ARE REVERSE MORTGAGES SMART OR A MISTAKE?
By Marilyn MacGruder Barnewall
November 1, 2015
Like all things involving money, you need to know the rules
of the game
The theft by Congress of Social Security funds has left only IOUs
in the non-existent lock-box. Combine that with the criminal methods used
to calculate the cost-of-living and you will find Social Security recipients
will receive no cost-of-living increase in their 2016 monthly checks.
Former Senator Fred Thompson and former superstar Henry
Winkler along with a high-ranking retired military guy appear
every-other-minute on television, hawking the benefits of taking a reverse
mortgage against your home. And there are many benefits. There are also some
downsides... enough that the Consumer Financial Protection Bureau has issued a
warning to seniors to watch out for them.
A reverse mortgage is a loan against the equity in your
home. It requires no repayment as long as you live in the
home. I repeat, the loan doesn’t have to be repaid until the homeowner
dies, sells the house, or moves out for at least 12 months. At that time, you
or the person(s) who inherit your home need to pay both the loan and accrued
interest. That is usually accomplished by selling the home.
Who owns the house? You, not the bank or mortgage company,
own the house. You must keep up your insurance because any liability that is
filed against the home – if someone falls in your driveway, for example – may
file charges to get compensated for their injuries. You, not the bank or the
mortgage company, are responsible. You must also pay your property taxes. In
fact, if you don’t pay them the reverse mortgage lender can file foreclosure
proceedings against you.
Seniors who find their after retirement cash flow less than
needed to maintain their lifestyle may find reverse mortgages helpful. Some
people believe it is silly to have their monthly incomes drop at retirement
when they finally have time to do things they always wanted to do.
Perhaps a mate has a stroke and requires expensive medical
care you cannot afford. Perhaps you have a severe health problem but prefer
home nursing services to a nursing home – but cannot afford the cost. Maybe you
need to widen doors for wheelchair access, or have a walk-in shower built in
your bathroom. Age requires us to adjust to all kinds of changes.
Your income is an important part of the reverse mortgage
qualification process. Your ability to continue paying insurance and property
taxes will be evaluated. If your income looks too low, a portion of your loan
proceeds may be placed in an escrow account to ensure money will be available
to pay them.
Reverse mortgages are often referred to as “rising debt,
falling equity” loans. They are given this name because as you receive money
from the lender, your debt rises and your equity goes down. When you first
bought the home, you had a “falling debt - rising equity” situation. As you
made payments each month, your equity rose and your debt decreased.
To qualify for this type of credit, all of the people whose
names are on the deed to the home on which a reverse mortgage is requested must
be 62 years of age and all must sign the papers involved. Aside from being
required to have sufficient income to pay taxes and insurance, your income is
not relevant to the credit process. There is no loan repayment. The amount of
equity in your home determines the amount of money available to you.
You are charged interest on the money you receive but you
make no interest payments during your lifetime. Interest is paid at the end of
the loan – when the last living person whose name is on the deed of trust to
the property dies, moves out of the home for more than a year, or sells the home.
The federally-insured (by FHA) Home Equity Conversion
Mortgage (HECM) requires the property being financed to be a single-family
dwelling, a two-to-four unit building (duplex or fourplex), or a
federally-approved condominium or planned unit development (PUD).
Most manufactured or mobile homes are not eligible. Some
manufactured homes built on permanent foundations may qualify provided they are
classed and taxed as real estate and meet other requirements. HECMs have home
value limits. The limits vary by county but cannot exceed $625,000. Each
program is different in its requirements, so it is impossible to state all of
the rules of the game in one article.
The home must be the borrower’s primary residence. If you
have a large enough equity position in the home it is possible to get the
reverse mortgage and use a portion of the funds to pay any mortgage debt
against the property. Aside from that, the home must be debt free.
Suppose you owe $15,000 on your mortgage but need to
increase your monthly income. You decide to get a reverse mortgage. Your house
is appraised at $250,000.00. Depending on the program you choose – and there
are several – you could easily pay the balance remaining on your mortgage and
still have a nice sum available to increase your monthly income.
How much can you borrow? On the $250,000 you would probably
get about $135,000 with a fixed-rate. You can (and should) go to reversemortgage.org to
check out for yourself how much you can borrow. That way you’ll be sure the
organization to whom you apply is giving you fair treatment. Reverse mortgages
are what lenders call “non-recourse loans.” That means there is no repayment
source available to lenders other than the equity in the property on which the
loan is made.
There is no repayment schedule. The amount of cash you can
get varies. A lot depends on the program you choose and on basic credit factors
like your age, the appraised value of your home, and current and projected
Various programs fit different and unique consumer needs.
Fannie Mae, for example, offers a Home Keeper loan. In February 2001, Fannie
waived the equity share fee on all loans of this kind. In May 2001, they discontinued
charging a 1 percent fee on Home Keeper loans. Fannie Mae is a good resource to
begin gathering information.
Be sure and compare different fees charged by various
lenders. When you talk about a large sum of money, fees add up very quickly.
Every dollar the lender gets in a fee is a dollar you won’t get. There will be
an application fee – it should include the cost of an appraisal. If it does
not, be sure to find out that cost.
A basic credit check is done to see if you have defaulted on
any federally-insured loans – education loans, for example. Be sure you ask
about the total fee structure so there are no surprises at closing. There is
usually a 2 percent origination fee for the first $200,000 of the home’s value
– not on the $135,000 you will receive, but (in our example) on the $250,000
home value. There is usually a $6,000 cap. There may be a half-point fee paid
by the homeowner at loan closing for mortgage insurance premium (MIP). There is
also a 1.25 percent MIP annual fee. In other words, you are paying for the
lender’s mortgage insurance.
You can get your money in a lump sum or regular monthly
checks. Or, you may opt for a line of credit – or a combination of these
options. However, if you withdraw more than 60 percent of the loan (the $135,000,
not the $250,000 home value) your MIP will increase to 2.5 percent annually.
Check the sales price of comparable homes in your
neighborhood. Divide the number of square feet of each home into the total
sales price. That tells you the cost per square foot. Take an average of the
per square foot cost on the properties you investigate (if you found the per
square foot cost on four properties, add the four numbers and then divide by
4). Multiply the number of square feet in your home by that number and it
should give you a good overview of what you are likely to receive in the way of
an appraised value. The appraisal you receive from your lender should place the
value of your home in a similar ballpark.
Utilize the U.S. Department of Housing and Urban Development
(HUD) or the AARP Foundation as resources for information. Because of the
increased demand for them, AARP has a consumer education program about reverse
mortgages. You can also get a booklet, “Use Your Home to Stay at Home,” from
the National Council on Aging.
How you receive money – lump sum or monthly payment, e.g. --
from the lender can impact the amount of cash available to you from the reverse
mortgage, so ask the right questions.
Remember, the total amount of the loan is anyone’s best
guess. It may depend on how long you are expected to live. You will owe the
loan balance (all of the cash you received from the reverse mortgage), costs
used for loan fees, plus all of the interest up to the loan’s “nonrecourse”
limit. Title search, insurance, surveys, inspections, recording fees, mortgage
taxes... all can be financed by the loan, but must be repaid.
Social Security and Medicare benefits are generally not
impacted by reverse mortgage loans. The IRS generally does not view loans as
If, however, you receive Supplemental Security Income (SSI)
and Medicaid, the way you receive cash from a reverse mortgage could cause you
to lose benefits. Get legal input from an expert who understands SSI and
Medicaid because you can structure your program around potential problems.
With reverse mortgages, you are not borrowing against future
earnings. You are using assets you have acquired in the past – an asset you
have already paid for – to leverage a more secure, more comfortable future.
When making decisions of this kind, you really need to
consider when to use your savings and for what. A house may be a home, but it
is also an asset and part of your savings.
© 2015 Marilyn M. Barnewall - All Rights Reserved