selected based on their track record of accurately gauging propeGEDrty value.
Today, many loans are originated not by lenders, but by individuals and businesses that are compensated for originating the loan; by getting the borrower approved. Even the original lenders are not all as fussy as they used to be because they often plan on bundling the loan with others and selling the batch to a third party and so on. HUD, Freddie, Fannie and others are set up to be guarantors and watchdogs, but are under unmerciful pressure from congress to satisfy political rather that business goals.
We are truly fortunate that the vast majority of people who work in the industry are honest and responsible. Those few who are not can spot a gullible client as readily as a shark can smell blood in the water. They are the only ones who benefit from ill informed victims, who will sell a reverse mortgage to an unsuspecting elderly person with a million dollar portfolio. A professional is comfortable working with informed clients. The same people who misused forward mortgages will be found among those peddling reverse mortgages, but reverse mortgages are no more prone to abuse than forward mortgages. The consumer’s greatest protection is knowledge tempered with a little skepticism. [end of soapbox]
Remember, the only two things that are important in determining the amount you receive in a reverse mortgage are your age and the appraised value of the home. You will be able to live in the home without making any mortgage payments until you move, sell the house, or die so naturally the lender will look at both the borrower’s expected life span as well as the projected future value of the home.
In the example below, the subject home is appraised at $250,000. Three different ages are assumed for the owner (or youngest owner if jointly owned).
| Aged 65 | Aged 70 | Aged 75 | |
| Principal limit |
$161,250 |
$172,250 |
$183,000 |
| Service set aside |
(6,234) |
(5.924) |
(5,506) |
| Initial mortgage insurance premium |
(5,000) |
(5,000) |
(5,000) |
| Financed origination fee |
(4.500) |
(4.500) |
(4.500) |
|
Other financed closing costs |
(5,351) |
(5,351) |
(5,351) |
| Net Available |
$141,164 |
$151,475 |
$162,64 |
Understanding the numbers – all costs are rolled into the mortgage. The borrower receives the net amount either as a lump sum, a monthly payment, or a line of credit.
-
The service set aside is, in my estimation, the foggiest number in the resulting calculation. It consists of a charge of $35 per month spread out over (presumably) your expected life. Forward mortgages do not have a monthly service fee. I’m told that this number can be negotiated down to $25 per month, but my guess is that increasing competition in a growing reverse mortgage market will substantially reduce or eliminate the fee. But for today, it’s here. Be sure to negotiate this figure.
-
Initial mortgage insurance premium – this is set at 2% of the appraised value. This is not negotiable. An additional .5% is added to the monthly interest rate for mortgage insurance. It pays for the insurance that covers any deficit to the mortgage when the home is sold. Remember, this is a non-recourse loan. You will never owe more than the house is worth, regardless of price deflation or accumulated interest.
-
Financed origination fee – 2% of the appraised value (not to exceed $6 thousand) paid as "commission" to the loan originator. This too is somewhat negotiable. Do your best.
-
Remaining financed closing costs – These are the same items you will see at the closing of a forward mortgage; title insurance, other title fees, recording fees, doc stamps, intangible tax, appraisal fees, survey fee, repair allowance, termite bond, etc. some of which may not apply in an individual case.
Remember, with a reverse mortgage:
-
You still own the home.
-
You or your surviving spouse may live there until you decide to move, sell the house, or until you die, no matter how long that is.
-
You will not have to make any mortgage payments.
-
You will never owe more money than the house is worth, no matter how long you live and no matter how much interest has accrued on the mortgage.
-
When the home is sold, either you or your heirs receive any amounts in excess of the mortgage balance.
-
You can use the proceeds to pay off an existing mortgage and equity line.
The next article in the series will talk about using a reverse mortgage to purchase a home or second home. I’ll also talk about which types of people are most appropriate for reverse mortgages.
Sandy Mullen of E Q Financial and John Reardon of 1st Metropolitan Mortgage contributed information used in this article.
Accruing interest
I thought your cost/value chart was helpful and informative. It would be interesting to see, on say a 5% interest rate, what the acrued debit might look like after say, 5, 10 and 15 years. I assume interest acrues at the contractual rate agreed to at the time of signing until sale/move/death occurs.
The next big financial problem is starting now
I cannot believe that people advocate these loans. I realize their purpose, but it sets the economy for disaster in 10-20 years. Imagine the foreclosures that come when a family has their parents pass away, and instead of inheriting their parent’s house that they’ve lived in for 50 years, they inherit a mortgage that they probably won’t be able to afford. So the kids will have to walk away from the house, leaving it for foreclosures and more bank failures.
Can’t wait… 🙁
Reply to Billy
You misunderstand the different mortgage. When the parents die, the children have two choices; pay off or refinance the mortgage to keep the house or sell the house. If they choose to sell the house, the bank gets, at most, the mortgage balance. Any excess goes to the estate. If the sale amount is less than the mortgage balance, the bank loses. There is no recourse on the estate and no foreclosure.