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Reverse Mortgage:  Yes or No?

A reverse mortgage is a type of Home equity loan for a senior homeowner, who is at least 62 years old. It is also called a home equity conversion mortgage (HECM). The loan is repaid when the last surviving borrower moves out of the property, passes away, or the house is sold.

You need to ask yourself:  do you want to stay in the house – can you afford to pay taxes, insurance, any HOA/Condo fees, and repairs – do you want to use the equity in your home for supplementing the social security payments or pay off debts or health bills –and is this your primary residence?  If your answers are yes, you can consider a reverse mortgage. There is no income or credit requirement – a big difference to a conventional equity loan!  And there are no future mortgage payments!

The money you receive can be used as cash to supplement your income, pay for health care expenses, pay off debt, finance home improvement, or to re-invest.  Moneys from a reverse mortgage are not considered income and are not taxable. (Consult a tax advisor for more information).

You personally can never owe more than the value of your home with a reverse mortgage and if the balance is less, your heirs can sell the house and keep the difference. The bank cannot ask you to pay more than 95% of the value of the house, even if the mortgage balance is way higher.

I like to mention a scenario I personally experienced:

My friend owned her house without a mortgage, she was 66 years old and she had no heirs.  This was a perfect base for a reverse mortgage.  She took out a lump sum and 10 years later she owed way more than the house was worth.  When she died the house was worth $190,000 and she owed $245,000, because every month the interest is added to the loan amount.  The bank sued all her beneficiaries for the full $245,000!  I told them not to do anything, and after we sold the house in a short sale the bank released everybody from liability.  Since the estate is not personally liable if the home sells for less than the balance of the reverse mortgage, there were no grounds of going after the beneficiaries!

If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA (Federal Housing Administration) insurance.  No other assets are affected by a reverse mortgage. For example, investments, second homes, cars, and other valuable possessions cannot be taken from the estate to pay off the reverse mortgage.

The amount you can borrow is determined by an FHA formula that considers age, the current interest rate, and the appraised value of the home.  You must own the house outright or have substantial equity in your home.  It is very simple: the older you are, the more valuable the house is, and the lower your current mortgage is, the more money you can get with the reverse mortgage.

Here are some issues I like to mention for you to consider:

  • The mortgage fees and closing costs, including the mortgage insurance can be high, you must maintain the house, pay property taxes, homeowner insurance and condo/HOA fees.
  • It can complicate your wish to keep the house in the family. Again the mortgage comes due when you move out (senior facility) or die.
  • A reverse mortgage wouldn't be the best option if you can't maintain the costs associated with the home, even without a monthly mortgage payment.
  • Spending the equity in your home, of course, also diminishes the value of your estate -- leaving you less to pass along to your heirs down the road.
  • If you have a younger spouse who is not a co borrower (maybe you removed the spouse to get a higher amount of the reverse mortgage) the surviving spouse may have to move out of the house, you might need to consult an attorney.
  • You should let your children know when you get a reverse mortgage, they need to be aware if you have to move into a retirement home, the reverse mortgage becomes due and the house cannot be rented!

Because the requirements are so complex the government requires Homeowners interested in taking out a reverse mortgage to receive mandatory (free) counseling by an independent third party. These organizations have to be approved by HUD (Housing and Urban Development) and help homeowners review alternative options.  My advice is to have your children attend the counseling session or a good friend.

If you decide to proceed with the loan, you can expect to pay higher-than-average closing costs based on the value of your home, including origination fees, upfront mortgage insurance and appraisal fees.  The interest rate you pay is also generally higher than that for a traditional mortgage. You are also required to pay an initial Mortgage Insurance Premium (MIP), as well as an annual MIP of 1.25 percent.  The origination fee is what the reverse mortgage lender earns on the loan, but it is determined by FHA what the lender can charge (for example: 2 % for the first $200000 of the property value).  These expenses can be rolled into the loan!

You can also use this reverse mortgage program to purchase a property and never have a mortgage payment, but you need cash for the difference between the reverse mortgage amount and the sales price of the property.

It all depends on your situation whether a reverse mortgage is a good fit for you!  
Posted in:Real Estate and tagged: Yes or No?
Posted by Christel Silver on April 14th, 2018 3:58 PM