Reverse Mortgage Information

Bad information still circulates among seniors even as federally insured Reverse Mortgages from HUD/FHA reached record levels through 2009.  While 2010 & 2011 saw less dramatic growth, these same myths continue to originate from well-meaning but misinformed relatives, friends or even trusted advisors… who recall times past when the HECM reverse mortgage did not exist, was not insured and reverse mortgages were not regulated by the federal government.

Following are 10+ reverse mortgage myths still circulating.  Perhaps the assumption that there are only 10 of them is the greatest of all reverse mortgage myths!

Reverse Mortgage Myth #1 – The Bank Owns The House

Silly. As is the case with a conventional mortgage, the borrower continues to own the home. Title remains intact. You do not “sign the house over” to the lender. Of course, the reverse mortgage lender does have a lien against the property. But you make all decisions that impact your home, not the lender. Sell it if you want, leave it to the kids in your will, etc.

Reverse Mortgage Myth #2 – Borrower(s) Could Lose The Home

The borrower cannot be forced from the home as long as taxes and insurance are paid current and the home is reasonably maintained. Even if the borrower uses up all the money obtained from a reverse mortgage… the lender cannot require repayment until after the last borrower permanently leaves the home.

Reverse Mortgage Myth #3 – At The End, The Bank Takes The Home

Wrong! When all borrowers have permanently left the home, the borrower or the estate must pay off the balance owed to the lender… but ownership remains with the borrower, the heirs or the estate. The heirs or the estate might elect to sell the home and pay off the reverse mortgage balance and pocket the difference (net equity). Or an heir might inherit the home, obtain a conventional (forward) mortgage locally and pay off the reverse mortgage balance with those funds.

Reverse Mortgage Myth #4 – Nothing Left For The Kids

Under federal rules for government insured reverse mortgage programs it is impossible to initially borrow 100% of the equity in the home. In many cases there will be substantial “net equity” (home value minus loan balance) remaining in the property. Lenders are required to provide an Amortization Schedule that projects net equity through each year of the loan up to borrower age 99. The point at which all equity might be used up can be estimated from this document. Many borrowers probably will not live to an age where all equity is depleted.

Reverse Mortgage Myth #5 – Money Can Only Be Used For Repairs

What you use the money for is entirely up to you. There are no restrictions on use of the funds. Use the cash to pay credit card debt, supplement monthly income, complete needed home repairs, pay medical expenses or buy long term care insurance. By the way – the money you receive from a reverse mortgage is not actually income – therefore, it is not taxable. You will not receive a 1099 or W-2 from the lender. Check with your tax advisor for confirmation.

Reverse Mortgage Myth #6 – We Could End Up Owing More Than The Home Is Worth

An important safeguard with reverse mortgages is that the borrowers or the estate can never owe more than the home is worth at the time of repayment. If the borrower owes more than the home value, the difference is made up by FHA Mortgage Insurance in the case of HUD/FHA programs or absorbed by the lender in the case of most private programs.

Reverse Mortgage Myth #7 – Our Children Will Be Burdened With The Debt

Reverse mortgage loans are “non-recourse” loans. In simple terms, these loans are unique in that the borrower, the heirs and/or the estate have no personal liability for the debt. The only way the lender can be made whole is through the home value. If the home is eventually sold for less than the loan balance, the deficit is paid by FHA mortgage insurance or absorbed by the lender. The lender has no legal recourse against borrowers, lenders or the estate. Children, heirs or the estate do not inherit the debt.

Reverse Mortgage Myth #8 – Home Must Be Debt Free To Qualify

Many homeowners actually do have an existing mortgage… and a majority use reverse mortgages specifically to eliminate a monthly mortgage payment… and improve their monthly cash flow.

Reverse Mortgage Myth #9 – The Fees Are Outrageous

Compared to what? Fees and charges are closely regulated on federally insured loans. Still, this is one of the most misunderstood issues with respect to reverse mortgages. Total costs are higher than home equity loans but not all money goes to the lender. Under HECM federal programs costs include (a.) an origination fee paid to the lender, (b.) 3rd party closing costs paid to attorneys, title companies, appraisers, etc., and (c.) an up-front FHA mortgage insurance premium (that is waived in the case of the new HECM Saver product).  Many lenders allow you to roll all of these fees and costs into the loan balance so there is usually no initial out-of-pocket expense. The new HECM Saver program very sharply reduces your up-front costs since the FHA mortgage insurance fee can be as much as 50% of total fees & costs.

Reverse Mortgage Myth #10 – It’s Cheaper To move To A Smaller Home

Maybe… if that’s really what you want. This strategy might be right for some… but senior homeowners should carefully analyze all costs before assuming that a smaller house is a cheaper option. Selling your existing home could cost $12,000 to $18,000 in real estate commissions alone. Add many thousands more to move furniture and appliances to a smaller home and that choice could be the most costly solution… not cheaper. Most seniors who do a reverse mortgage have already determined that they want to remain in the existing home for as long as possible. If you think you will move soon, don’t do a reverse mortgage unless you fully understand the costs.

Reverse Mortgage Myth #11 – If We Wait, Rates Will Be Lower

Rates are already at 50 year lows. Predicting future rates is difficult even for the experts. And with home values still declining in many regions, a home worth $300,000 today could lose 10-15% in value over the coming months. Since the appraised value of your home is a key factor in determining how much money you qualify for, waiting for interest rates to be more favorable might prove to be a major mistake.

Reverse Mortgage Myth #12 – My Social Security Or Other Benefits Will Decrease

Money from a reverse mortgage is borrowed money; not income. This money is usually not considered disqualifying for Social Security or Medicare. But for some special needs based benefit programs monthly draws must be spent and not accumulated. If you qualify for state administered Medicaid, SSI or for a subsistence program like fuel assistance you should consult your tax advisor. Generally, you should draw only a monthly amount equal to monthly expenditures to avoid accumulating excess funds.

Reverse Mortgage Myth #13 – Only For Seniors “In Need” Or “House Rich, Cash Poor”

Today, reverse mortgages are used by homeowners from all walks of life to enhance retirement years. Even seniors with million dollar homes have used reverse mortgages in estate planning in conjunction with advice from financial planners. The HECM is increasingly viewed as a financial tool by seniors and their advisers.

Reverse Mortgage Myth #14 – We Will Have To Pay Taxes On The Money Received

Money received from a reverse mortgage is income tax free….because it is already your money. In general, no income taxes will be due on money received from a reverse mortgage. Funds do not need to be reported on your income tax return. But consult with your financial or tax advisor.

Reverse Mortgage Myth #15 – We Plan To Leave The Home To The Children

Do the children really want you to do that? Seniors are encouraged to discuss reverse mortgage decisions with children. Often, the children are happy to learn that parents have a financial solution to help them live independently and financially secure.

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant – NMLS #19086

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For those of us who have been in the reverse mortgage industry for any length of time it is puzzling to understand how so many “financial experts” continue to be misinformed when it comes to reverse mortgages.   The latest misinformation is repeated by a certified financial planner, Doug Flynn, in a CNN HelpDesk video released May 17, 2011.  While discussing pros/cons of a reverse mortgage, Mr. Flynn cites a hypothetical example to demonstrate that a borrower with a $200,000 home who qualifies for a reverse mortgage benefit of $100,000 would instantly owe fees of about $20,000.

Reverse Mortgage Expert

This is total nonsense.  It is evidence that yet another “expert” just does not know what he is talking about with regard to reverse mortgages.  Depending upon the specific Home Equity Conversion Mortgage (HECM) program this particular sample borrower selects… fees would normally range from $4,600 to $10,805.  Mr. Flynn is substantially in error on his claim that fees would be $20,000.

Worse, the certified financial planner cautions that the amount owed compounds “in a phantom way”.  There is nothing phantom about compound interest and any financial planner should be able to explain this elementary concept to any client.  He also claims that borrowers will likely disinherit children because at some future point the amount owed will be greater than the $200,000 home value.

Shame on Mr. Flynn. He correctly calculates that interest is added to the amount a client borrows and that this amount will increase over time.  After all, no repayments are made to the lender during the life of the loan. However, he conveniently fails to recognize that over the same time period the value of the home should also increase.  In fact, a required disclosure that every HECM borrower receives and carefully reviews with his loan officer is an Amortization Schedule that estimates future loan balance, home value and remaining borrower equity for each year up to age 100.

A 62-year old borrower might qualify for $100,000 but elect to take his benefit in terms of a tenure (lifetime) payment of about $600 every month.  At age 100, reasonable projections show he would still have amost $245,000 equity left in the home… because the asset has also been rising in value over the prior 38 years.

Another borrower with completely different needs in different circumstances might elect to take all the available money at closing.  Still… upon reaching a future total loan balance of around $200,000 (at about the 12 year point according to the Amortization Schedule) he would have approximately $100,000 of equity remaining in the home because the home value has also increased over this period.  And in this case, initial fees might have been as low as $4000 or about 20% of Mr. Flynn’s wrongful assertion.

Work With a Real Reverse Mortgage Expert

The moral to the story here is be careful where you get your information.  Work with a veteran reverse mortgage loan specialist (with credentials and expertise in reverse mortgages) who will help you properly understand the real pros and cons. Stay away from self promoting media stars… who often don’t know what they are talking about or have some ulterior motive for slanting the facts.  Sit down face-to-face with your experienced broker specialist and demand clear, concise answers to your questions and you will do just fine.  Reverse mortgages are not that difficult to figure out if you have the right people helping you.

See video here ->  CNN HelpDesk video

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant – NMLS #19086

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DISCLAIMER: The information presented in this blog is accurate and correct to the very best of our ability. We are, of course, not legal experts and we do not attempt to give legal advice. If you think we report something inaccurate, please let us know right away. If we write something you like, let us know about that, too. Tell a friend or link to the site.

COPYRIGHT 2011: All posts herein are copyrighted by Robert H. Irving. You may link to any post as long as you properly credit the author and the blog. You may not copy or republish without crediting the author and referencing the post

Some seniors will believe anything that’s in print.  The same applies to anything published on the internet. Unfortunately, much information published on the internet is simply wrong.  Take the subject of trusts as they apply to reverse mortgages .

HECMs & Revocable/Irrevocable Trusts

Self-proclaimed experts confidently report in news articles and on the internet that if your home is held “in a trust”, you are automatically prevented from completing a Home Equity Conversion Mortgage (HECM). Others laboriously explain the legal difference between revocable & irrevocable trusts… concluding with the falsehood that HUD will permit a reverse mortgage if home ownership is held by a revocable trust… but reject the HECM if ownership is in the form of an irrevocable trust.

Such a conclusion is simply not correct. And it illustrates why you absolutely need to work with a competent, experienced reverse mortgage specialist. Only an individual with direct reverse mortgage experience over a long period of time can guide you through this maze. Newcomers to the business simply do not have the broad exposure or weight of long experience to adequately assist you.

So what’s the correct answer? Well…. it depends.

Many revocable trusts are acceptable to HUD. But your loan officer and the lender will need to carefully review your trust document to make certain that it contains acceptable language… or that the trust can be amended to include that necessary language.  Also, the borrowers themselves need to be the beneficiaries of the trust. Trustees (as well as borrowers) will need to sign several of the reverse mortgage documents at closing; namely the loan agreement, the mortgage and the promissory note. Finally, you will need to locate the original trust document so that it may be recorded.  An experienced reverse mortgage specialist will understand each of these issues and help you to overcome possible hurdles. An inexperienced loan officer will fail to anticipate possible issues and might even cause your loan to blow up at the closing table.

Can I Do a Reverse Mortgage With an Irrevocable Trust?

Even some very experienced reverse mortgage professionals are quick to point out that irrevocable trusts are absolutely not acceptable to HUD.  Guess what… they’re wrong!  I just completed a Home Equity Conversion Mortgage for a client within the last month wherein the property was held by an irrevocable trust.  Experience (as always) is the key… and as a broker with nine (9) years reverse mortgage experience and multiple lender connections… I was able to find a lender for my borrowers that was willing to do the loan. It took some extra effort, it wasn’t easy but we got it completed without delay.

I continue to urge you to learn everything you can about your loan officer.  (See Choosing a Reverse Mortgage Loan Officer – Part I – III).  Always ask direct questions about his/her experience, licensing, training, actual number of reverse loans completed, character of the organization he/she represents.  Be wary of vague or incomplete answers.  Too many borrowers focus exclusively upon the fees and select the loan officer that promises to charge a few dollars less.  If that’s your focus, I promise that you will get what you pay for… and probably much less!

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant – NMLS #19086

Subscribe to Reverse Mortgage Information by Email

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DISCLAIMER: The information presented in this blog is accurate and correct to the very best of our ability. We are, of course, not legal experts and we do not attempt to give legal advice. If you think we report something inaccurate, please let us know right away. If we write something you like, let us know about that, too. Tell a friend or link to the site.

COPYRIGHT: All posts herein are copyrighted by Robert H. Irving. You may link to any post as long as you properly credit the author and the blog. You may not copy or republish without permission from the author.

A primary lender announced this week that approval has finally been received by the Massachusetts Division of Banks for the “HECM for Purchase” reverse mortgage  program. It’s been a long time coming here in the Commonwealth. While this special reverse mortgage program backed by FHA has been available in many other states for some time, volume has been disappointing to date. The program has not yet achieved popularity. This will change as seniors begin to understand the special advantages of HECM for Purchase. But it’s going to take some serious effort on the part of lenders to teach these benefits.

How Regular Reverse Mortgages (HECMs) Work

Let’s review.  The Home Equity Conversion Mortgage (HECM) program is a reverse mortgage program guaranteed by FHA for seniors 62 years of age and older who own their own homes. Most often, seniors taking advantage of the special HECM programs fully intend to remain in their present home as long as possible. They use the equity built up over the years to supplement monthly income and/or eliminate conventional mortgage payments without selling the home. Some need to payoff home equity loan notes accumulated in years when banks touted the benefits of “cashing out” the rapidly increasing home value… implying that it would go on forever. Others have large debt that has become a serious burden in retirement. But the single most common characteristic of these borrowers is that they choose to remain in their existing home. The regular HECM program was originally designed specifically for them.

Well, what about seniors wanting to down-size in retirement?  The 4 bedroom, 2 bath home  now seems difficult to maintain, heat, and keep clean.  Or  what about others wanting to move closer to older children and grandchildren?  Or seniors wanting to enjoy a warmer climate?  Each of these clients could eventually do a reverse mortgage, but the process was cumbersome, complex and costs were terrible; closing expenses for original purchase of the new home or condo plus closing expenses again to convert the regular conventional mortgage to a HECM. Only very experienced reverse mortgage loan originators knew how to make this happen seamlessly.

HECM for Purchase Example

HECM for Purchase allows the senior to sell an existing home and keep much of the cash realized from the sale.  Here’s an example – Joe & Mary are in their mid 70s and sell their 4 bedroom home in Cambridge, MA for $650,000.  They are left with about $450,000 after paying off several home equity loans, the real estate broker, and closing costs.  The plan is to buy a much smaller home or condo in the western part of the state to be close to grandchildren… and Tanglewood (a popular classical music venue in the Berkshires).  They locate a nice 2 bedroom condo near their daughter and negotiate a price of $280,000. If they pay cash for the new condo, they will have about $170,000 remaining that will go into CDs at the local bank and earn about 1/2 percent interest.

If they opt instead to use the HECM for Purchase  program, they qualify for about $170,000 on the new home.  That means they only need to come up with $110,000 at closing instead of the full $280,000 as originally planned.  The extra cash that they keep ($170,000) will also go into CDs giving them a total of $340,000 in the bank.

Results

With the HECM for Purchase program, Joe & Mary are in a new home close to Tanglewood and the kids. They will make no mortgage payments as long as one of them remains in the home.  And… they have $340,000 cash remaining in the bank.  The result is the same but they have twice as much money in the bank.  Life is good!

Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant
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Outrageous fees! This is perhaps the hottest topic one could chose to address about reverse mortgages. I especially like the analysis of an experienced Minnesota reverse mortgage loan originator, Beth Paterson on this subject. Please read her blog at Beth’s Reverse Mortgage Blog  In a June, 2009 post she published a great analysis of specific costs of  the HECM reverse mortgage vs. a conventional forward mortgage and she shows a side-by-side comparisons of the numbers. If you are interested in facts… as opposed to falsehoods or myths perpetuated by the uninformed, read on.

Below is an excerpt from her June 27th post Reverse Mortgage Closing Costs – High or Mythical? She closely examines fees & costs and shows total cost calculations in a summary chart at the end. The property in the example is a $200,000 home. Her conclusion is that reverse mortgage costs are not outrageously different from traditional mortgage costs. Following is a excerpt but please read her entire post to follow the analysis from beginning to end:

“Now let’s compare the Lender Fees:

FHA’s Mortgage Insurance Premium (MIP) is paid directly to FHA.  This is 2% of the home value for the reverse and 1 ½% for a forward.  The advantages with FHA insuring the reverse mortgage include:

• Guaranteeing the funds are available for you.
• Guaranteeing the lender against default or shortfalls which means the interest rates are lower (currently under 4%) compared to other mortgages.
• Providing a line of credit growth rate (available only with reverse mortgages).
• Insuring as a reverse mortgage it is a non-recourse (no personal liability) loan.

The origination fee is what the originating lender receives to cover the loan officer’s salary, overhead to run the business, i.e. staff salaries, administration costs, computers, electricity, office supplies, marketing expense, gas mileage, health insurance of employees, etc..  The origination fee also includes the processing and underwriting costs which are generally separate and charged to the borrower on forward loans.  HUD regulates the reverse mortgage origination fee to be 2% of the 1^st $200,000; 1% thereafter with a cap of $6,000.

The reverse mortgage fees are based on the full home value because over time borrowers can access more than the home value at the time of origination.

An estimate based on a $200,000 home value:

*Typical points on Forward loans are 0-4%; this example is based on $100,000 loan at 2% points
** Forward loans often have a 1% backend fee
*** Number of points are directly related to interest rate charged; the more points paid the lower the interest rate; the lower points paid, the higher interest rate

Note:  THE DIFFERENCE IS BASICALLY THE FHA MORTGAGE PREMIUM!”

< Author – Robert H. Irving, CSA®
Senior Reverse Mortgage Consultant