Reverse Mortgage Information: January 2010

I love talking with my clients, prospects and closed clients alike.  They are my inspiration for most of the posts on my blog.

Yesterday, I was speaking with Jerry, a client who currently has a reverse mortgage.  He was interested in refinancing out of his reverse mortgage into a 30 year fixed rate "forward" mortgage in order to maintain plenty of equity in his home to leave to his children.  He has a great income, excellent credit and plenty of equity and should easily qualify for a conventional loan.

"Why don't you just make payments on the reverse mortgage?" I asked.

"Can you do that?"

"You sure can!" I replied.  "And let me tell you why I think that would be the best idea for you."   I went on to explain the following to him.

The current rate on your adjustable reverse is at a 1.25% margin over the One Month T-Bill (A HECM CMT 125 in reverse speak.) One of the lowest margins ever offered on the HECM. 

1. By making payments on the reverse mortgage you will not only eliminate or slow down the current principal balance increases, you increase the available line of credit. This feature is only available on the FHA Adjustable Rate Reverse product.
2. You avoid the cost of refinancing.
3. Payments on a 30 year fixed are mostly interest during the first half of the loan life, so basically the bank is now making @5.5% on the loan instead of the current less than 2%.  This reduces the amount of principal reduction you would see from the same monthly payment.
4. In the event the interest does adjust upwards,( and yes, everyone agrees that is bound to happen) you will have lowered your principal balance more than if you had refinanced AND.... Ready???  Here comes the best part!    The growth feature on your line of credit is directly tied to the interest rate being paid on your loan (plus .5%)!  That means that should you need to access equity in the future, due to an emergency of any kind, you will have more funds available to you when you need it. 
5. There is never a prepayment penalty on n FHA Reverse Mortgage, and yes, you can refinance at anytime, but carefully weigh the benefits of other options before you spend your hard earned equity.

Needless, to say, although I talked Jerry out of what would be an easy refinance for one of my forward team mates, I helped him to accomplish his goal of reducing his debt in order to leave more for his children AND be prepared for whatever the future may bring. 

As always, I love to hear your thoughts, comments and especially differing points of view.  Please let me know what you think.

I have posted on this topic before, and recently have had more questions and visits from seniors who are concerned about their reverse mortgage balances being higher than their home's current value.

I want to go into a bit of detail, but before I do here's the answer in a nutshell: 

As long as the borrower is living in the home, paying taxes and insurance and maintaing the home in good condition, there is nothing to worry about.  So please, do not lose any more sleep over this or don't let your loved ones lose any sleep.  All is well.

1. Is this a bad thing? 
2. Is the lender going to call the loan? 
3. What about my line of credit?
4. Can I sell my home? 
5. Will my children have to pay the difference when they inherit?

Here's the answers:

1.  It's never fun to owe more than your home is worth, but you should know that an FHA Insured reverse mortgage is a non recourse loan.  In fact all of the Jumbo Reverse Mortgages that I've ever dealt with are also "non-recourse" loans.  Non recourse means there is no "personal" liability for the borrower.  If the lender takes a loss on the loan, they cannot obtain a judgment or lien against the borrower.

2. As long as the senior homeowner occupies the home as their principal residence, pays insurance and taxes, and maintains the home in good condition the loan is not in default.

3. If you have an available balance in the line of credit for your reverse mortgage, it is available to you to withdraw.  Even if the home value has exceeded your loan balance!  That is not true for traditional HELOCs (nice feature for seniors, I wish they had it for me...)

4.  Yes, you can sell your home. Anytime.  But if it will be a short sale you will need to work with the lender.  They will want to have an appraisal so that you don't "dump" the house and the sale will need to be an arm's length transaction.

5. Nope, the kids are fine.  If you pass away with a reverse mortgage and the loan balance is higher than the value, your estate will need to payoff the loan.  If there is no equity left, or the home is "upside down" the estate will most likely allow the home to go into foreclosure (which takes a minimum of 6 months on a reverse) and the lender will then sell the home and any loss will wind up being a claim for the lender to FHA. 

Note- If the family inherits the home, and the loan is upside down, the family cannot purchase the home for the current value.  Just as it is in the regular mortgage world any short sales must be "arm's length" transactions.

I hope that I have alleviated some fears and if you know of a senior who is losing sleep over their reverse mortgage or worred about whether or not getting a reverse is the right thing to do.  Please direct them to my activerain blog or my linked outside blog, www.coronareverse.com where they can find links to lots of free and interesting information without any pressure.