Reverse Mortgage

Reverse Mortgages are only available to borrowers age 62 and older.  The home being financed with a Reverse Mortgage must be the borrower’s primary home.  Reverse Mortgages do not consider income, credit or cash reserves of the borrower.  This is an asset-based loan.  The loan amount is determined by a simple “home value / borrower age / LTV” calculation!

Until just a few years ago I had a very negative mind set regarding Reverse Mortgage products.  My negativity was largely based on my ignorance.  I was thinking from the perspective of borrowers whose income easily covered the costs associated with home ownership.  In this perspective, underwriting was responsible for approving the good applicants and rejecting the loan applications that represented too much risk.

NOT SO WITH REVERSE MORTGAGES.

Loan amount is based on the value of the house and the age of the applicant.  First, understand that these loans are not “cheap”!  There are loan costs that initially seemed steep to me as I compared them to “normal” home loans.  I didn’t feel that there was adequate value to the home owner to justify such costs…but then when my dad died and I was appointed as Trustee of the Family Trust and the assets that had been set aside to support my Mom, something happened to my perspective.

After months of looking at down-sizing her living accommodations, my Mom became aware that she just didn’t want to leave the house that she knows and loves.  She resigned to the inevitability that she will be forced to leave just because of the financial burden of supporting the house.  She went through the mental gymnastics of cutting back on some expenses to help compensate for the added costs of the larger-than-needed home.  Clearly, she loves the place and doesn’t want to leave any sooner than she must.

That’s when I took a “fresh look” at the Reverse Mortgage from an entirely new perspective (that I was too blind to see formerly) and in the final analysis I was surprised to find that under certain circumstances, a REVERSE MORTGAGE can be a bargain!  There are a series of specific decisions to make before settling on the structure of the loan to suit your specific desires, but the benefits can be incredible.

Actually, I now see a Reverse Mortgage as a basis for a broad new set of retirement strategies and will probably be included in my own retirement plans.  One of the first issues to consider is that there are LTV restrictions based on the age of the borrower.  The way it works is that the older the borrower, the HIGHER the maximum allowable loan will be.  Timing is a part of the equation, just like selecting WHEN you begin collecting Social Security benefits.  Find that “sweet spot” in your plan and work toward it.

My perspective changed and the realization became the costs associated with Reverse Mortgages, although not insignificant, represented a new horizon for the “happily ever after” for my Mom.  She agreed that she was not unwilling to go into an assisted living facility, “but could it wait for a year?”  I had been comparing costs of a Reverse Mortgage with costs of a regular conventional mortgage…a different animal altogether, for a different borrower altogether!  It was like comparing apples to oranges.

On the issue of cost, Reverse Mortgages are priced differently by each of the lenders that offer them.  Therefore, just as it makes perfect sense to do a little background investigation on conventional mortgage lenders and specific Loan Originators, the same can be said of Reverse Mortgage lenders.  It is healthy to assume that you will be leaving some of your money on the table for others if you don’t do a little checking on your own.  Kind of like seeing a shiny new convertible on the showroom floor and saying “I love it, I’ll take it…how much is it?”

The LTV (Loan-To-Value) of a Reverse Mortgage is determined by the borrower’s age.  If the borrowers are husband and wife, the LTV will be determined by the age of the younger of the two.  A word of caution is that in an attempt to get the highest loan amount, leaving the younger spouse off of the loan can generate a loan perhaps thousands more than if the younger spouse was included, BUT….this is no time to be “betting” on who will out-live whom!

Had a Reverse Mortgage been considered when my Dad was alive, I probably would have suggested that the loan be done in just his name, as he was a couple of years older AND “appeared” healthier.  All of the family members assumed that he would outlive our Mom.  Now, four years after his death, Mom is alive, well and active, AND LIVING IN THE HOME SHE KNOWS AND LOVES.   That may not have been the case had a Reverse Mortgage been put in place in my Dad’s name only when he was alive.  Keep reading….

PERHAPS THE COOLEST FEATURE OF A REVERSE MORTGAGE IS THAT THERE ARE NO PAYMENTS AT ALL!  But there is a sticking point that must be considered:  Upon the death of the borrower, or when the borrower no longer uses the home as their primary residence, you have just twelve months to either:

  1. PAY OFF the Reverse Mortgage and the accrued interest and take back title to the property and use the home as you please, or;
  2. Relinquish any interest in the property and the lender will simply sell the property (much like the recovery available to them in a foreclosure).

You can use this feature very favorably.  It’s a simple issue; get the home appraised when the borrower no longer uses the subject property as their primary residence.  If the value is higher than the mortgage pay-off PLUS the costs of selling the home, SELL IT and pocket the cash.  If the value is LESS…give the lender the keys!  No harm, no foul, no hassle.

So, you see, if the borrowers are not husband AND wife, the risk is that the non-borrowing spouse could be left homeless.  Be smart, plan conservatively.

Reverse mortgages have several structures.  Each supports a different financial strategy.  All of them are ruled by a chart that uses a value / age / loan relationship.  The following table (next page) shows the relationship of age to LTV (loan-to-value) as well as the “OPTIONS” available to the Reverse Mortgage Borrower.

Loan Limits will change from year to year, and are higher in HUD “high cost” areas.  Ask your selected lender what the loan limits are in your zip code.  They will tell you your area loan limits and your particular maximum loan amount (subject to an appraisal of your home). To make it easier for you to calculate your own personal numbers, this model uses a property value of $100,000.  The simplicity is that when you estimate the value of your home, multiply that value by the chart number, after converting the chart number to a percentage.

For example, look at age 65 and in OPTION 1 (column one, IN RED), you will see $51,442 which is the maximum loan for a home valued at $100,000 to a 65 year old borrower.    Converting that number to a percentage becomes .51442.  Let’s say your home is valued at $350,000; the loan calculation would then be ($350,000) x (.51442) = $180,047, the maximum loan for a 65 year old borrower for a home valued at $350,000.  YOUR MAXIMUM LOAN If you selected the fixed rate. OPTION 2 (column two, also IN RED), your converted percentage is .53942 and your maximum loan will be $188,797 on the $350,000 home.

THE SMALL PRINT for that chart.  All ages above 94 will offer a maximum loan equal to age 94 amounts.  These numbers were calculated by the calculation tool on the National Reverse Mortgage Lenders Association web site (http://rmc.ibisreverse.com).

An important benefit of a reverse mortgage is that it can even pay off the current debt on your home, so your available spending money will increase monthly by the amount that you are currently spending monthly on the principal and interest portion of your current mortgage.  Some retirees who’ve wanted to fulfill specific passions for as long as they can remember, but never had the time or money to do so…well maybe some of your bucket list can be accomplished with a Reverse Mortgage.

The above chart estimates the maximum loan / credit lines.  Interest rates and margins will vary as markets change.  The numbers generated by the calculators are “estimates” and may differ slightly from those you receive from private lenders.  The figures do not reflect any home repairs (homes and mechanical systems must be brought to safe, usable status before closing).

*OPTION 1:  HUD HECM (Home Equity Conversion Mortgage) Variable Rate (interest rate changes monthly), using the 1-month LIBOR index.

**OPTION 2:  HUD HECM Fixed Rate

***OPTION 3:  HUD HECM Variable Rate (interest rate changes annually), using 1-year Treasury index

CHOICES on the OPTIONS: 

1)   All three Options offer you a single lump sum advance choice.  See chart figures.

2)   Options 1 and 3 offer a line-of-credit account that the unused portion grows larger each year by an interest rate set by market conditions.  On September 21, 2010 Option 1 growth interest rate was 3%, Option 3 growth interest rate was 6.97%.

3)   Options 1 and 3 offer a monthly loan advance for as long as you own your home.  Much like receiving an annuity.  The amount on 9/21/2010 for Option 1 is $325.13/month and Option 3 is $184.80/month.

4)   With HECM, Options 1, 2 and 3, any combination of lump sum, credit line account and monthly advance.

REMEMBER, NO MONTHLY PAYMENTS!  What happens is the lender keeps a running tally of what interest rate accrues on the Reverse Mortgage.  The borrower makes no payments on the loan.  It is the borrower’s responsibility to pay the property taxes and home owners insurance, just like they would do if they owned the home with no mortgage.

These mortgages are unlike any you’ve known earlier in life.  I personally suggest that you discuss the options with your family and, if you have financial savvy people that assist in guiding your financial decisions, bring them in on the selection process.  This mortgage product is very special and should be discussed candidly with someone you trust to make decisions in YOUR best interests.

 

If you liked this post, share it with others: