Reverse Mortgages, the Next Wave in Lending
Are you over 62? Here’s a new way to look at home equity. Exploding myths, the reverse mortgage is not what you think it is.
Palm Coast, Florida – March 4, 2009 – One year ago I wrote an article titled "Baby Boomers and Reverse Mortgages, another Perfect Storm for Lenders." I prophesied, "Since the subprime loan sector is shut down, the mortgage industry is looking for new products to sell, products with less risk and with a broad appeal. With the baby boomer generation reaching retirement, the industry will find the perfect product in the reverse mortgage." It seems that I was right.
Reverse mortgages are low risk to both lenders and borrowers but they are more expensive up front. They offer those over 62 innovative ways to unlock home equity without incurring monthly payments. Neither credit ratings nor income are important. The amount you can borrow is dependent on only two things; your age and the value of your home. The money can be taken as a lump sum, as a monthly payment stream, or as a line of credit. There is no limit on how you use the money. You can use it to pay off existing forward mortgages or home equity loans.
With baby boomers hitting 62, reverse mortgages have the potential to fuel the turnaround in the housing market, but first, people need to understand how they work. They need to clear their mind of myths previously associated with reverse mortgages. Today, I’m presenting Reverse Mortgages 101, a basic lesson courtesy of Sandra Mullen, a reverse mortgage specialist with E Q Financial. In upcoming articles, I’ll expand the discussion including innovative ways the product can be used (for instance to purchase a home) and how to determine if it is appropriate for you.
I thank Sandra Mullen and E Q Financial for the following:
A Reverse Mortgage: A Sound Addition to Your Financial Tool Box
Today many seniors are unexpectedly finding themselves “house rich and cash poor.” They have built up equity in their homes or have paid off their mortgages entirely only to be faced with unanticipated increases in living costs and retirement portfolios that have taken a beating. These factors have seniors concerned about the realistic possibility of outliving their money. Quite ironically, due in part to the volatility of our financial market, a majority of their wealth is now trapped within the walls of their home. A reverse mortgage may provide the perfect solution. More and more forward-thinking insurance and investment advisors are recommending these mortgages to their senior clients than ever before. Advisors who understand how these programs work and when to recommend them realize a reverse mortgage’s potential in providing additional retirement income, including long-term care via prudent investment strategies.
Reverse Mortgage Basics
A reverse mortgage is a special type of loan offered to homeowners 62 and older. The borrower either owns their home outright or has a low mortgage balance that can be paid off at the time of closing with the proceeds from the reverse loan. The reverse mortgage, unlike a traditional mortgage or home equity loan, allows the borrower to live in his or her home without repayment of the loan until he or she sells the home, moves out permanently or dies. Also, unlike traditional “forward” mortgages, reverse mortgages are not based on the borrower’s credit or monthly income.
The amount of money a homeowner qualifies for depends on the age of the youngest borrower, current interest rates and the appraised value of the home. The home value is also subject to the national lending limit of $417,000. However, this limit has temporarily been increased to $625,500 until the end of 2009 under the American Recovery and Reinvestment Act of 2009 (ARRA) signed into law on February 17, 2009. The borrower can obtain this equity from the lender in a lump sum, monthly installments, a line of credit or a combination of these methods.
Reverse Mortgage Myths
- The bank owns your home when you do a reverse mortgage?
- False. You retain title to your home with a reverse mortgage. The bank adds a lien onto the title for the amount that you borrow.
- Your heirs will not inherit the home.
- False. Your estate inherits your home as usual. However, there will be a lien on the title for the balance of the reverse mortgage. This balance is the amount you’ve received plus interest. All proceeds left after this is paid to the lender belong to the estate.
- You could get forced out of your home with a reverse mortgage.
- False. The FHA reverse mortgage was established to allow seniors to live in their homes for the rest of their lives. Because you are not making payments with a reverse mortgage you cannot be evicted or foreclosed for non-payment. You do remain responsible for taxes, insurance and repairs and maintenance.
- You could outlive the reverse mortgage.
- False. The reverse mortgage becomes due when the homeowners have permanently moved out of the property or have passed away.
- Social Security and Medicare will be affected by a reverse mortgage?
- False. Government entitlement programs such as Social Security and Medicare are generally not affected by a reverse mortgage. However, need-based programs such as Medicaid can be affected. Borrowers should speak with a financial advisor or the appropriate agencies.
- You pay taxes on proceeds obtained from a reverse mortgage?
- False. The monies obtained from a reverse mortgage are not considered income and thus are not taxable. In addition, unlike a traditional “forward” mortgage, the interest on a reverse mortgage is not tax deductible until it is repaid.
- The borrower or their estate could end up owing more than the house is worth.
- False. A reverse mortgage is a non-recourse loan. Due to built-in safeguards, the borrower or the estate can never owe more than the value of the home upon repayment.
- When the reverse mortgage is due, the bank sells the house.
- False. The borrower is in control of the home and retains title. Most borrowers or their heirs sell the home to repay the loan. However, they can refinance the home to repay the loan.
- Reverse Mortgages are only for seniors in financial need.
- False. Reverse mortgages are an excellent financial planning tool to be used by senior homeowners in all walks of life to enhance their retirement years.
In summary, a reverse mortgage can be a valuable financial tool. However, there are many considerations when thinking about a reverse mortgage. Make sure to contact a reputable reverse mortgage representative and seek professional advice from your financial advisor.
Another shark attack?
It is disturbing that the sharks of the subprime mortgage campaign are focusing on the elderly, the precise group of people who may not be able to withstand the shark’s attacks.
I am very suspicious when a program that is being marketed has a WIN WIN story only.
Sandra Mullen’s article fails to mention the fees involved with reverse mortgages. I understand the fees are as high as 20% of the mortgage. Perhaps other negative aspects of this program exist and should have been pointed out in this article.
Are people involved with reverse mortgages trained, licensed, supervised and regulated? If the answer is yes, does the state have the necessary manpower and budget to do the job?
Too many questions and no answers as of yet.
Reverse Mortgages
Hold on to you rear, here come the crooks (Bankers) again. Haven’t they learned anything from the current mess. Anyone that get’s sucked into one of these deals needs to have their head examined. You will only get a portion of your current value and the bank will make a killing on the fees and interest they will charge. When it’s time to sell the house you will incurr a "ton" of new charges drummed up by the bank.
Toby I’m sorry you are lowering yourself to the level of endorsing this New Financial Weapon of Mass Destruction.
take it easy
Based on some of the comments I see here and other places, I see the polar opposite problem we had in 2005. In those days, you were an idiot unless you had yourself leveraged to the teeth flipping as many properties as you can. Now, you need your head examined if you get involved in real estate at all. The hysteria that all bankers are "crooks" and all mortgage people are greedy money mongers has created the mess the markets are in. It’s a case of a few bad apples spoiling the whole bunch. In my experience, most folks in these professions are ethical, professional folks who will provide appropriate advice. Don’t paint them all with the same broad brush.
Thanks Toby for a very informative article. I would be curious to see an example laid out, so that folks could see the fees, rates, etc.
And the Industry finds another way
With commissions upon commissions the lending industry made a killing when you purchased your home,who paid for that…..YOU did!
Then thanks to amortization you also paid somewhere in the region of 3 times the value of your loan back to the lenders.
Bringing us to today; your home is paid off and the lending industry is in turmoil. Lenders needs a new tool to allow them to once again dig their greedy hands deep into your pockets.
Yes Reverse Mortgages are a Win win…..for the lending industry! Commissions are back and amortizing debt will once again compound.
Participants will sadly be giving their Reverse Mortgage lenders a huge chunk of their legacy, normally passed on to heirs.
Rest assured the lending industry will hedge their bets, they know what trends lay ahead and have made careful calculations. You shall be loaned a small percentage of your homes current value (plus interest x your life expectancy.)
Reverse Mortgages(plus interest)will be kept conservative to allow for the yet unmeasurable but no doubt significant DEPRECIATION in real estate values caused when that huge bulge in society called The Baby Boomers are at the stage of their lives when they are moving into senior homes, nursing homes and funeral homes. Once again the Baby Boomers will create a boom in the real estate market when their estates and heirs list millions upon millions of homes, essentially flooding the market.
And we all know how that will effect prices.
With all the above in consideration it’s quite feasible that after a reverse mortgage pay off settlement, there will be little or no equity remaining for heirs to the estate.
The lenders will once again have their pound of flesh, this Revers Mortgage Boom is NOT about you, it’s about THEM!
Now if you have no heirs, and you don’t want to leave your estate to your church or a favorite charity, go ahead and give your life’s work to a cigar chomping lender and commisioned sales people, a reverse Mortgage is for you.
"Caveat Emptor"
Purpose
Lets be honest the banks and lenders are not the only ones at fault in todays situation. Equally, if not more, responsible are the individuals that knowingly tried to jump on the real estate bandwagon and make a quick buck. The ones that got out early and made money are very happy. The ones that got stuck blame the banks and lenders for creating all of todays problems. There are thousands of people that bought properties that they knew in their right mind they could not afford over the long haul, but planned to "flip" those properties in time to make a buck. We cant continue to blame the banks and lenders for the decisions we chose to make. I am speaking as a person who has three properties that are significantly under market value.
Reverse mortgages can be a very valuable tool for seniors to add income to their retirement that would normally not be there. I look at it from a perspective of what would I want my parents to do. A lot of seniors do not have enough money saved to live the kind of lifestyle they thought they would live in retirement. If they have the ability to tap into the equity in their home to increase their monthly cash flow and live a better life then I would want that for my parents. If this meant that I would not inherit their home then that is a trade I would want them to make for themselves. If leaving a legacy is a huge priority, then use a portion of the income from the reverse mortgage to buy life insurance to pay off the property at death.
Reply to Lou and John Boy
The cost of a reverse mortgage is not 20%. Costs consist of a mortgage initiation fee – standard 2% but negotiable plus mortgage insurance – 2% not negotiable. The remainder of the costs are standard closing costs – doc stamps, title insurance, etc. I will cover these aspects in future articles.
I am not endorsing any product. I am educating. I believe that if there is an educated seller, an educated buyer, and educated real estate professionals (including mortgage professionals) then only good things will happen.