Reverse Mortgage Information

Savvy Senior Uses Reverse Mortgage

I was fortunate to recently work with a senior who was very strategic and smart about using her home equity.  This 82 year old was as sharp as they come, highly educated and in the financial field.  She needed to access $300,000 for a short period of time (less than a year) and didn’t want to withdraw funds from retirement accounts, IRA’s, CD’s and the like.  So she looked into the new HECM SAVER.  

Things she considered:  

1. Upfront Fees - Much lower on the SAVER
2. Interest Rate - Lower on the Adjustable
3. Available Funds - SAVER provided plenty for her needs and using the ARM allowed her to only access the amount she needed.

Because she lived in a high value home worth over $800,000, she was able to qualify for $344K in funds with zero origination fees, zero upfront Mortgage Insurance Premium.  In about six months she will repay the reverse mortgage down to a very small balance to keep the equity line available should she ever need access to it.  (No prepayment penalties on a HECM Reverse Mortgage)  
Here is a snapshot of what she did.

• $800,000 Home Value
• $344,000 Appx Available Loan based upon Age, Interest, Lending Limit
• $     2,400 Closing Costs
• $       0 Payoff Current Mortgage
• $341,600 Available Loan Proceeds
• $300,000 Lump Sum Disbursement to her Checking Account
• $  41,000 Line of Credit

In six months, when she is ready to repay the loan, I advised her to just pay the loan down to a very small balance. (If she completely pays it off that will close the loan) Since the loan is an “Open-Ended” loan if she just pays it down her line of credit will correspondingly increase.  That increased line of credit can be used in the future for unexpected financial needs that may come up (Medical Expenses, In Home Care, Other Needs)... or she may never need it.  The carrying costs on that paid down loan would be very small. In my personal opinion this is a great example of a strategic use of of an HECM SAVER Adjustable by a savvy Senior!

I had two phone calls today from family members of reverse mortgaged senior homeowners.  One found me through my blog here and the other from a mutual business acquaintance. These two calls have me writing today about some things that borrowers and their families should know.

First

I know you don’t tell your parents everything and guess what?  They don’t tell you everything either.  But I think it ‘s a good idea for someone that the senior knows and trusts to understand the reason the senior has taken the reverse mortgage and what happens when the loan comes due.  The house belongs to the homeowners, not the kids, but when mom and dad pass away, it can be confusing and frustrating for the heirs if they have no idea what happened and are not prepared.

If they already have a reverse mortgage, they should not “deed” someone else onto title with them (like one of the kids). Technically it can be done - but it could be considered a default action on the reverse mortgage causing the loan to become due and payable.

Not to mention,  you could really mess up title to the property. Preparing a deed is serious business, not one that should be done lightly.  You should contact a real estate attorney to review the terms and condition of any liens or agreements currently affecting the property, to review and counsel you on the tax and estate ramifications of being added on title and to prepare the deed properly.

Second

If your parents have a reverse mortgage ask them if they are both on the loan.  If not you need to have a plan because once the last remaining “borrower” passes away, the loan will become due and payable, will the younger spouse have the funds to repay the loan?  Perhaps they have a plan already in place, maybe she has a large life insurance policy on the old guy.  That would be great.

Sometimes the younger spouse will have gone “off of title” in order for the older spouse to get a higher loan amount. In the situation I came across today, they did just that and if they hadn’t they would not have gotten enough money from the reverse to payoff their subprime, adjustable, negatively amortizing loan that they couldn’t afford.  It would have been worth it for the family and everyone’s peace of mind to come up with another solution at the time they were taking the reverse mortgage.  

Possible alternative solutions:

1.  Instead of taking out a reverse - sell the home and move to a more affordable apartment. The market was much better then and they could have gotten a lot more on their home.

2.  If the children wanted to keep the home in the family,  perhaps they could have purchased it from the parents and then rented it back to them.

3. Take the reverse in both spouses names since the younger spouse was over 62 and when the loan proceeds were not sufficient to payoff the existing mortgage - the family members could have gifted the shortage amount to the senior couple.  This way either spouse could have remained in the home without the loan becoming due and payable at the death of the other.

I think reverse mortgages are a wonderful financial tool for seniors who want to age in place in a suitable home. I don’t think they are for everyone, but I do think everyone should know and understand them.

A reverse mortgage does not have to affect a client/clients on Supplemental Security Income benefits.  Here’s what the Social Security Administration has to say about it on their website.

“If you enter into a valid loan agreement, the value of the cash or item you receive is not income and does not reduce your SSI benefit. However, any funds that you borrow which you do not spend in that month will count toward your SSIresource limit of $2,000 for an individual (or $3,000 for a couple) the next month.”

First, is  “HECM Counseling”. All borrowers must complete HECM Counseling prior to applying for a reverse mortgage and there is a fee for this.  You can expect to pay between $90 and $125 for the counseling.  Many agencies will allow you to have the fee paid from the loan proceeds, and they all will waive the fee in the event of a true financial hardship.   

The second upfront fee is usually an “Appraisal Deposit”.  The company I work for asks for an upfront $325 at time of application.  So, the counseling and the appraisal deposit would be two “out of pocket” expenses.

Other closing costs are:
Initial Premium for FHA Mortgage Insurance.  Depending upon which reverse mortgage loan you choose, SAVER or STANDARD the fee will be .01% of the lesser of home value or lending limit for the SAVER or 2% of the lesser of the home value or lending limit.  That’s a huge difference.  If you can get by with the SAVER, I recommend it!

Lender Origination Charge - lenders maximum origination fee is regulated at 2% of the home value up to $200,000 and then 1% of additional value beyond that, capped at a maximum origination fee of $6,000.00  Remember the maximum fee is regulated, but lenders can (and do) charge less!

Some states have additional fees, like Mortgage Taxes - but in Southern California you can bet on the following:

• Escrow (Settlement) Fees
• Title Insurance
• County Recording Fees
• Appraisal Fee (less any credit for prepaid deposit)
• Attorney Trust Review
• Notary Fees.
• 3rd Party Document Preparation

One more note - direct from FHA - prior to obtaining a reverse mortgage:

"9. Should I use an estate planning service to find a reverse mortgage?

FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HECM housing counselors are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you."

This blog reflects only my thoughts and opinions and not necessarily those of my employer.

As professional financial planners design retirement plans for their senior customers, using home equity should be addressed as part of the retirement and estate planning.

• Is the client planning to remain in their home?
• Do they currently have a mortgage payment? For how long?
• Do they have other real estate assets in their estate?
• Is there a benefit to using the equity to increase tax free cash flow?
• Do they have long term care insurance?

A reverse mortgage is designed to help homeowners aged 62 and older remain in their homes as well as maintain or improve their quality of life in retirement.  Reverse mortgage loans are non-recourse loan that unlock home equity and convert it into tax-free income. The borrower will continue to own their home and is not required to make any principal or interest payments as long as they live in the home.
Whether the goal is to augment income, pay for long-term care insurance, or just to enjoy their retirement years; a reverse mortgage Loan may be the key to unleashing their home equity to secure a well-planned retirement.
A Reverse Mortgage Loan provides the following features that aide in estate-planning:

• Provides funding for home health care or medical treatments.
• Provides funding for long term care insurance products.
• Provides funding for real estate taxes, homeowners insurance and upkeep.
• May reduce the impact of and provides funding for estate taxes.
• May be used to maximize legacy asset transfer.

Professional Financial planners will take the time to make sure they are well versed on current reverse mortgage options available to senior homeowners, including the new HECM Saver with its low upfront costs. The HECM Saver is a serious competitor to the traditional HELOC with advantages that a HELOC cannot provide.