What is a Reverse Mortgage and how does it work?
A reverse mortgage is a financial tool. It is a mortgage and does place a lien on your property. It is a lien on a property where the lender expects to earn interest on their loan from the equity in the property over time after the property is paid off. When people think of a mortgage, they think of making monthly payments to a lender which will reduce the balance of the loan they owe the lender. That is a forward mortgage. Typically, a forward mortgage will start with a high balance and over time the balance is reduced by monthly principle and interest payments. Over time if the loan is not refinanced and if the borrower pays all their payments they will eventually pay off the loan and the property will no longer have a mortgage lien against it. Let’s turn all this around. Let’s look at it in reverse. A reverse mortgage will start with a lower balance and over time the balance will increase as interest grows on the principle balance. When a borrower has a reverse mortgage they typically do not pay any payments to the lender, but they can if they wish. Most of the time people want to ‘eliminate’ their monthly mortgage payment. Consider this example: Bob is 67 years old. He owes $100,000 on his home which is worth $400,000. He is paying $1000 per month on his mortgage. The $1000 monthly payment is a burden that Bob wishes to eliminate, but he also wants to live in his home for as long as he can. When Bob takes out his reverse mortgage he will no longer be obligated to pay on the mortgage. The balance will increase over time, but Bob is relieved of his monthly obligation to the ‘forward’ mortgage. Bob has every ‘right’ over the property that he had when he had his forward mortgage. He is obligated to pay his property taxes and property insurance. The lender can include these payments into Bob’s loan and sometimes this is required if Bob has had financial difficulties. This is analyzed on a case by case basis. Bob can live in the home for as long as he wants or as long as he is able to live in the home. He is never required to make payments to the reverse mortgage. Bob can sell at any time he wishes and the equity belongs to him. If Bob dies, his family has the right to sell the property and the equity belongs to his estate or his heirs. The only time Bob could be forced by the lender to do something is if Bob doesn’t pay his taxes and/or his insurance or if Bob lets the house fall into disrepair. If Bob falls ill but wants to eventually return to his home, he can do this as long as he has not been out of the home for a year. Once Bob has moved out of the home permanently, the family or the estate will have 6 months to sell the home or to pay off the reverse mortgage. As long as a real effort is put forth to sell the home, the lender can extend the amount of time allowed to sell the home up to 12 months and perhaps longer depending on the situation. This should give the heirs or estate plenty of time to sell the home at a reasonable price.
It is my personal belief that a reverse mortgage should be centered on the borrower’s quality of life. You worked hard to pay off your house or to pay down your mortgage over the years. The equity in the home is essentially dead money that is unusable for a person who does not wish to pay monthly payments on a forward mortgage. Putting your home equity to work for your quality of life isn’t always the best choice, but for many seniors it is a great choice that will improve the quality of their life in their golden years.
How do I qualify for a Reverse Mortgage?
Unfortunately, not everyone qualifies. Credit and your ability to pay your taxes and insurance are considered. You must be 62 years of age or older. You must have an acceptable credit profile and enough income to cover any other debts you have along with your real estate taxes and insurance. Also, you must have enough equity in the home. If you only have 10% equity in the home, then you will not qualify. This is where I will help you determine if a reverse mortgage is the right product for you. You don’t have to be retired to get a reverse mortgage. You don’t have to be in financial distress to get a reverse mortgage. If you are in foreclosure, it is possible for a reverse mortgage to cure that if the circumstances make sense. Again, this is where I will help you work through the details.
Why would a reverse mortgage be a bad choice for me?
The most important thing a reverse mortgage loan officer should do for you is to make sure this is a smart financial decision for you. They should take their knowledge and stand in your shoes and guide you to the decision they would make for themselves if they were you. This is what I strive to do every day in my mortgage practice.
Reverse mortgages are not for everyone. Let’s look at the primary reason why you might not want to do a reverse mortgage. The main reason why someone might not want to do a reverse mortgage is because they want to leave the property or the equity in the property to their family. This is a big concern especially if you don’t have anything else to leave your family. It is also a big concern if your kids are expecting to get your house (or the money tied up in the house) when you pass on. I encourage anyone who thinks they need to discuss this with their children to do so. You don’t want to take out a reverse mortgage and then have your children get upset with you. That is not how you want to live out your golden years. However, if you are struggling financially and the equity in your house is your ticket to a better quality of life, then you might need to make a decision that could upset your family. You have to decide if you are going to continue to make sacrifices for your kids. On the other hand, I encourage kids who have parents that are struggling and who could qualify for a reverse mortgage to seriously consider helping their parents understand both the benefits and the costs of doing the loan. Depending on your age, you might be able to obtain a life insurance policy that could pay off the loan if you pass sooner than you expect. That could be a tool that would help your children be open to the idea or it could help you make the decision if you know they will have the life insurance policy proceeds. Again, as your mortgage specialist, I can help you consider these decisions and look at all aspects of the loan.
How much money can I get if I do a Reverse Mortgage?
This isn’t a question that can be answered without a lot more information. The answer is dependent on your age and the value of the property (up to a limit determined by HUD) and the balance of liens on the property. I suggest that you give me a call and we can look at your scenario to determine what you can get out of a reverse mortgage.
Can I use the money I get from a reverse mortgage for anything I want?
The simple answer is yes, if you qualify for the loan. If you are trying to get the loan to pay off delinquent debts then things can become more difficult and you will need to call me so we can discuss your situation. If you qualify for the loan and you get $100,000 cash from the loan, this is your money and you can use it as you please barring ridiculous things like taking your house apart or something crazy like that!! But maybe you want to buy that condo in Florida or Arizona so you have a place you can go in the winter for a few months and then maybe you rent it out when you aren’t there and you make some money off that investment. You could also invest the money. You could help your child with some of their expenses or send a grandchild to college. You could do home improvements to make your house easier to live in during your golden years. Take that trip to Europe you have been dreaming about for the last 15 years! Enjoy your life!!
What are the closing costs on a Reverse Mortgage?
Closing costs on a Reverse Mortgage are very similar to a forward mortgage with the exception of the mortgage insurance premium. The mortgage insurance is required when you get an FHA insured reverse mortgage. This figure is based on the loan amount and therefore varies. It is not a small amount of money, but, unlike most mortgage insurance, it actually protects you and your estate from owing too much on the property. I will address this further below. When you get a reverse mortgage you are obligated to pay for your appraisal when it is ordered. You are also obligated to pay for your counseling which is required before you can get a reverse mortgage.
How does the FHA mortgage insurance protect me and/or my estate?
One of my favorite aspects of a reverse mortgage is that you can never owe more than the home is worth! This is a big deal for you and for your family. The best way to explain this is with an example. Bob has a house that is worth $400,000. He owes $100,000 when he takes out his reverse mortgage. After 15 years, Bob passes away. He lived in the home for all that time without a mortgage payment and the reverse mortgage allowed him to enjoy his retirement years more than he would have if he had to keep paying his ‘forward’ mortgage. But just before Bob passed away the housing market crashed and when he died his $400,000 house was only worth $200,000. Also, at the time of his death, the reverse mortgage balance is $250,000. Most people would think that his estate is going to have to do something about the $50,000 of ‘negative’ equity. But this is not the case!! His family and his estate are not liable for the $50,000 because the FHA mortgage insurance is in place and that will cover the $50,000 short fall. Conversely, if the house was worth $600,000 when Bob died and Bob still only owed $250,000, his estate can get the equity from the property after the sale. Or if a family member wants the house, they simply have to pay off the reverse mortgage. This can be done with cash or a mortgage. If the heir is of age to do a reverse mortgage and they want the house, it is possible that they could get their own reverse mortgage on the property.
My Promise to You
When I look at any mortgage, I put myself in my clients’ shoes with my knowledge and I offer to them what I would do for myself if I was them.
I have seen older people, who should be enjoying their retirement years, struggle with mortgage payments when they don’t have to. I know that I don’t want to be struggling to get by during the last years of my life and it pains me to see anyone struggle during their retirement years.