This is a question that I was asked recently during an initial meeting from potential reverse mortgage borrowers. A great question that I think has a couple answers.
- People still haven’t heard of them. When I was talking with one of my reverse mortgage borrowers the other day he said he’s been mentioning that he had done one but is surprised on how many people still haven’t heard about them. While there are many ads and media coverage, some people are still unfamiliar with them.
- A lot of misinformation has been spread through the media, politicians and the community putting fear into the minds of potential reverse mortgage borrowers. Unfortunately the media, politicians and people in our communities have not reached out to the experts, those to who specialize in reverse mortgages, to get the facts but continually spread the misinformation. Even some of the articles that tend toward being accurate don’t get all the facts right. Or the comments on the article contain misinformation. This misinformation is what scares people from doing a reverse mortgage even when they could benefit from one.
Let’s look at the facts of reverse mortgages and some of the misinformation that people have that keeps them from doing a reverse mortgage.
A reverse mortgage is a mortgage that has special terms for those 62 and over. Unlike a conventional mortgage or Home Equity Line of Credit (HELOC) monthly mortgage payments are not required. Income and credit scores are not factors in determining one’s interest rate or how much can be loaned. As without or with a conventional mortgage, a HELOC, homeowners are responsible for paying their property taxes and homeowners insurance.
It is often stated that reverse mortgages are complicated or complex transactions. In reality reverse mortgages aren’t any more complex than a conventional mortgage or other financial products. Do you understand all the terms and features of a conventional mortgage or HELOC? Do you understand your 401K’s, stock investments or other retirement plans? What about your credit card(s)… do you know how they work?
My smart phone has so many bells and whistles I don’t understand all the options or how it works… complex yes, but I still utilize one and I don’t think I could live without it any more. If people are open to getting the facts, they will likely have a better understanding of reverse mortgage and might just find it useful.
People still think the bank or the lender will own the home once the reverse mortgage is done. Or the bank or lender will take ownership once the loan becomes due and payable. However, like a conventional mortgage or HELOC, the title remains in the homeowners name, the bank or lender does NOT own the home. When the reverse mortgage borrowers are no longer in the home as their primary residence the loan become due and payable.
The amount repaid is the amount borrowed by the homeowners including interest and FHA Mortgage Insurance Premiums. Any remaining funds go to the borrowers or their heirs. As a non-recourse loan, if the loan balance is higher than the fair market value of the home, the borrowers or their heirs don’t have to come up with the difference.
Other false statements often seen or heard are that reverse mortgages are a scam, only the lender benefits. They take advantage of people. Let me clarify, the most common reverse mortgage, the Home Equity Conversion Mortgage (HECM) is FHA insured and regulated by HUD – no, not scams but a valid loan using a home as collateral.
Borrowers receive many benefits in having funds to use without having to make monthly mortgage payments, improved cash flow without restrictions on how the funds can be used, being able to stay in their home or purchase a new home. Originators and lenders do get paid for reverse mortgage loans, but everyone gets paid for the work they do. Personally I find it rewarding to help people, and I’m not ripping people off, in fact I and others I know in the industry are certainly not getting rich in this career…there is a lot of work involved to originate reverse mortgages, but we’re passionate in making a difference for people. In fact, because of all the work, on some loans our compensation works out to very little.
Headlines have stated seniors are losing their homes to foreclosure if they don’t pay property taxes or keep insurance on the home. Think about it, with or without a mortgage if you don’t pay property taxes, the county will foreclose. If you don’t have insurance on your property and the home is destroyed you will have lost your home and you won’t have the money to rebuild or replace it. Neither of these are the fault of a reverse mortgage. But these false headline statements scare people to not do a reverse mortgage.
We often see or hear that the reverse mortgage should be a last resort, to refinance with a conventional mortgage or HELOC or sell. The problem with this is most seniors don’t qualify for conventional mortgages or HELOCs. And if they do, the borrowers have to make monthly mortgage payments. Even if they can make the payments now, if life happens they may not be able to make the payments in the future. Rather than being a last resort the reverse mortgage can help one pay for retirement, long-term care.
The unused portion of the reverse mortgage line of credit so more funds can become available in the future. And the funds in the line of credit could be higher than what one could qualify for in the future. This can be very beneficial to seniors and isn’t available with any other loan.
Seniors often want to stay in their home rather than moving so don’t tell them to sell. If they do sell, where are they going to live? They’d still have housing expenses…can they afford those or wouldn’t having no rent or monthly mortgage payments be more beneficial?
If they do wish to sell maybe to downsize, move closer to their children or to purchase the home of their dreams, the HECM for Purchase program gives them the option to purchase without having to make monthly mortgage payments.
Have you heard or read reverse mortgages are expensive? Have you looked at the costs of a traditional or forward mortgage? The costs are the same other than the FHA Mortgage Insurance Premium. With a conventional mortgage people want to know what the payment will be and what the interest is, they generally don’t pay attention to the costs. But when you look at the costs of the conventional mortgage you’ll likely be surprised, they aren’t really different from reverse mortgages.
HELOC’s may have lower up-front fees but the interest rate may be higher which in the long run could turn out to be more expensive than a reverse mortgage… besides one has to qualify on income, assets and credit. Additionally payments have to be made on the HELOCs. And there is a risk that they HELOC could be called due and at some point during the term the monthly payment must be increased to include the principal, not just the interest.
Other headlines or statements about reverse mortgages state the bank/lender gets the children’s inheritance. Another false one! The homeowners receive funds during the term of the loan, whether to pay off conventional loans or receiving funds monthly or draws from their line of credit. When the loan is being paid, due when the home is no longer the primary residence of the borrower(s), there may or may not be funds left for an inheritance. The lender is receiving payment of principal and interest, this is NOT stealing the children’s inheritance from the remaining equity. With the reverse mortgage, the homeowner is using the funds for their needs or wants. Are you as heirs going to give them the funds they need just so you have an inheritance? What about letting your parents live their quality of life and not worry about getting an inheritance?
The last one I’m going to cover today is the option that lowering your expenses is a better option. Really? Most seniors don’t have this option. Seniors want to maintain their lifestyle and why shouldn’t they? Do you want to be told to lower your expenses, stop getting your hair done, not having cable TV, being able to get together with friends for lunch, go to a family wedding or reunion? Just because one turns 62 doesn’t mean they can’t enjoy life especially when they have equity in their home they can utilize.
Don’t buy into the scare tactics! Before believing everything in the media, those commenting on stories, politicians or your friends or neighbors, get the facts about reverse mortgages. As I often ask, “Do you go to a plumber if you’re having health issues?” Of course you don’t! So why are you listening to those who can’t or aren’t providing the facts on reverse mortgages?
Take time to understand and have the facts. When people do, they see the benefits and more people will do a reverse mortgage!
And hopefully, as my borrower is doing, reverse mortgage borrowers will spread the word on how the reverse mortgage has benefitted them so more people will hear about them.
*As of April 27, 2015 income and credit are used for the Financial Assessment to determine borrower’s ability and willingness to pay property taxes and insurance into the future
© 2014-2015 Beth Paterson http://rmsidac.com/beths-reverse-mortgage-blog/ 651-762-9648
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