Reverse Mortgage Information: August 2009

More and more I am coming across clients who are interested in using the reverse mortgage as a retirement planning tool, rather than as an absolute need for additional cash. 

Out of my last 10 reverse mortgage loans, 4 of them already had decent incomes, low or no mortgages.  One thing that seems to be a common thread is the idea of planning for the future.

One client had a beautiful $800,000 home right on the golf course with no mortgage payment.  Over the last 2 years though his investment portfolio really took a hit and his income from that went down by half. He was loathe to bail out on those investments at the bottom, knowing that until he sold, he really had no realized losses.  His solution was to take a reverse mortgage out and use the tax free monthly tenure payments  to supplement his income back to a more normal state.  His plan is to maintain his lifestyle and when his investments recoup their value and that income returns to normal he will reduce the tenure payments he is receiving on the reverse loan.

I spoke with another client today, who basically wants to do the same thing. He is looking to have some of his equity reserved for his use, should he need it in the future and to supplement his lower returns on his investment income. Some smart retirees are figuring out that even with the high closing costs, the fact that the interest rates are low, and the loan proceeds income is tax free seems to be a logical move to help them maintain their lifestyle and protect their other investments.

A couple of clients are considering using a reverse mortgage to help them to delay taking their Social Security so they can take advantage of a higher SS payment later.  And some of those folks are thinking that even if they sell their home when they do take the Social Security, they will be able to still get enough equity from the sale to buy a single story new home to retire in and finance that with a reverse mortgage.

Another couple I worked with at the beginning of this year, saw their monthly income reduced from $10,000 per month to just $5,000.  Not a bad income, but still very difficult to adjust too.  My original recomendation was for them to sell the home but the older borrower was in his 90's and just couldn't bear to go thru packing and moving after 40 years in the house. With the new higher lending limits this year for FHA reverse mortgages they were able to increase their income, remain in the home and will still have tons of equity down the road. 

I've already written about the dear lady in LA who got her reverse just to have money availabe to provide for her home health care should she ever need it.  She swears that she will never move to a nursing facility, no matter how nice.

Lots of interesting things to consider.... 

As always I love to hear your comments, ideas, suggestions.  Tell me what you think!

  10 Popular Reasons for Obtaining a Reverse Mortgage. (At least in my experience!)

1. Eliminate Monthly Mortgage Payment
2. Replace Investment Income Lost Due to Market Performance
3. Supplement Inadequate Retirement Income - It is amazing how many senior  homeowners are trying to make ends meet on less than $1300 a month!
4. Repair and complete Deferred Maintenance on an Older Home.
5. Help Out Family
6. Set Up Credit Line For Future or Immediate Replacement of Lost Income Due to     the Death of Spouse.
7. Payoff Other Debts (Credit Cards, Automobile Payments)
8. Set Up Credit Line to Fund In Home Health Care.
9. Large Purchase -  Vacation Home, Investment Property, Motor Home, Car
10. Remodel & Add On to the Home.

Thanks for the reminder! One of the newest reasons to get a reverse mortgage.  Buy A New Home with No House Payments!

Reverse Mortgages are a financial tool designed to address cash flow.  This tool can be used for all sorts of reasons, some good and some poor.  Be sure to discuss your plans with a knowledgeable financial advisor well versed in the reverse mortgage product, who understands your goals and financial situation.  For information about impartial 3rd party reverse mortgage counseling please link to HUD's HECM Counseling Page - http://www.hud.gov/offices/hsg/sfh/hcc/hccprof18.cfm

Mrs. H, in Southern California just signed her loan documents on a reverse mortgage. At over 80 years old she qualified for an amount sufficient to pay off her current loan and establish a line of credit for over $300,000.00.  With the advice of her financial planner, and the blessing of her children, she left the money in a line of credit where it will grow. Her goal is to use the funds to pay for in home health care at such time as she may need it.  Since she hasn't "borrowed" the available funds in the line of credit, her equity in the home is far greater than if she had taken all the funds in a lump sum. 

Based upon HER needs I think this was a great option!  Another person may have been better served by selling the home and moving into an apartment or condo and investing the proceeds into something safe.  But she did not want to leave the home and would have had to pay a capital gains tax which would have been considerable as the home was appraised at almost 2 million dollars and she bought it for less than $70K over 40 years ago! The tax hit on that would have been far greater than the cost of the reverse mortgage. More importantly, it would have broken her heart to ever leave her home.

What do you think?

In this post - An example of a way the HECM For Purchase could be used.  I always find that if I can place new learning into an example, then the learning has a better chance of sticking.

First thing to know is that the Reverse Mortgage for Purchase (or HECM For Purchase) is not your typical 80/20 loan.  The required down payments will be much larger than 20%.  I know that's not the best news, but keep reading.  This loan requires no minimum credit score or debt to income!  So if you have a senior homebuyer who just sold their big ole family house that they bought for $32,000 30 years ago for $350,000 they just might have a sizeable down payment!   

Here's one example:

Mr. & Mrs. Barry Buyer (fake name), just sold their rambling family home (hopefully you were the listing Realtor!) and they netted after all costs $150,000.00.  Now they want to buy a 3 bedroom 2 bath single story home somewhere in Temecula or Murrieta.  Their income is about $3000.00 per month between the two of them.  What are you going to show them?  Anything over $150,000 will either cause them to tap into savings or require a loan of some kind.  Any loan is going to require monthly payments and probably for 30 years.  Maybe they'd be better off renting - or maybe a reverse mortgage would work.  Here's how.

You show them a beautiful 3 bedroom home in Murrieta listed at $280,000. It's fairly new, in a great neighborhood and single story of course!  Newer is important because they are planning that this is the home they will live in until they "graduate" so ease of maintenance is a key buying point.  In this example our buyers are able to purchase a higher value home and STILL never have to make a home payment.

Here's what happens: 

Home Price                              $280,000

Closing Costs                           $  12,808  (including title, escrow, MIP, loan fees.)

Funds Needed to Close            $292,808

Where the money is coming from?

New HECM Loan                    $161,122

Cash From Buyer                     $131,686 (leaving them some change)

$ From Lender and Buyer         $292,808

So - Depending upon your clients dreams of retirement life they may find that a reverse mortgage is an appropriate vehicle for purchasing their "rest of life" home.

Some cautionary words - because the loan never requires a monthly payment, each month the loan balance goes up impacting the homeowner's equity.  In essence the remaining equity is where the payments come from.  If the home does not appreciate much and our homeowners live long enough there could come a day when they have zero equity or are upside down.  Then what?  Well, as long as the homeowner is living in the home and paying the property taxes, keeping the home insured and in good maintenance there would not be a default.  So the homeowner can still remain in the home with no payments. 

So what happens when they die?  Well, it depends upon what the heirs want to do?  If there is equity - sell the house and keep the change, refinance the balance, or pay it off.  Exactly the same as they would if a forward mortgage was encumbering the home.   If there is no equity left, then they have two choices - one, pay the balance due and keep the property or two, sell the home for fair market value and the lender will get the balance of what's left by filing a claim on the MIP Insurance on the loan.

These are very simple explanations - for a more detailed explanation please read the HUD guidelines at. http://www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm

Which in part say the following: "The HECM insurance guarantees that you will receive expected loan advances and that you will not have to repay the loan for as long as you live in your home. The insurance also guarantees that, if you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home."  BUT-if you sell it must be an arms length transaction, meaning if the balance due is greater than the present value; you cannot sell it to a relative for market value to excuse the remaining balance.  It's just like any other FHA insured loan in that respect.

Ok - this post is way too long already... I'll finish up now and post another sample scenario tomorrow!   I'm heading out to help a client who already has a reverse mortgage, take advantage of the new higher limits (lucky people live close to the beach and their little bungalow is worth a heap of money even in this market) they can access another $100K and still have tons of equity and no monthly payments.  They have no children to leave the equity too ... "Someone's going to spend our equity -may as well be us!

Reverse Mortgages are a type of home loan.  Most reverse mortgages are a HUD/FHA insured home loan that allows you to liquidate some of your equity in order to payoff existing mortgages as well as generate additional cash flow.  They are called HECM Loans.  HECM stands for Home Equity Conversion Mortgage.

There are 3 types of HECM Loans.

• Adjustable Rate HECM (the original FHA Reverse Mortgage!)
• Fixed Rate HECM
• HECM For Purchase (either Fixed or Adjustable)

Reverse Mortgages are regulated and insured by the Federal Housing Administration (FHA).  By law, you can never be forced to sell your home of move.  You will always retain the title to your home, and you can still leave your home to your children or whoever you choose.  There is almost no risk of losing your home.  The homeowners obligations are threefold:

• Live in the home as your Primary Residence (at least one spouse must live in the home)
• Keep the home insured and property taxes current.
• Keep the home in good condition.

Who Qualifies?

• Senior Homeowners with enough equity, over the age of 62.
• Most 1 to 4 family Residences qualify.
• FHA Approved Condominiums
• Post 1976 Manufactured Homes on their own lots.*

Some of the best features of an FHA Reverse Mortgage are the methods that you can access the equity in your home!

• Lump Sum - Take all the money you are entitle to in cash/direct deposit at the close of escrow.
• Tenure Payments* - Monthly payments to the homeowner for as long as they live in the home!
• Credit Line* - Leave the funds in a line of credit (that has a guaranteed growth feature!) to be accessed as you need it.
• * Both the Tenure and Credit Line Options are not available on the Fixed Rate Reverse Mortgage.
• Any combination of the options listed above.

As with all other FHA Home Loans, a reverse mortgage is a "Non Recourse" loan.  This means that the lenders only security for repayment of the loan is the home itself.  The lender has no rights to lien any other assets of the borrower or their estate.  Only the home itself can be used as the lenders recourse to a foreclosure.  If the home is worth less than the outstanding balance of the reverse mortgage then the lender must go to FHA for reimbursement of any loss.  The loss will not generate any judgements or liens against the borrower or their heirs. 

To see if you or your clients may benefit from a reverse mortgage please email me the following information.  I will not call you unless you ask me to and provide your number, but in order to get you a decent estimate I need the following information.

• Birthdays of all persons on title to the home.
• Home Value.  (if you provide your address I can do a value check for you)
• Current Home Loan and Equity Loans on the property.
• Zip Code