Basically, a reverse mortgage is a negative amortization loan. That means that rather than making monthly payments, you borrow the money you borrow and you also borrow the interest (compounded monthly). So, the loan balance gets bigger over time rather than smaller.
There are basically 3 categories of companies that do reverse mortgages: brokers, lenders that table fund, and lenders that also service the loan.
A broker usually just originates and closes the application. A lender may or may not originate the loan. The big difference here is that the lender underwrites the loan (makes the lending decision). A table funder sells the loan after closing and a lender that services the loan continues the relationship with the borrower past closing
There are lots of reasons why reverse mortgages have a bad reputation. When they were first introduced, reverse mortgages weren’t as strictly regulated as they are today. There are also a lot of misleading information and extravagant claims being made in TV and Internet advertising; that doesn’t help. Another reason is that anyone can call anything a reverse mortgage, which adds to the confusion.
To play it safe, look into a Home Equity Conversion Mortgage (HECM). That’s the only federally insured reverse mortgage. It is one of the safest, most regulated mortgages in the country.
With most lenders, you get a form with your monthly statement. All borrowers complete and sign the form. Usually the options to return the form are mail, email or fax. In talking with my clients over the years, I’ve learned mailing it back can be unreliable. Sometimes it takes a few days, sometimes a few weeks, and you don’t have proof when it was sent.
Once the lender receives the form, it usually takes 3 – 5 business days to direct deposit the money into your account. If the request is for a large amount, say $10,000, or an amount significantly different than what is usually drawn, the lender may call to confirm the request. This is to protect the borrower from fraud. No one asks why you are taking the money or what you will be doing with it.
I tell my clients, “The reverse mortgage counseling is there to protect you from me”. What if I’m not telling the truth? After all, I’m a commission salesperson.
Or what if you are working with someone who doesn’t know what they are doing? Or the person is telling you to should invest the money with him/her?
The counseling is there to make sure you are making an informed decision, you understand the decision, it will do what you expect, and you are informed about how a reverse mortgage works by someone other than a commission sales person.
Well, there are lots of things to worry about. Maybe you should be concerned about everything. But since I can’t list everything, here are a few of my top “what to worry about with reverse mortgages” list.
[or just ‘here is my top . . .list]
One of the most important things is be sure no one is hurrying you. This is an important decision no matter which way you decide to go. Take your time and avoid anyone who seems to be pressuring you.
Pressure can be more than just someone saying, “You better decide today because . . .” Pressure can be constant phone calls or emails. Someone just showing up with paperwork at the door is a real bad sign of pressure, too.
Beyond the process, you should worry about whether you are honestly evaluating this option in a realistic way given your situation, goals, and expectations for the future. Don’t just think about today. Think also about 10 or 20 years from now.
There are always the normal costs associated with any mortgage: appraisal fees, title work and insurance, closing and recording fees.
When interest rates are rising, there can be points or origination fees. These are used to get a lower initial rate, which means more money to the borrower. However, they can also just mean higher profits for the lender or loan originator, so be careful. Each point is 1% of the Maximum Claim Amount.
As of September 30, 2013, the Initial Mortgage Insurance Premium is being charged based on the amount of money you take at closing or within the first 12 months of the loan.
If you take 60% or less of available funds, there is a 1 time fee at closing of 0.5% of the maximum claim amount. If you plan to take 61% or more at closing or in the first year, the fee jumps to 2.5%.
Just like with regular mortgages, to get a fixed rate you have to take all the money at closing. Why? Because the bank knows the cost of the money when you borrow it.
If you take an equity or credit line, the rate is adjustable. This is because the lender is promising you can borrow money in the future and doesn’t know what money will cost then.
A Home Equity Conversion Mortgage is the only reverse mortgage that is insured by the federal government through the Federal Housing Administration (FHA). This insurance protects borrowers and their heirs from owing more than the value of the home when it is sold.
If you take an equity line (credit line), that line is protected by the insurance. You can get the money even if the bank goes out of business, your home goes down in value, or you have credit problems, so long as you live in your home, keep up with property taxes, and maintain your homeowner’s insurance.
Unfortunately, you can’t always be sure a reverse mortgage is right for you. Many of my clients are not 100% positive a reverse mortgage is the right step at the point they close their loan. What they usually are sure of is the reason they are getting it.
Usually, those who are being proactive and setting up their reverse mortgage well in advance are the most certain. Maybe it’s because there is no pressure in those situations. You have more control when you act in advance of need.
After you close your reverse mortgage, you have 3 business days to change your mind. On the fourth day, it becomes official and any money you have requested at closing is wired to your bank account. If you had a mortgage or equity line, the lender pays it off.
Usually a welcome package with information about how things will work with your loan comes from the lender. Then on the first of each month, you will receive a statement detailing and updating the information about your loan. There will also be a way to request money in the future, if you have a credit line.
You can change your mind after getting a revere mortgage, but if you’ve borrowed money, it has to be paid back to close out the loan.
You can pay off it off at anytime, in whole or part, without penalty. You can also sell your home if you want. At any point, you owe the money you have borrowed, plus the interest and fees.
The heirs have 6 months, with the possibility of two 90-day extensions, to resolve the debt. They can pay off the loan with their own funds or sell the house. If they decide to sell, any money above the mortgage is theirs. However, they cannot owe more than the house will sell for. If the house sells for less than is owed, the FHA insurance pays the difference to the lender.
If they decide to keep the house, they can pay the lender the market value or what is owed, whichever is less. During the time the heirs are trying to resolve the debt, they have to keep up the property taxes and home insurance.
I think the biggest mistake you can make with a reverse mortgage is waiting too long to get one. I know there is a lot on the Internet that says you shouldn’t get a reverse mortgage until you have no other choice. I disagree; why would someone want to take a chance on what things might be like when they are 80 when they could be protect themselves at 62?
Setting up a reverse mortgage as soon as you can gives you the benefit of the Cost of Living Adjuster and protects you from risk between when you first retire and when you actually may need the money. How is it good financial planning to wait until you have a problem and then hope to solve it?
Answering whether a reverse mortgage can be equity insurance is not as simple you would expect.
Insurance exists to transfer risk from you to someone else: the insurance company. So, fire insurance protects you because the fire insurance company now carries that risk. A Home Equity Conversion Mortgage (HECM) is a reverse mortgage that is insured by the federal government through the Federal Housing Administration (FHA). That insurance transfers the risk of owing more that the home can sell for from you to FHA.
It also protects the credit line, assuring you it will be available even if home values go down, the bank goes out of business, or you have credit problems.
While this is not equity insurance in the literal sense that fire insurance is fire insurance, having a HECM may provide more protection and greater may provide a borrower more protection and greater choices than a traditional equity line.
It is possible to annuitize your reverse mortgage. That means getting a monthly tenure payment (for life). This payment continues at the same level for as long as you inhabit the property. Tenure payments are based on a calculation made by the lender.
You can also get a term payment, a monthly amount that you pick, but for a predetermined length of time. Or you could say, ‘I want $5,000 a month for as long as I can get it’ or ‘I want as much as I can get for the next five years’.
In any case, you can change the plan later for a small administration fee ($20-$30) without penalty.
There are two good reasons not to wait to get a reverse mortgage. First, waiting ignores risk in our lives and in the marketplace. Rules can change; home values and interest rates can go both up and down.
Second, waiting ignores the power of the Cost of Living Adjuster that grows the credit line at the cost of funds. So, a person who sets up a Home Equity Conversion Mortgage reverse mortgage at 62 and waits to use it, is more likely to have more money available at 80 than someone setting theirs up at 80.
The reverse mortgage credit line growth rate grows the credit line at the cost of funds. On a Home Equity Conversion Mortgage (HECM) reverse mortgage that is the interest rate plus the Mortgage Insurance Premium (MIP).
Suppose the starting interest rate is 3.75% and the MIP is 1.25%. That makes the cost of funds 5%. The money in the credit line is going to increase at 5% a year, compounded monthly, independent of the value of the home.
Interest rates on a HECM can go up or down with a cap of 10% above the start rate.
Generally speaking, there are several reasons why financial advisors don’t like to talk about reverse mortgages. The sad fact is many of the big financial service companies don’t allow their people to recommend or even discuss reverse mortgages. This is crazy-making for me because it means if you are worth a million dollars and half of your wealth happens to be in invested in your house, it isn’t going to be managed, even though your financial planner is claiming to help protect your wealth from risk and manage it to the best advantage.
Often, financial advisors see reverse mortgage as a crisis management tool for seniors. If your advisor is a good one, you shouldn’t be in crisis. Or they see it as for poor people and don’t see you as poor.
Unfortunately, that brings up another reason. Your advisor simply might not be up to date on how Home Equity Conversion Mortgage reverse mortgages can help protect you from risk, increase your control over all your wealth and even improve your tax liability management.
There is also the possibility that he/she doesn’t even know the difference between reverse mortgages generally and Home Equity Conversion Mortgages.
My recommendation is to insist your advisor have a meeting or conference call with you and your Home Equity Conversion Mortgage reverse mortgage Consultant. Too often, financial professionals provide a verdict without actually hearing all the evidence. That isn’t good planning and it doesn’t do you justice.
Not having your spouse/partner on you reverse mortgage can be very bad. The loan comes due when the borrower passes and this leaves the spouse/partner alone with a revere mortgage that has to be paid off within 6 months (with two possible 90-day extensions). Your survivor can’t owe more than the house will sell for and anything above the mortgage is her/his.
The great risk to the spouse/partner is not only the loss of a dear one, but also the pressure to resolve the debt or move.
How a reverse mortgage is used has changed significantly with the arrival of Boomers to the qualifying age of 62. This began to happen during the worst real estate and financial crisis of their lives. At the time they could retire, both their home values and retirement investments were going down, something many people believed simply would never happen.
Boomers are more actively involved in their finances and less debt-averse than previous generations. The combination of financial uncertainty and a more proactive approach to everything in their lives has resulted in this cohort turning to Home Equity Conversion Mortgage (HECM) reverse mortgages as a part of their overall retirement income strategy.
So, we are now seeing people using HECM’s as a way to manage abundance instead of a way to manage scarcity. Both the reverse mortgage industry and financial professionals in general have been slow to appreciate the shift in this use and the power of a HECM in protecting against risk and funding longevity.
Rising interest rates have a significant impact on reverse mortgages because the interest rate is one of the major factors in determining the amount of equity you can access at the beginning. Higher rates can also increase costs as lenders often introduce origination fees (points) to buy down the starting margin. This can mean more money for you, but at a large increase in closing costs.
First and foremost, is it a Home Equity Conversion Mortgage (HECM) reverse mortgage? If it isn’t and your home is valued below a million dollars, run the other way.
Next, ask how the person you are dealing with is getting paid. Does she/he have an incentive to get you to apply? Is their commission based on the Maximum Claim amount, which program you choose, or encouraging you to borrow more money at closing? You also want to know whether the commission is paid by the lender or by you out of the closing costs.
What is the loan officer’s role after the application is submitted and after the closing? How much experience does that person have with HECM’s? Does he/she specialize? Are you dealing with a lender or a broker? Are you working with the company that will service your loan? Which fees are negotiable? Can you have friends and advisors join in the conversation? (If the answer to that one is no, something is wrong.) How long will the process take? And finally, what might be the reasons your application could be denied?
The credit line growth rate and Cost of Living Adjuster refer to the same thing. Both mean your credit line grows at the cost of money. I prefer Cost of Living Adjuster because that better illustrates what it actually does. After all, when interest rates go up, the cost of living usually goes up, as well.
On a Home Equity Conversion Mortgage (HECM) reverse mortgage, the cost of funds is the interest rate plus the Mortgage Insurance Premium (MIP).
Suppose the starting interest rate is 3.75% and the MIP is 1.25%. That makes the cost of funds 5%. The money in the credit line is going to increase at 5% a year, compounded monthly, independent of the value of the home.
Interest rates on a HECM can go up or down with a cap of 10% above the start rate.
Yes, depending on the lender. While FHA makes the general rules, any lender can have more restrictive guidelines based on their investors’ comfort level.
One of the biggest misconceptions about Home Equity Conversion Mortgage (HECM) reverse mortgages is that people with money don’t need them. Now, let’s be clear here, if you have $5,000,000 or more, you may not need a HECM. But if you have a million or less, you should understand how a HECM might work for you.
Like so many things at this point in our history, a HECM can actually provide the greatest benefit for those who seem to need it least. Many of my upper income clients use their HECMs as a source for tax-free money. They draw and pay back in a way that gives them the greatest benefit.
The ability to pay all the outstanding interest when it is most advantageous is something both clients and CPA’s appreciate.
Need is a very ambiguous term. Finding out you do need a reverse mortgage can often be too important a bit of news too late to help your situation.
Being proactive is the best way to avoid the pressure of need driven by circumstance. However, there are a few no-brainers. If you can’t afford or don’t qualify for LTC, you need a reverse mortgage whether you know it or not. Same for a surviving spouse — if you don’t have an adequate life insurance policy in place or a pension he/she can inherit, there is a need.
Think of a reverse mortgage like a spare tire. No one wants to use a spare tire, but would you go on a long trip without checking to make sure it is there? Well, retirement is the longest trip you are ever going to take.
The reason there are so many reverse mortgage ads everywhere is simple: it’s the Boomers’ fault. They are turning 62 at a rate of 5,000 to 7,000 a day. That’s the age for qualifying to get a reverse mortgage, so everyone is chasing that business.
Adding to the mix are companies that look like reverse mortgage lenders but in actuality are lead generators. They want you to give your information so they can sell it to companies targeting the 62 plus crowd.
One of the safest places you can get information on the web is from the National Reverse Mortgage Lenders Association (NRMLA). They are careful about what they claim and don’t ask for your information. NRMLA also lists their members by state. So, you can check to see if the company or individual you are dealing with has joined the industry’s association and subscribed to its code of conduct.
It’s hard to say whether a reverse mortgage will solve all your problems for the rest of your life. My general answer is probably not.
First of all, a lot of the problems we face as we age have nothing to do with money. That being said, there are few problems where that having money turns out not to be an advantage.
All other factors being equal, the earlier you set up your Home Equity Conversion Mortgage reverse mortgage (HECM), the better the results can be. Also, the more retirement investments you have, the longer you expect to wait to draw on your HECM, the higher your home value and equity, the further into your life a HECM may be of benefit.
There are too many variables in life to promise certainty. The most we can do is our best planning, including making sure we have as many financial options in play as possible. You also want to involve your family and financial advisors into the discussion.
There are several ways a reverse mortgage can help your grandchildren go to college. You can gift them directly out of your credit line while they are going to college. Better yet, you can create a college fund while they are growing up. Ask your financial advisor about SAGE. This is a great way to increase your tuition support for college-bound kids.
You can create a moral will, which rewards heirs for things like going to college or maintaining a strong GPA during school. Estate Planners and financial planners are great people to bring into this conversation. Meeting with them and your Home Equity Conversion Mortgage (HECM) reverse mortgage consultant can open many creative approaches to inter-generational gifting.
There are a several of significant differences between a regular mortgage and a reverse mortgage. With a regular mortgage you owe the money and the house is security. With a Home Equity Conversion Mortgage reverse mortgage, the house owes the money not you.
Regular mortgages are usually less expensive to set up. Because they have mandatory payments, they carry the risk of foreclosure if you don’t make your monthly payment. Of course, with a regular mortgage, you are building equity with those payments while a reverse mortgage is drawing down your equity. So, you pay a regular mortgage and a reverse mortgage pays you.
With a HECM, you have to live in the home as your primary residence. A forward mortgage may allow you to move and rent out your home.
Finally, a regular mortgage comes due (must be paid off) on a date certain. With a HECM, the loan is due when the last borrower dies, goes into a continuing care facility for 12 consecutive months, sells, or moves.
There is one important thing that is the same with both mortgages: if you don’t pay your property taxes and keep the home insured, the bank may foreclose.
I don’t expect anyone just to believe or trust me. In my rural state of Vermont, it is pretty easy to check on me. Because of the Internet, even from Phoenix or Orlando, it is still pretty easy to check. With a name like “Funk”, it would get around pretty fast if I was not taking care of business in an appropriate way.
If you go through with the process of getting a Home Equity Conversion Mortgage reverse mortgage, there is counseling where you can double-check what you have been told.
In the final analysis, I don’t ask people to believe me. Trust is earned, not requested. I encourage people to take their time, involve trusted advisors in the discussion, and come back to me with as many questions, as many times, as necessary to make the right decision.
In the end, what I say either makes sense and sounds reasonable or it doesn’t. That’s probably what makes it believable or not.
A reverse mortgage can be a tool in delaying taking Social Security.
Whether you start taking Social Security at 62, 65 or 71 (actual plateaus may be different for you) is often driven by your immediate circumstance rather than long range priorities. The difference in how much you will receive over a lifetime can be substantial. The benefit of delay for a surviving spouse can be even more dramatic.
Yet, a huge portion of the population signs up at 62. Setting up a Home Equity Conversion Mortgage reverse mortgage and drawing on that instead may help bridge those 3, 6 or 9 years. Talk to your financial advisor about how the advantages can add up over two lifetimes.
Yes, you can buy a home with a Home Equity Conversion Mortgage (HECM) reverse mortgage. It takes approximately 50% down payment. You finance the rest without the risk or pressure of a monthly payment.
This enables homebuyers over 62 to double their purchasing power. After all, right-sizing it not always down-sizing. You may want a different home with more amenities. Or you might not want to trap all the money from the big house you are selling in the new house you are buying. Using a HECM for purchase let’s you decide how best to leverage your money.
Yes, you can buy a vacation home with a Home Equity Conversion Mortgage (HECM) reverse mortgage, sort of. You would set up the reverse mortgage on your primary mortgage and use the proceeds to purchase the second home.
Saving the family farm with a Home Equity Conversion Mortgage (HECM) is one of my proudest achievements.
It usually happens that mom and dad are in the homestead and want to retire. The whole farm is burdened with a mortgage. While the family may want to farm, they can’t afford to buy the parents out and someone has to pay off the mortgage. What we do is subdivide out the house and minimal acres. At closing, the mortgage is paid off with the HECM.
Only the house is encumbered by the new debt. No one has a monthly payment. Now the family can continue to farm and can afford to buy it from the parents over time. Meanwhile, mom and dad are finally enjoying their retirement. Hey, somebody tell Willie Nelson I’m saving family farms!
If you can’t afford or don’t qualify for LTC insurance, a reverse mortgage can give peace of mind. The risk of a health emergency can hang like a cloud as we age. The older we get, the greater worry that an accident or illness will take away either our savings or our independence.
While a Home Equity Conversion Mortgage (HECM) reverse mortgage is not a replacement for LTC insurance, it can help fill the void. By setting up a HECM early and just leaving the credit line to grow and compound, you have it as an emergency health fund. The longer it grows, the greater it is because of the Cost of Living Adjuster.
You can be confident the money will be there when you need it because the federal government insures the HECM credit line through FHA. Under current law, the money in your credit line is not counted as an asset for Medicaid qualifying, either.
There can be both tax advantages and disadvantages to a reverse mortgage.
With a reverse mortgage, interest is paid only when you want to. By bunching the interest payment into the year you need it, you may be able to use the deduction more effectively.
With a forward mortgage, interest is paid every month. Depending on your income, that interest can be deducted from your federal taxes. With a reverse mortgage, the interest is accruing because you are borrowing it. Until it is paid it may not be deductible. This could impact your taxable income, so you should check with your accountant or CPA.
A reverse mortgage can help protect a surviving spouse or partner in many ways. First of all, it can enable you to delay taking Social Security early. This not only means more money over a lifetime, it means more money for your surviving spouse for the rest of his/her lifetime.
Another way to use a Home Equity Conversion Mortgage reverse mortgage (HECM) to help protect a surviving spouse is to set up the credit line early and leave it to grow over your lifetime. Should you need to qualify for Medicaid some day, current law doesn’t count the credit line in its spend-down requirements.
But the most powerful advantage for the surviving spouse is to have the HECM credit line there to help replace the income loss which she/he will likely face when alone.
My clients have used reverse mortgages to enable them to enjoy distributing their wealth before they die. After all, it is a lot more fun to participate in the funding and joy of a grandchild graduating from college than it is to help pay off student debt after you are gone.
Proceeds can be used to contribute to loved ones’ college funds or home purchase. They can also be donated to your favorite charity (which can have nice tax benefits, too).
However, my favorite scenario was an Italian client who had promised his parents their grandchildren would visit Italy some day. He used the proceeds to take all his children back to the village he was born in. This connected him and them to the distant family he had lost track of. Best of all, his children all promised him that his grandchildren would make the same trip someday!
I don’t know why your friends are saying you will lose control of your house with a reverse mortgage. Chances are they are wrong. One of the things that surprises my clients most it that they don’t lose control with their Home Equity Conversion Mortgage (HECM) reverse mortgage, they gain it.
There are only two choices if you need money. Either you provide it yourself, from savings, selling what you have, or borrowing against what you have. Or you need to get it from someone else, usually that someone is family, most often your adult children.
If you are going to get the money you need from your home, you must either sell it or borrow against it. When you have a HECM already set up, it is easy to tap into it when you need funds. If you don’t need it, the credit line just sits there growing. This often gives my clients more control of their choices and less pressure in their lives.
Generally, estate planning is about protecting assets for the next generation (or at least for others). Taking on debt that is to be paid back later doesn’t always fit with how an estate planner views the world. There is also the possibility he/she doesn’t know the difference between reverse mortgages generally and Home Equity Conversion Mortgages.
In most cases, the planner will not be a financial advisor or tax expert. That puts the reverse mortgage further out of the normal range of business for them. On top of that, just like other financial professionals and the reverse mortgage industry in general, your planner may be stuck in the old paradigm of reverse mortgages just being a tool for seniors to manage scarcity.
My recommendation is to insist your estate planner have a meeting or conference call with you, your financial advisor, and a Home Equity Conversion Mortgage reverse mortgage Consultant. Too often financial professionals provide a verdict without actually hearing all the evidence. That isn’t good planning and it doesn’t do you justice.
There could be many reasons why your CPA doesn’t like reverse mortgages. If your CPA is like mine, he/she only talks about deductions and documentation. Until we talked, my guy didn’t even know the difference between reverse mortgages generally and Home Equity Conversion Mortgage (HECM) reverse mortgages.
There can certainly be tax implications with a reverse mortgage. This is especially true if you need the mortgage interest deduction and don’t plan to make payments. There is also the possibility of selectively paying RM interest as the deduction is needed. So, bringing your CPA into the conversation may be a good idea.
My recommendation is to insist your CPA have a meeting or conference call with you, your financial advisor, and a Home Equity Conversion Mortgage reverse mortgage Consultant. Too often, financial professionals provide a verdict without actually hearing all the evidence. That isn’t good planning and it doesn’t do you justice.
Deciding about anything as big as your retirement finances and your home should be hard. This is not a choice to rush into. There are a few things that can add to the difficulty of the decision for you.
First, there are your circumstances. If you have waited until you are in a financial crisis or under a great deal of pressure, the sense that you don’t have much choice can make deciding harder.
Just the opposite can also be true. Americans generally, and Boomers specifically, have not done a great job of preparing financially for their retirement. We tend to worry more about today than tomorrow. So, taking a step with a Home Equity Conversion Mortgage (HECM) reverse mortgage to protect against future risk can be more difficult than it should be.
Perhaps the toughest thing about deciding whether or not to get a HECM is the lack of accurate and complete information about your situation now and in the future. Retirement income planning comes down to math. But our lives are run on emotion. A conflict between those two realities can often be difficult.
To list everything wrong with the reverse mortgage industry could take a long, long time. While I am very proud of the role my industry plays in the lives of the people we help, I wish the standards in advertising and customer service were more aligned with the realities of the client base we serve.
The message in many ads is simplistic and ignores the difference between using a reverse mortgage to manage scarcity and to manage abundance. Much of how we communicate doesn’t resonate with the people we are speaking to and their unique circumstances. Whether consultants or counselors, we have a lot to catch up on.
Let’s face it, reverse mortgages are being sold to people at a critical point in their lives. In my opinion, we need to have people in my job licensed specifically to do business with retirees, not just mortgage originating generally. Our systems throughout the process could be more client-friendly and age-appropriate. After all, talking to you at 62 is different than talking to you at 92.
Finally, servicing of loans after closing has a long way to go. We need it to be easier for clients to complain when they aren’t satisfied. A good step would be a more proactive approach. That is why in my practice we reach out to our closed clients every 6 months to make sure everything is going OK. Solving problems isn’t enough in dealing with a vulnerable population. We need to be ahead of the curve making sure things are all right.
The problem with a lot of reverse mortgage servicing is that it is no different than servicing for regular mortgages. Unlike regular mortgages, the dance really starts after the loan closes with reverse mortgages. We are also working with an older population.
The industry needs to make servicing part of a real relationship with the customer. In our business, we call all the closed clients every 6 months. We check in to make sure things are going all right, before there is a problem. This means we really get to know clients better after the closing than during the process. When they have questions, they call, confident they are taking to someone who cares and listens. Even when there are mistakes, that relationship helps make things go easier.
Yes, you can use a reverse mortgage in a divorce. The spouse/partner who wants to remain in the home has several options that might work.
You can use the reverse mortgage to buy out the other person so you can remain in your home. If there is a mortgage already, there may only be enough to pay that off, but that could still work, depending on your settlement.
Dismantling the retirement savings can mean less income for both people later. With a Home Equity Conversion Mortgage reverse mortgage money can be accessed to transfer ownership to one while helping the other to move on. Accomplishing this without draining the 401K can benefit everyone.
I had never thought about using a revere mortgage to help one’s favorite charity until a client suggested it to me.
Her charity was asking to be remembered in her will. Nice idea, but she wanted to see the benefit of her generosity in the living years. There were tax and other concerns if she disturbed her investments. After discussing things with her financial advisors, she found there could actually be tax advantages to giving sooner rather than later if it were done without taking the money from her investments.
By using a Home Equity Conversion Mortgage she was able to enjoy the fruits of her benevolence, and her home and savings, at the same time.
More than a few people have asked why I am a Home Equity Conversion Mortgage reverse mortgage consultant. I’ve had a very long life in sales, but nothing I have ever done has made me prouder than my current job.
I truly feel I am making a difference for the better for every person I meet with. Whether they get a HECM with me or not, they usually come to a better understanding of their retirement financing options.
Beyond that, I thoroughly enjoy the people I work with. The older we are, the more unique we become. The oldest client I’ve had was 100 when we met.
I’ve worked with a fellow who was a cabin boy on the steamboat, the Vermonter. His captain was a Civil War general, which put me two degrees from Lincoln.
I’ve worked with folks who still farm with horses, a former Pittsburgh Pirate, people who have worked in the space program, someone who taught in a one-room schoolhouse, and a lady who explained to me how the Depression made life better for people in Vermont.
An interesting job, good pay, fascinating people, and a wonderful sense that I make a real difference in people’s lives, that’s why I am a Home Equity Conversion Mortgage Consultant on reverse mortgages.
A Home equity Conversion Mortgage reverse mortgage has two mortgages because it involves two separate entities.
The lender is loaning the money, so there is a note and there is a mortgage with the lender. Then there is a second note and mortgage with the Department of Housing and Urban Affairs (HUD). This is because the Federal Housing Administration (FHA) insures Home Equity Conversion Mortgages.
The insurance protects you and your heirs from owing more than the value of the property at the time of sale. If you have a credit line, it also protects that by promising to give you available funds if the lender doesn’t. By recording both mortgages, the promises are “chiseled in granite” and can’t be changed. That’s how people can believe the promises.
You only owe the money once, so when the debt is paid back, only one mortgage will need to be paid off. However, both mortgages will have to be discharged.
I can’t say for certain why the big banks got out of the reverse mortgage business. From my lowly place on the food chain, there are only rumors and more rumors.
For one lender, I hear it was because the government was using Dodd-Frank to regulate insurance company that happened to own a bank that did reverse mortgages. This is said to have created a competitive disadvantage in the company’s primary market. Bye, bye bank. Bye, bye reverses mortgage business.
For two others, it was what is called “foreclosure fatigue”. These were companies with a lot of old reverse mortgages on the books. Many had the potential for becoming problem loans in what was possibly the worst real estate market in history. These banks also had more than enough problems on the forward side and needed their best brains working on the biggest problems. Bye, bye reverse mortgages.
The departure of the largest lenders may turn out to be a blessing in disguise for the reverse mortgage industry because what’s left are mainly companies dedicated to the market as their primary business. It also left a lot of smaller companies without any having the size and power to dominate the reverse mortgage space. That should mean more competition in pricing, customer service, and products.
Mortgage servicing is the process of getting your monthly statement. With a reverse mortgage, clients also interact with servicing when they need to draw money from the credit line. Poor servicing can result in delayed payments and confused information.
With a regular mortgage, that is less likely to happen. First of all, borrowers are usually not relying on a forward mortgage for income. Secondly, borrowers are often younger and more willing to advocate for themselves. Finally, with a reverse mortgage there is often an implied commitment made to the borrower for the future. This can create a greater level of expectation with a more vulnerable population.
The LIBOR is the London Inter Bank Offered Rate. That is the cost of funds between banks in London. Most adjustable rate mortgages are now tied to the LIBOR as the index on which adjustments are made. With Home Equity Conversion Mortgages, it is the one-month LIBOR as reported in the Wall Street Journal.
Keeping track of how much you owe or have available in your reverse mortgage credit line is easy. Most servicers send out a statement, usually on the first of each month. It tells you how much you owed last month, how much in additional fees and interest was added this month, what money you have received in the past month, and how much is remaining in your credit line.
There is also a customer service number listed so you can call if you have questions.
Having a problem with your reverse mortgage lender after you close can be a real pain. There are several things you can do to make sure problems stay manageable and get resolved quickly.
First of all, just because an issue develops doesn’t mean you have made a mistake or that you will always have problems. Stuff happens, so make sure to stay cool and assume everyone on the other end wants the problem to go away, too.
If you do have a difficulty, is important to keep a log recording all your communication with the lender. Get people’s names and note what was said. And be sure to include the day and time, as well as the outcome of the conversation. If things aren’t going right in the call, ask to speak to someone else or to a supervisor. Make sure you understand whether there is an appeal process, as well.
When there is an issue, call the mortgage consultant who helped you set up your reverse mortgage. Because of privacy laws and concerns about fraud, he/she can’t speak directly for you, but they may be able to offer helpful guidance. Often I find the difficulty can just be a communication glitch, which is easily cleared up.
No one is trying to aggravate you or be a jerk, although it can feel that way when talking to an anonymous voice on the other end of the phone. Sometimes, just calling back and starting over with another person does the trick.
If all else fails you should report your problem to the FHA and the Consumer Finance Protection Bureau and even your congressperson. You need to advocate for yourself. Just living with the problem doesn’t help you, the company you are dealing with, or the thousands of other customers just like you who may encounter the same problem.
Non-traditional couples have are entitled to getting a reverse mortgage just like anyone else. You don’t have to be married to be on the deed with your partner. All homeowners over 62 can participate in a Home Equity Conversion Mortgage reverse mortgage on their primary residence, long as their application meets the underwriting guidelines.
Just like with married couples, non-married couples should be extremely careful about setting up a reverse mortgage for only one of the two. In my practice, I never encourage this. Of course, sometimes circumstances make it the best option in spite of the risk. But it is always a tough and complicated decision that merits extra care.
The loan comes due when the last borrower dies, sells, moves, or goes into a continuing care facility for 12 consecutive months, regardless of the gender or marital status of the couple.
The best and worst things about a reverse mortgage credit line are the same: it has an adjustable rate. That means the rate can go up or down over time. There is no way of predicting how much you will owe in the future. This is because you can’t predict what rates will do, how or when you will draw down the money, or how long the loan will last.
The good part is that the Cost of Living Adjuster grows the credit line at the same rate of interest charged on the money you borrow. This means higher rates can increase the amount of money in your credit line.
So, this is one of those value thresholds. If you can’t sleep nights with these possibilities, a HECM credit line may not be the best solution for you. Perhaps you would be more comfortable with a fixed rate, even if it has its own advantages and disadvantages.
Yes, the bank can foreclose on your home with a reverse mortgage. You have to live in the home as your primary residence, keep the home insured, and pay the property taxes. If you don’t, the lender may foreclose.
When the last borrower dies, the heirs have six months with two possible 90-day extensions to pay off the debt. If they fail to do so, the lender may foreclose then, as well.
The difference between cash flow and income is more a matter of function.
During working years, you can increase income by working extra hours, asking the boss for a raise, taking a second job or a better paying job. For retirees, cash flow is more important because their income is usually fixed.
In retirement, you are surviving on limited savings (no matter how large they are, we usually don’t add to them substantially during the distribution phase), fixed income, and little or no control over costs. So, what matters is the difference between what we have coming in each month and what we have going out. That’s cash flow.
Getting a reverse mortgage can help cash flow by increasing the amount of available money each month. It isn’t income, so it isn’t taxable, either.
Yes, a reverse mortgage is a negative amortization loan. Negative Amortization means you are borrowing the interest as well as the principle, so the debt is increasing over time. That’s what is happening with a reverse mortgage.
One of the biggest downsides to getting a reverse mortgage early is the risk you will use up all the available funds too soon.
With a reverse mortgage, you are getting money now, but borrowing it from the future. Setting up a reverse mortgage early works well if the credit line is left to grow and compound for the future. However, if the money is drawn down too early in retirement, you could encounter problems later.
When the credit line runs out, you might not be able to afford the home. The loan comes due when you sell the house. After paying off the mortgage, there might not be much money left over for the next phase of your life.
Yes, with a Home Equity Conversion Mortgage (HECM) reverse mortgage, you can sell at any time without penalty. At the time of sale, you will owe only the money you have borrowed and the interest and fees on that money for the time you have borrowed it. Any money left over is yours.
If there isn’t enough money to pay off the mortgage with the sale of the house, the FHA insurance pays the difference. So, you can’t be “under water” with a HECM.
When you have a reverse mortgage and the last borrower dies, the heirs inherit the house. They will need to inform the lender and provide a death certificate. An appraiser may be sent out to establish the market value of the home. Then they will have 6 months, with the possibility of two 90-day extensions, to resolve the debt. During that time, they don’t have to make payments but must keep up the home insurance and pay the property taxes.
They can keep the home by paying what is owed, or they can pay the market value, whichever is less. If they decide to sell, any money above what is owed is theirs. If there isn’t enough money to pay off the mortgage with the sale of the house, the FHA insurance pays the difference. So they can’t be “under water” with a Home Equity Conversion reverse mortgage.
In general, you can only have one Home Equity Conversion Mortgage (HECM) reverse mortgage at a time because it has to be on your primary residence. However, you can pay one HECM off and get another one on a different home. You can also refinance an existing HECM with a new one on the same home.
While I have never seen it done, technically if you have moved far enough from your old home that has a HECM, you could get another one on your new residence. However, you would have to meet the underwriting guidelines and find a lender who would finance it.
There may also be proprietary products out there that would do a reverse mortgage on an investment or vacation home, but I’m not aware of them.
If you kids are on the deed and you have always occupied the property as your primary residence, you can still get a reverse mortgage. At closing, your children would have to quit claim their interest in the property back to you. This means they would no longer be owners of the home.
The only way your children could remain on the deed is if they are over 62 and reside with you in the home as their primary residence.
Technically, you can get a reverse mortgage on a mobile home or doublewide manufactured home. However, lenders have increasing backed away from these loans. You will need to shop around to find a lender whose guidelines will work for you.
Yes, you can get a Home Equity Conversion Mortgage reverse mortgage on a condo. The homeowners’ association has to meet FHA guidelines. Many lenders require this approval prior to starting the loan application. There is also a difference between lenders as to how much help is provided in getting the homeowners’ association approved. It is worth shopping around to make sure that you find a lender who does condos and will help make the approval process as easy on you as possible.
Log homes qualify for Home Equity Conversion Mortgage reverse mortgages. However, they are more difficult to approve than traditional, stick built houses.
The catch is the appraisal. Usually, lenders need at least two comparable sales to establish marketability and value of the log home. This can often be a challenge.
Not all lenders loan on log homes and others aren’t comfortable with rural properties, which is where most log homes are located. Be sure to shop around to find someone experienced in this niche.
No, you don’t have to be on town water and sewer to get a Home Equity Conversion reverse mortgage. However, if it runs past your front door, you will have to hook up unless the cost is burdensome.
Generally, a drilled well and private septic are acceptable. You can even do a shared or community well and septic, as long as they meet lender and FHA guidelines.
Deferred maintenance is not an obstacle to getting a Home Equity Conversion Mortgage reverse mortgage. Safety issues can be another matter.
If your home needs a new roof, but isn’t leaking, we can close your loan with an estimate of the cost to repair the roof. At closing, more than enough money will be placed in a repair-set-aside. You will have a limited amount of time to make their repair after closing and can use any other funds in the credit line to do so. Once the work is completed, the appraiser comes back out to confirm the work is done. There might be some paperwork, such as a receipt, and then the set-aside is released to you.
Now, if the roof is leaking and you have 18 buckets placed around the house to catch the water when the rains, we’ve got a problem. In that case, you will have to repair the roof before we can close. After the work is done, the appraiser comes back out to the house to verify prior to closing.
So, deferred maintenance is not usually a big problem but safety issues are.
Unfortunately, if by ‘spring’ you mean water flowing naturally rather than a drilled well, no you can’t get a Home Equity Conversion Mortgage reverse mortgage with a spring.
Yes, you can get a Home Equity Conversion Mortgage reverse mortgage with a shared road. There has to be a recorded right to the road that stipulates the rights and responsibilities of all the road owners.
You can only get a Home Equity Conversion Mortgage (HECM) reverse mortgage if all owners of the home are at least 62. If your spouse is not old enough he/she must come off the deed in order for you to proceed.
In the event of the borrower’s death, the consequences for a surviving spouse who is not on the deed to the house can be significant. Counseling is required for both before proceeding with the application. You are strongly advised to seek financial/legal counsel and be certain this move is right for both of you.
If you have defaulted on a federally-backed student loan, you can’t get an FHA-insured reverse mortgage. So the answer is no, you can’t get a Home Equity Conversion Mortgage reverse mortgage if you have defaulted on any federal debt.
The Alternate Contact on a reverse mortgage application is there for two reasons. First is so we have someone to contact if your monthly statement comes back marked “Deceased”. The other reason is to help protect you from fraud. So, if we get a request for $20,000 faxed from phone in Guadalajara, Mexico, with instructions to wire the money there, we might want to speak to you first. If we can’t reach you, we’d call your alternate contact to help us locate you.
You can apply for a reverse mortgage over the phone, face-to-face, through the mail, and probably on the Internet somewhere. So applying is pretty easy. In fact, you can just go to the contact page on this website to start the process.
Interest on your reverse mortgage accrues, on both the money you have received for your benefit and the interest and fees on that money, compounding monthly.
I don’t think anyone can make your heirs accept the inheritance of your house, with or without a reverse mortgage. If no one claims the property, the laws of your state would come into play.
I’ve had more than one experience where the children of a deceased borrower have simply called the lender directly. This can help resolve the situation more swiftly.
There are several factors used in figuring out how much you can get with a reverse mortgage. They include the age of the youngest borrower, the Expected Interest Rate, and the home’s value.
An FHA-certified appraiser establishes the home’s value for the purpose of the loan. The appraised value is based on comparison to the 3 most recent sales of similar houses as close as possible in location, style, and time of sale.
This does not tell you what your home is worth; you have to find a willing buyer to do that. We are telling you how much the lender will lend on that particular day in that particular market.
With a forward mortgage, interest is paid every month. Depending on your circumstances, that interest can be deducted from your federally taxable income. With a reverse mortgage the interest is accruing because you are borrowing it. Until it is paid, it probably isn’t deductible. This could impact your taxable income.
That can also be an advantage. With a reverse mortgage, interest is paid only when you want to. Buy bunching the interest payment into the year you need it, you may be able to use the deduction more effectively. Talk to your CPA or accountant to know for certain.
If you simply want to pay off an existing mortgage, a fixed rate reverse mortgage may be the best choice. It does offer the security of knowing the interest rate won’t change.
However, with the new rules for Home Equity Conversion Mortgage reverse mortgages, the limit on how much you can take at closing is 10% of available funds beyond mandatory obligations. If there is more money available and you want a fixed rate, you would have to relinquish your access to the additional funds.
Often people get that impression, but no, the Credit Line Growth Rate does not offset what you owe on your reverse mortgage.
The growth rate (also called the Cost of Living Adjuster) increases the amount you can borrow in the future by increasing what is available in your credit line at the same rate being charged on your debt.
You still owe what you have borrowed and interest that accrues on that debt for the duration of the loan, independently of the credit line.
Yes, your reverse mortgage can be paid off early. You can make payments if you want and can pre-pay the mortgage, in whole or in part, at any time without penalty. At any point, you owe only the money you have borrowed and the interest and fees on that money for the time you have borrowed it.
Making payments at one point does not obligate you to make any other payments on your reverse mortgage.
I’ve closed one Home Equity Conversion Mortgage reverse mortgage on a home off the grid, so I know it can be done. HUD definitely wants to support alternative energy sources in homes. However, the property still has to work with the regular appraisal process. That means comparable sales, and that is tough. Also, be sure you are working with a lender that will finance off the grid. Just because the rules say you can, doesn’t mean the lender has to.
Rural properties present their own unique challenges to getting a reverse mortgage. Be sure whoever you are working with understands this type of property and has a track record of success with them.
Excess acreage can be a problem getting a Home Equity Conversion Mortgage reverse mortgage. FHA really doesn’t like more than 35 acres or so. You might want to shop lenders, too; some may have different levels of tolerance for land.
Beyond that, it can be advantageous to subdivide. We are lending on the house and acreage normal in your area. If normal is 10 acres, having a 100 acres really doesn’t increase the value proportionally. Why encumber all the land if you don’t need to? Better to separate it (be sure to check for consequences and costs). That way you have the reverse mortgage only on the minimum amount of land necessary for the deal.
There is an appraisal to protect the lender’s risk of owning the property should there be a foreclosure. The appraiser establishes market value for that particular time to secure the lender’s interest.
First of all, in most areas the real estate market is still rough. Foreclosures and distressed sales can devalue your property.
Next, if you have safety problems like bad wiring or foundation, you may have to fix them before you can close.
The best way to avoid surprises with the appraisal is be up front with your loan officer about the good and bad of your house, and to work with someone who will do the same about the application process.
You can’t get a Home Equity Conversion Mortgage with some water sources. For example, you can’t draw water from a lake or spring.
Not all lenders may have the same underwriting guidelines, so be sure to check and shop around.
Getting a reverse mortgage should be no problem with a shared well. You can’t have more than 4 homes on the system, each home must have a shut-off at the wellhead, there must be dedicated power to the well that is metered, and there must be a written, recorded shared well agreement.
Not all lenders may have the same underwriting guidelines, so be sure to check and shop around.
Usually dug wells are a problem for getting a reverse mortgage.
Not all lenders may have the same underwriting guidelines, so be sure to check and shop around.
You can still get a reverse mortgage with a federal tax lien. There needs to be either a written agreement and payment history or funds sufficient to pay it off at closing.
Not all lenders may have the same underwriting guidelines, so be sure to check and shop around.
The interest rate on a reverse mortgage can be either fixed or adjustable. To get the fixed rate, you have to take all the available money at once. If you get the credit line, the rate is adjustable.
The margin on a reverse mortgage is the amount added to the index to get the interest rate on an adjustable rate mortgage. So, for example, if the index is 1% and the margin is 2%, the rate is 3%.
The cap on an adjustable rate reverse mortgage is the highest level the rate can reach. On a Home Equity Conversion Mortgage reverse mortgage, that is 10% above the initial rate. So, if the initial rate is 2%, the rate can’t go higher than 12%. However, there is also the Mortgage Insurance Rate of 1.25%. That should be factored in when you are figuring the highest cost of your loan. It would then be 13.25% instead of 12%.
The index on a reverse mortgage is the value to which the margin is added to come up with the adjustable rate. Most adjustable rate reverse mortgages have the London Inter Bank Offered Rate (LIBOR) as their index. If, for example, the index is 1% and the margin is 2%, the rate will be 3%.
The Home Equity Conversion Mortgage (HECM) reverse mortgages credit line is just the same as what traditional loans call an equity line. It is an amount of your home equity that the lender has made available for you to borrow in the future. The HECM credit line can get bigger over time because the balance compounds monthly, based on the cost of funds, independent of the home’s value.
With HECM’s, the credit line is insured by the Federal Housing Authority (FHA). This insurance protects the credit line so you can get it even if the bank goes out of business, your home goes down in value, or you have credit problems (as long as you live in the home as your primary residence and pay your property taxes and home insurance).
A reverse mortgage tenure payment is a monthly payment guaranteed for the life of the borrower(s) so long as they live in the home as their primary residence, keep up the homeowner’s insurance, and pay the property taxes.
A reverse mortgage term payment is a specific amount paid to the borrower(s) for certain duration. For example, you could receive $5,000 a month for the next 5 years.
The Mortgage Insurance Premium (MIP) on Home Equity Conversion Mortgage reverse mortgages is 1.25% a year. It is charged on the outstanding loan balance, compounded monthly, or approximately .102% a month.
The Mortgage Insurance Rate is the ongoing cost for the FHA insurance on the loan.
The same 1.25% is also part of the Cost of Living Adjuster calculation that determines how much your credit line grows each month.
The reverse mortgage Initial Interest Rate is the start rate of your adjustable rate mortgage.
The reverse mortgage Monthly Servicing Fee is a lender charge for sending your monthly statement and servicing your loan. When it is charged, it typically runs from $20 – $40 each month.
This fee can vary between lenders and is considered a negotiable fee.
The reverse mortgage Tax & Insurance Set-Aside is an amount of the funds available to the borrower that is held back in escrow at closing. The purpose of the set-aside is to have money in reserve to help the borrower pay property taxes or homeowners insurance should he/she have difficulties in the future.
The money in the set-aside can only be used for this purpose. HUD may require Tax & Insurance Set-Asides on loans where there appears to be risk of tax or insurance default based on a financial assessment by the lender.
It is hoped this will enable certain borrowers to be able to obtain a Home Equity Conversion Mortgage reverse mortgage, even though they may have had or are having financial difficulties. Should there be a problem with taxes or insurance payments in the future, the set-aside would be available to act as a cushion that might help avoid foreclosure.
Beginning in January of 2014, HUD is expected to require lenders of Home Equity Conversion Mortgage (HECM) reverse mortgages to do a Financial Assessment of all borrowers. This is expected to be used to indicate a higher probability of financial difficulty in the future. This may result in some borrowers being required to set up a Tax and Insurance Set-Aside. There may also be instances where this could mean a HECM won’t work.
The reverse mortgage Initial Mortgage Insurance Premium is a one-time charge, at closing on Home Equity Conversion Mortgages reverse mortgages.
This fee is now based on the amount of funds the borrower intends to receive at closing. If the amount is 60% or less than the Maximum Claim Amount, the fee will be 0.5%. If the amount is 61% or more, the fee will be 2.5%
Here is an example: the Maximum Claim Amount is $100,000. If the borrower needs 60% ($60,000), the (IMIP) will be $500. If the borrower needs 61% or more, the (IMIP) goes up to $2,500.
The Principal Limit on a reverse mortgage is the amount of equity available to the borrower. So, your house could be worth $400,000, but that isn’t what you can borrow. If the Principal Limit is $200,000 that is the amount available for you to borrow initially.
There isn’t a fixed percentage you can get of your home’s value with a reverse mortgage. The amount of equity available to you is based on interest rates, the youngest homeowner’s age, the home’s value, and the program you choose. Because interest rates fluctuate and programs change, this can be a moving target.
The expected rate on a reverse mortgage is a rate the lender uses to determine the Maximum Claim Amount at the closing of the loan. It is higher than the Initial Interest Rate with adjustable rate mortgages.