Thursday evening, October 29, I attended a meeting for the California 62nd Assembly District on Economic Recovery. I was a volunteer for the HELP - Homeownership Education Learning Program booth, giving homeowners and homebuyers information about free classes put on by the organization.
While I was there a distinguished older gentleman came to our table. I asked him how he was doing with his home loan. With a glum look on his face and a soft voice, he said, "I don't think you can help me, I have a reverse mortgage."
I answered, "I'm sure I can help you, because reverse mortgages are my expertise! Tell me about your loan."
"I got it a couple of years ago when my home was worth a lot more than it is now. I can't sleep at night because the balance is higher than what the house is worth and I don't know what they are going to do. Will they take the house from me? I keep getting mail telling me I better do a loan modification or refinance before the rate resets and they say my mortgage is $425,000,00!! I've never had a mortgage for that amount! There must be a mistake on my credit report. I don't know what to do, can you help me?"
I took his hand and said to him. "I think I can put your mind at ease."
I proceeded to give him a quick lesson in the mechanics (blessings) of a reverse mortgage. I explained to him that no matter how high the balance of the loan became, he would never be required to make payments and it would never be foreclosed on if he did four things:
- Paid his property taxes. (He had)
- Kept the home insured. (It was)
- Maintained the home. "Of course!" he said.
- Lived in the home. "Where else would I live?"
Then I asked him if he knew whether or not he had a line of credit on his reverse mortgage, and he told me that according to his statement there was a line of credit of about ten thousand dollars. That was good news and I shared with him that no matter what happened to the home value that his line of credit was secure, insured by FHA to be available to him when he needed to take the money. (Note: Traditional HELOC's will lower, freeze or cut off lines of credit when value or borrower credit declines - just when you need it most.) I explained that the ten thousand was a nice little cushion should he have any emergencies and that if he did not use it, the funds available to him would continue to GROW EVEN IF THE HOME VALUE CONTINUED TO DECLINE! What peace of mind for a senior.
I then explained to him that because he had received his reverse mortgage a few years ago the margin was likely very low, meaning his current interest rate was probably in the twos! He agreed that was true. I shared how with a low rate like that the balance would not grow as fast as with a higher rate and that there was a possibility in 4 or 5 years if home values came back up that he could actually be in an equity position again. But, even if that didn't happen he would never have to leave the home as long as he did the four things I had told him.
I also explained to him that on a reverse mortgage, because the lenders are obligated to make line of credit funds available with a growth factor, and because the balance grows over time, a formula was established for determining the principal amount shown on the recorded deeds of trust. That formula is 1.5 times the home value, or FHA lending limit, whichever is less. So, if his home had appraised for $284,000 a few years ago, the lender would have multiplied that amount by 1.5 to determine the figure posted to the deed of trust - $425,000.00 I shared with him that the balance owed on the loan could be more or less than that and that he should look to his monthly statement to see how much was owed. I joked with him that if he lived to 100 his loan balance could be even higher than the 425.
Then he learned from me that no matter the loan balance, when he sold (or passed away and the kids sold it), the MIP Insurance on the loan would insure that he would never have to pay any amounts owing over the sale proceeds, as long as it was an arm's length transaction. However, if there was equity, then he (or his heirs) could sell and the remaining funds after payoff belonged to him. The bank only has a loan on the home, they do not have any ownership.
After our conversation, I could see he was feeling better. He was smiling and standing up straighter. I asked him if he thought he could sleep tonight and he answered, "Oh yes, you've taken a huge weight off my shoulders!" It made me feel so awesome to have put his mind at ease! I was higher than a kite! I gave him my business card and told him, that if he ever got to the point again that he was losing sleep over his reverse mortgage to please call me! I would be happy to keep him grounded with facts, not scare tactics or fiction.
If you (or your parents) are concerned about an existing reverse mortgage, you might be just fine. Remember to do the four things:
- Occupy the home.
- Keep current on property taxes.
- Keep the home insured.
- Maintain the home.
As long as those four things are done, you will not be foreclosed on, even if the amount owed is more than the home value, and you will never be asked to make a payment on the loan. I hope that this information will bring peace of mind to senior homeowners that may be wondering....please pass it on.
As always I welcome and encourage your comments and feedback.
Deborah Nance, Reverse Mortgage Professional for Corona, the Inland Empire and Southern Californa.
