Monthly Archives: August 2009

But Wait, There’s More… Reverse Mortgage Facts The Media Needs To Know

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Man reading newspaperWith the fear factor and incorrect information the media is publishing, seniors don’t even want to include a reverse mortgage with other options they are considering to determine which would be the best for their situation.  Unfortunately they just assume the reverse mortgage shouldn’t be done and that any other option would be a better decision.  Maybe another option would be best, maybe not.  The media needs to stop throwing the baby out with the bathwater and let the decision be based on the facts of the reverse mortgage, not on a fear factor.

The media and politicians need to stop assuming that a conventional mortgage or HELOC is available to seniors.  Generally seniors don’t qualify for these loans.  And even if they do, they too have costs similar to the reverse mortgage, a higher interest rate than the reverse mortgage, and risks to the homeowner and the lender when “life happens” and payments can’t be made.  Even if they do qualify today, what happens in six months, a year, two years or five years when they can’t make the payment?  Doing the reverse mortgage instead of a conventional mortgage or HELOC is generally a better option for seniors.  Read “Is Waiting To Do A Reverse Mortgage The Best Decision?”

Reverse mortgages are not riskier or more complex than any other financial decision made by seniors, or anyone else for that matter.  In fact, NOT getting a reverse mortgage could be riskier for a senior.

Homeownership offers more benefits than renting.  One owns the home, and can benefit from the equity.  If renting, one has the expense of monthly payments and covering utilities (whether included in the rent or separate) and insurance.  If a senior does the reverse mortgage, payments are not required which improves their cash flow (no mortgage or rent payments).  The amount of their utilities, taxes, insurance and maintenance of their home is probably less than monthly rent of another property and they are at the mercy of future escalating rental rates.  If they can’t afford the rent payments where are they going to live?  On subsidized housing?  The reverse mortgage allows them to stay in the home without monthly payments and allows them control and choices of their living conditions.

Reverse mortgage borrowers are, however, still responsible for paying their taxes, insurance, and maintaining the home as they would be under any circumstances.  If they don’t pay taxes the county can foreclose, if they don’t have insurance and there is a fire or other destruction to the home, they won’t have a home, if they don’t maintain the home and it becomes really run down the city may fine and/or evict them whether or not they have a reverse mortgage.  If they are renting and can’t pay the rent they would be evicted.

Another common statement is the reverse mortgage has high closing costs – compared to what?  What other financial option is available that offers seniors the same benefits?

It shouldn’t be considered a loan of last resort.  As Mary, one of my borrowers who used the loan in order to retire stated, “When you retire is IS the last resort – you no longer have that income coming in.”  So what do you consider a last resort?

That reverse mortgages could be the “next sub-prime” mortgage is another fear the media and politicians are forcing on all of us with no substantial or viable comparisons.  Don’t let this keep you from a reverse mortgage, read my article, “Don’t Let Fear Keep You From A Reverse Mortgage But Know What To Look For In A Lender.”

The reverse mortgage has protections unlike any other loan or financial option.  Borrowers are required to go through third party HUD approved counseling which reviews the program, costs, positives and negatives, risks, and other options that may be available for them.  HUD is implementing a new counseling protocol for added protections.

Enjoying Life with Their Reverse Mortgage

Enjoying Life with Their Reverse Mortgage

Let’s review the facts of some benefits a reverse mortgage provides:

  • The title stays in the borrower’s name same as with any mortgage.  The borrower owns the home, no one else does.
  • The borrower may be able to stay in their home as long as it’s their primary residence or until their 150th birthday.
  • Lower interest rates than other loans – historically the reverse mortgage interest rates have been lower than conventional loans, lines of credit and credit cards.
  • A borrower won’t lose their home because of a reverse mortgage – they don’t have to make monthly payments.  They are however, as with any loan, responsible for taxes, insurance and maintaining the property and abiding by the terms of the loan agreement.
  • The reverse mortgage funds are tax-free (although if proceeds are used for certain purposes taxes may apply – consult with a tax advisor).
  • The proceeds are not considered income so Social Security and Medicare are not impacted and one can receive Medicaid.
  • The HECM is government insured and guaranteed to be available for borrowers. (Currently proprietary reverse mortgages are not available or are limited by county and city offerings.)
  • Borrowers or their heirs get to keep any remaining equity after the loan is paid off.
  • Allows access to more funds without paying additional closing costs – there is a growth rate with the line of credit and monthly payment options.
  • There are no out of pocket costs, income or credit qualifications for the reverse mortgage.
  • There are no prepayment penalties.
  • Seniors can have money for covering their everyday living expenses, making home repairs, covering medical expenses, paying for long term care, paying taxes and debts, paying off their current mortgage to improve their cash flow, buy a new car, taking a desired vacation or visiting children who live out of town.
  • The reverse mortgage has helped many seniors save their home from foreclosure.
  • The reverse mortgage gives seniors their security, independence, dignity and control.

Ed wrote, “Our reverse mortgage is great.  Gives us some elbow room.  Special thanks to you.”  Now these are the facts the media should be using!

© 2009 Beth Paterson http://bethsreversemortgageblog.wordpress.com 651-762-9648

The Media Needs The Reverse Mortgage Facts!

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ManReadingThe media paints a negative picture of reverse mortgages by using incorrect or misleading information.  It’s unfortunate and frustrating from the standpoint that this scares people from getting the facts and making a decision based on the true facts.  A recent example of this is the September issue of Consumer Reports and TV interviews based off the Consumer Reports article.

Consumer Reports starts out with a story about Mr. Minor who is facing losing his home after his wife passed away, implying it was because of a reverse mortgage.  As you read later in the article, Mr. Minor was not 62 when a reverse mortgage was done on the home with his wife who was over 62 as the borrower.  He was under the impression that his name could be added on the title when he turned 62.

The fact is that when a couple is doing a reverse mortgage with a non-borrowing spouse (Mr. Minor in this case because he wasn’t 62 at the time of the origination of the reverse mortgage), lenders require the non-borrowing spouse sign documents stating they are aware they may lose the home when the older spouse is no longer in the home as their primary residence.  This would also be covered with the required counseling and then again at closing.  It is unfortunate that Mr. Minor had a wrong impression or may have been told incorrect information from a loan officer.  Being told this information is a very rare circumstance – so the loan officer should be addressed, not the whole reverse mortgage industry blasted with negative media.

Mr. Minor says he was misled that the reverse mortgage was a good way to pay his wife’s medical bills.  So if they didn’t do the reverse mortgage, how would they have paid the medical bills?  Obviously the funds they received did benefit them to pay those medical expenses.

This article states that Mr. Minor owes more than the home value implying that the reverse mortgage caused this.  What is not pointed out here is the fact that Mr. and Mrs. Minor would have used those funds during the term of the loan.  If funds aren’t used, they are not part of the loan balance that has to be repaid, they remain equity in the home.  Whether to pay medical bills, medications, home care, daily living expenses or used to pay off a current mortgage (eliminating the mortgage payments so they had those funds for other uses), the majority of the loan balance was used by them.  The rest of the loan balance would have been for interest, FHA Mortgage Insurance Premium (MIP), and servicing fees.  Any loan has interest and servicing fees, whether a home loan, auto loan, bank line of credit, or even credit cards.  Have you added up what you paid in interest expense over the term of your loan(s)?  Yes, you are making payments so the debt is reduced over time but you have paid the interest.  And with the reverse mortgage payments aren’t generally made so loan the balance increases to be paid when the home is no longer the borrower’s primary residence.

Another fact that is often not stated or misstated is that the reverse mortgage is non-recourse.  This means there is no personal liability to the borrower or the estate if the loan is being paid off and not kept by the borrower or the estate.  So even if the loan balance is $200,000 and the home now can only be sold for $130,000, the lender is paid the $130,000 and the FHA Mortgage Insurance covers the difference.

Often called complicated, the reverse mortgage is a mortgage and while different than a conventional mortgage, they are not any more complicated than any other loan.  Seniors take out conventional loans and don’t necessarily understand all the terms or risks of these.  One risk on a conventional loan is that they may not be able to make the mortgage payment at a future date when “life happens.”  Borrowers may then face foreclosure.  Whereas the reverse mortgage helps seniors save their home from foreclosure.  There are many loan documents to help disclose all the details.  Additionally borrowers are required to receive counseling from a third-party to explain the loan details, this isn’t required with any other type of loan for seniors.  I have consistently been told that my book, “Understanding Reverse Mortgages,” and my education and explanations make it easy to understand.

Other misleading or misconstrued statements include the reverse mortgage is not right if the children want to keep the home.  While the loan will need to be repaid for the children to keep the home, they may still keep the home.  Let me tell you about a borrower who needed new glasses, teeth, clothes, and some home repairs.  She loved going to plays yet couldn’t even afford the local community plays.  She decided the reverse mortgage would help her afford her needs and enjoy her life.

After we had reviewed all the facts, positives and negatives, and she had completed the application, she called and said she wanted to stop the process because her son didn’t want her to do the reverse mortgage.  When I asked why, she said he wants to keep the house after she’s gone.  Upon further questioning she said it was so he could have the house and rent it out after she was gone.

My response was to ask, “So you’re going to do without your glasses, teeth, clothes, home repairs, affording the little things you enjoy so your son can make money after you are gone?”  I went on to ask, “Is he going to cover all these expenses of things you need now?”  Of course the answer to this question was, “No, he can’t afford to.”  I explained that he could still have the house after she was gone, he would need to pay off the mortgage balance, maybe by getting a new mortgage but then he could rent it out and make money on it that way.

Celebrating her reverse mortgage

Celebrating her reverse mortgage

She went ahead and did the reverse mortgage.  I have received a call from her a couple times a year since she closed her loan 4 years ago.  She is pleased that she did the reverse mortgage and the difference it’s made in her life.  And when she passes away or is no longer in the home, her son has the option to pay off the mortgage balance and keep the home.  In the mean time she’s had the use of funds to meet her needs and make her life enjoyable.

There is a statement that taxpayers are making up the difference on default loans or will need to in the future.  The fact is that borrowers pay a FHA Mortgage Insurance Premium to cover any defaults.  Unfortunately the MIP was put in the general fund and now there is a risk that there may not be enough funds for the current fiscal year.  Plenty of borrower paid MIP dollars have been paid into FHA over the years but unfortunately the federal government doesn’t hold these funds in escrow type accounts as they use these funds for other general HUD programs.  If these funds had been accumulated and reserved for the HECM, this would be a non-issue in the current year.  This issue is brought on by the way the government manages these funds.

Other misrepresented statements are about closing costs being high.  Please see my post “Reverse Mortgage Closing Costs – High or Mythical?” for the facts on this.

Regarding the media’s statements that the reverse mortgage should be a last resort read “AARP Has It Wrong About Reverse Mortgages” and “Reverse Mortgages Help Celebrate Independence.”

The media needs to provide the facts, not use scare tactics.  When borrowers have the facts, the decision to do the reverse mortgage can be made intelligently.  And, as with the hundreds of thousands satisfied reverse mortgage borrowers, those deciding to do the reverse mortgage based on the facts will find their life is much better, living with security, independence, dignity and control and a peace of mind.

In fact, today I received a call from a borrower who said, “I could not pay my bills without my reverse mortgage.  I’m glad I did it to maintain my lifestyle.”

© 2009 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-55

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Is Waiting To Do A Reverse Mortgage The Best Decision?

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Happy Minnesota Reverse Mortgage Borrower

Mary, A Happy Minnesota Reverse Mortgage Borrower

Let me introduce you to, Mary, a Minnesota Reverse Mortgage borrower whose home value, as most homes, had decreased over the last few years.  While she didn’t have any mortgages to pay off and didn’t have immediate needs for the funds she decided to do a reverse mortgage now instead of waiting.  Her decision was based on the fact that if she waited her home value may continue to decrease whereas if she did the loan now she would have the funds in the line of credit for future use and they would grow so more funds would be available when she needs them.  Additionally if she waited the Expected Interest Rate (used to determine how much can be loaned) may be higher making less funds available to her to her in the future.

Over the last few months we have talked with seniors whom we originally talked with 2, 3 or 4+ years go and had educated them about the reverse mortgage option.  At that time they decided to wait and not do a reverse mortgage.  Some even did a conventional mortgage or what we in the industry call a “forward” mortgage.  Now “life has happened” and they decide they now want to do the reverse mortgage.  Unfortunately with many of these seniors we have to tell them the sad news that less funds are available now and in some cases there aren’t enough proceeds to pay off their current mortgage, sometimes they are short $20, 000, $30,000 or more.  This is due to decreased home values and changes in the Expected Interest Rate, the interest rated used to determine how much can be loaned.  We are finding this can also be the case for even those we talked with just 6 months ago.

Let’s compare doing a reverse mortgage now to waiting 5 years before doing your reverse mortgage.

To determine how much is loaned with a reverse mortgage we use your age, your home value, and Expected Interest Rate.  With FHA Reverse Mortgages the Expected Interest Rate is calculated weekly by the Federal Government and is used to determine initial funds available.  The Expected Interest Rate is currently based on the LIBOR SWAP, as this is considered a long term projection of future interest rates.  As the Expected Interest Rate changes to a higher rate, in the future less initial funds could be available to borrowers.

While home values are a little lower right now  home values will most likely rise in the future.  It is also likely the Expected Interest Rate will go up.  This means that even with the future increased home value, the amount available on the reverse mortgage could be the same or less if you wait to do a reverse mortgage.  For example:

TODAY 5 Years from now Initial Interest Rate is currently below 4%
AGE 70 75
HOME VALUE $200,000 $225,000
*Based on Expected Rate of 7.14 8.14
AVAILABLE (Approximate net after fees) $92,710 $88,199
DIFFERENCE $4,511
These are all estimates.  Different assumptions would result in different numbers.  Interest rates are based on rates of 8/4/09.

Keep in mind, funds left in a Line of Credit grow. So if you have $92,710 in your line of credit today, in the future you could have more funds available to you.  Here’s an example:

Line of Credit Growth* No Draws Draw $4,000 each year
Today $92,710 $92,710
Year 1 Balance $96,515 $92,515
Year 2 Balance $100,476 $92,312
Year 3 Balance $104,600 $92,101
Year 4 Balance $108,893 $91,881
Year 5 Balance $113,362 $91,662
*Growth Rate based on Assumption of Expected Interest Rate of 3.529% in this example.  Actual Line of Credit Grows based on current interest rate plus .5%.

Consider having security knowing you readily have funds available in your Line of Credit without paying additional closing fees in the future.  When you use the funds each year you will be taking advantage of having the money you need during your retirement years and the benefit of improved financial health.Happy Minnesota Reverse Mortgage Couple

As Jerry stated, “The Reverse Mortgage enables us to live in our home without mortgage payments.  Line of credit will grow for our future needs.  The whole package is a win-win for my wife and me.”

Let’s look at a scenario if you are currently making payments on a mortgage, lien, or bank line of credit. There is still an advantage to doing the reverse mortgage now.  As an example, if you owe $75,000 and are paying 7% interest:

Interest Expense for next year on your current loan $5,422
Interest Expense based on reverse mortgage rate of 4% (4% is the approximate current interest rate on the adjustable rate program)
Plus .5% for FHA Annual Mortgage Insurance Premium (MIP)		 $3,446
Interest Expense based on reverse mortgage fixed rate of 5.56%
Plus .5% for FHA Annual Mortgage Insurance Premium (MIP)		 $4,673

In addition to lower interest with a reverse mortgage, eliminating your monthly payment will improve your cash flow. While the loan balance will rise because you are not making payments, the reverse mortgage is non-recourse which means there is no personal liability to you or your estate if the loan balance is higher than what the home can be sold for if you or your estate are not retaining ownership.

My borrower, Mary was happy with her decision to do her reverse mortgage sooner than later because she now has security knowing she has funds available for her needs, independence to live on her own without relying on others for financial support, she’s maintained her dignity of being able to pay her own bills, and continues having control of her life and the ability to make her own choices.

Waiting to do the reverse mortgage may not be the best decision.  Doing a reverse mortgage now may be more beneficial.  Are you ready to live with more now?

© 2009 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-4h

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.