Reverse Mortgages.

Here is a lengthy, but very clear  introduction on what reverse mortgages are as explained by Byron Warnken, Esq.  at Reverse Mortgage Page. A few of my clients are getting reverse mortgages. Be sure that if you have a reverse mortgage that your home is back into your Living Trust once the reverse mortgage is funded.

First, what a reverse mortgage is NOT:

• A reverse mortgage is not “a way for the bank to get your house”
• It is not a traditional home equity loan
• It is not based on income or credit levels
• It is not available to homeowners under the age of 62
• It is not free money
• It is not a cure-all
• It is not a decision to be taken lightly

What a reverse mortgage is: a good tool for financial planning and flexibility in the golden years.  There are only a very few requirements for eligibility.  The borrower must own and live in the home as a primary residence and be 62 years of age or older.  If husband and wife are both on the title, both must be over the age of 62.   

In addition, the home itself must be of a type that qualifies for the reverse mortgage program.  The vast majority of single family homes qualify, as do most condominiums, town homes, 2-4 unit owner-occupied dwellings and manufactured homes.  Your income and credit levels, however, do NOT matter.

To go through the process of getting a reverse mortgage you will need to speak with a reverse mortgage originator or provider.  This person will guide you through the preliminary steps, including counseling, home appraisals, inspections, and choice of loan specifics.  It is very important to feel comfortable with your lender.  Feel free to speak with as many people as you need in order to gain information and feel comfortable.  Click here for reverse mortgage lenders. 

There are a number of options for how to “structure” the money received.

1. Receive a one time lump sum.
2. Receive the money monthly.
3. Receive a credit line that provides flexibility.
4. Use a combination of the above methods.

Once you receive the money, there are virtually no restrictions on the way in which it can be used. But you must repay existing debt, including the existing mortgage.

You can:

• Make Home Improvements
• Finance Regular Living Expenses
• Ease Healthcare Costs
• Take a Trip to Somewhere You’ve Always Wanted to Go
• Give Gifts to Your Family and Friends

It almost seems too good to be true.  There are, however, as with everything these days, costs involved.  There is an origination fee, closing costs, a servicing fee, mortgage insurance, and interest.  These costs come from the proceeds of the loan.  You pay very little directly out of your pocket. 

You should also know that you cannot lose your home at any time during the life of the loan for failure to make payments.  THERE ARE NO PAYMENTS TO MAKE.  The loan does not come due until you permanently leave the home or the last borrower dies.  The home must be kept up to reasonable standards, it must be insured, and the property taxes must be paid. 

Default risk is one of the ways in which a reverse mortgage differs from a traditional mortgage or home equity loan.  With those traditional products there is a risk of default and therefore a chance you could lose your home.  On the other hand, there are no payments to make with a reverse mortgage.  Therefore, as long as the property is kept to a reasonable standard, you will always have somewhere to live.

In addition, you can never owe more than the value of your home.  Even if you have been paid more than your home is worth, you can only owe the value of your home.  When the loan comes due, you or your heirs can either pay off the loan with existing funds or sell the house in order to satisfy the loan.  Excess proceeds from the sale go to your or your estate.

Comments

[Stan Rule]

Jennifer: I think that it is important that anyone considering a reverse mortgage look at what the amount owing will be in 10 or 15 years. If no interest payments are required, the amount owing can get very big, pretty quickly. It could deplete the borrower's capital significantly if the borrower decides to move and sell.

[Jennifer Sawday]

Stan, I agree with you. It is very important for those considering a reverse mortgage to understand everything about it including the amounts owing in future years.