REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

I was driving my kids to school today and heard an advertisement for a movie that was so real and so frightening that I almost drove my car off the road.  The movie is called Drag Me To Hell and yet not having seen the movie, I am already scared on several levels.  First of all the entire conflict starts when an elderly woman walks into her local bank to ask for an extension on her loan.  The bank manager, in an attempt not to roll over and show any degree of pity, denies the extension.  Oh my, the first horror is realized as I imagine myself in the elderly woman’s shoes.  What would I do?  They could make a horror movie out of that in and of itself.  But the plot thickens as the elderly woman casts an evil spell that brings fierce demons upon the bank manager, forcing her to suffer greatly before her decent into hell.  Double the horror, what if loan officers who couldn’t push a loan through suffered similar consequences?  Not only would they not receive any commission, but they would undergo the most unpleasant of fates. Well if Forward Mortgages, and the trouble and pain people around the country are feeling in this present time, represent the path to hell, than perhaps I can offer an alternative.  Allow me to tell you about the movie I want to produce.  Its called Lift Me To Heaven.  Its about an elderly gentleman who walks into a bank and asks for an extension on his loan, allowing him time to gather some finances.  The bank manager kindly listens to the old man and finally tells him about the Revere Mortgage.  The elderly man is amazed at her kindness.  The bank manager explains how the reverse mortgage will allow him to pay off all of his debt as well as provide him with an income for the rest of his remaining years in the home.    Now he is just ecstatic.  His problems are solved and his once evil heart melts away like the Warlock in Santa Clause is Coming to Town. Now I really wanted to end the story with the old man reaching across and kissing the young pretty bank manager, thus transforming himself back into the young prince he once was.  But of course that would mean that he would no longer be qualified for the reverse mortgage be much younger than the required 62 years old.  But perhaps we could end the story by allowing the young bank manager/maiden, to inherit his small kingdom in years to come.

I was recently speaking to a loan officer I met who worked in Arizona, named Anne.  She had been a successful for the better part of her 7 year career, having decided to jump into the mortgage game at the beginning of the mortgage boom we all experienced, and admittedly enjoyed, even though it lead to where we are today.  However this young woman was a brass go-getter.  Her motivation was the money.  (Which is not to say it was simply greed).  None-the-less, she made the move from being an assistant golf pro, to learning about mortgage origination during a three-day course at the local Real Estate School.   Having passed the final exam, (which I believe was graded on a curve so that all would pass), she was able to send her resume out to multitudes of mortgage companies, looking to add on to their commission based army of hustlers.   She seemingly fit in great with the rest of the group.  Starting with friends and family, and getting referral after referral as rates continued to drop, she soon found herself in a prospering new business.  Then of course; it all came to a halt.   Now with most lenders, this marked a point in time where the professionals moved forward and the hobby goers, packed up and moved on to their next gig.  As for Anne from Arizona, she decided stick it out and change her tactics.  Her new focus: Reverse Mortgages.

Reverse Mortgages has just started becoming available about the time she entered the industry.  Most loan officers had some vague idea about them, with some of the main impressions being that they were a bit harder to process and special training was required, the borrower had to go through counseling, and that there must be some “trick to them because they just seemed like a pretty neat product.  All in all, there was no real need to bother with them because the other forward products were going great.  However today, the forward mortgage pool is much more shallow, while the elderly population continues to grow, and many of them have substantial equity in their homes. 

Now Anne saw this as a great opportunity.  She began calling on seniors, going door to door in older neighborhoods.  Her first 25 calls yielded only a few Reverse Mortgage Loan applications.  Her next 25, generated twice as much, and by her third set of 25, Anne as converting over a dozen cold calls into applications.

What Anne had found was that many seniors were used to being poor, growing up in the Great Depression.  They had been raised to pay their homes off free and clear, to leave to their children so their children would never be poor.  Company stock and retirement plans where something that came along as they grew up, so fortunes were made through real estate.  Anne found that by exploring a little bit about finance in general and how the economy, taxes, and financial vehicles, had revolutionized themselves over the years, she was able to break through the long held perceptions of the past.  In fact with proper planning, a senior could have a Reverse Mortgage, ridding themselves of debt, and allowing them to live with a bit more financial freedom, while still protecting their children and passing down an inheritance.   Now Anne’s business is over 7O% based on Seniors and Reverse Mortgages.  Although Anne is a bit stingy as far as passing down any of her “sales formula, she does recommend that loan officers interested in learning about catering to this growing market speak to a financial planner regarding the benefits a Reverse Mortgage can have on potential borrowers. 

Many people, seniors and juniors alike, have a misconception that a reverse mortgage is nothing more than selling your home to the bank.   There is no more truth in that than saying you own your home now, knowing that the bank holds a note on it worth 95% of the current value. 

A Reverse Mortgage is a mortgage just like the 30-year fixed we all know and love.  We, as homeowners, have the right to do what we like with our home, without having to consult with the bank. We are on the title, and reserve the right to pass our home down to our children, without the bank coming in and taking it from them claiming that they own it.  However the bank does reserve the right to call the note, under specific circumstances.

What homeowners, and their families should be aware of is that a Reverse Mortgage starts with a borrower 62 or older, living in their primary residence.  They also need to have substantial equity.  The premise of the Reverse Mortgage is that the bank sets a loan amount that it is willing to lend against the property, (just like a traditional mortgage), but instead of the loan proceeds going to someone else, like a seller, on the traditional side, they go to the homeowner.

So what happens when the homeowner vacates the home?  Many people are under the impression that the bank comes in a takes over.  This is certainly not the case.  In the event that the homeowner leaves the home, (and yes on a more permanent basis.  Vacations are allowed), the lender generally gives 9 months to settle the note.  This can be by selling the home, refinancing, or if available, having the not paid off.   In the event that the home does not sell, nor can anyone purchase, or refinance the note, the bank will step in and sell the property.  Keep in mind that most banks want to work with you.  If they see that an attempt is being made to resolve the debt, then they may grant an extension.  If the bank does come in and foreclose on the property, then they will become the party responsible for selling it.   Any proceeds available after the sale and appropriate fees, will go back to the estate.   Furthermore any heirs are not personally obligated to repay the note, thus a Reverse Mortgage allows for a degree of safety in terms of not creating an undue burden on the remaining family members.

I recently received an email from a reader that seemed to understand the concept of a Reverse Mortgage, but still did not completely understand what exactly a Reverse Mortgage was.  Oddly enough I kind of understand where he is coming from.  Think about all the things in life you fake.  Or the things you have just enough information about to get you in trouble.  I was a mortgage banker in my previous life.  (Sometimes I feel like a cat, I have so many lives).  In any case, my point was that I was extremely successful prior to the collapse of the market.  I had a great client base, built up of many successful retirees, developers, and well-backed investors.  With a little bit of cash, or a great story, I could get the deal done.  In a short time my client base was out of date and replaced with FHA Loans.  Unfortunately for me, I didn’t have a single FHA Loan profile.  Being obstinate, I wasn’t looking for one either.  I could easily compare myself to the reader in that I can tell you that FHA is for buyers looking for homes lower in value, you can go to 97% Loan to Value, there are advantageous programs to support the purchase, and the rates are favorable.  Yet I really have know idea what an FHA Loan is, nor am I 100% confident that I could put one through, or recognize the characteristics of one.   So yes, talking about a Reverse Mortgage intelligently as the reader did, and yet asking what one was, is not far from my comprehension.

In a traditional mortgage that most of us are familiar with, you pay it forward.  That is to say, you take out $200,000 and pay it back with interest over 30 years.   At the end of the term you own your home free and clear.  With a Reverse Mortgage, its the opposite, (as the name would imply).  With a Reverse Mortgage, you tend to own your home free and clear going into it, (or have substantial equity), and your mortgage pays you.  In this case you would take out $200,000 and the bank would pay you.  Now the neat feature is that instead of making payments as with a forward mortgage, the bank makes the payment to you.  Now you also have the option of taking the $200,000 out in a lump sum, a line of credit, or a combination of any of the three. 

The common misconception is that the bank is buying your home for the loan amount.  This is not the case at all.  You retain the title on the home, and should you leave the home, the loan is paid off and the remaining equity goes back to the estate.     As an example, a home that is valued at $700,000 and has a Reverse Mortgage of $250,000, would yield the $700,000 minus $250,000 plus any accrued interest, back to the Estate.  Furthermore the money received from the Reverse Mortgage is TAX FREE!  The Equity in your home could be more valuable than some retirement plans.  Reverse Mortgages won’t affect any Medicare, Medicaid, or Social Security benefits.  

Now the second part to the readers question was, is it always a good idea?  No.  A Reverse Mortgage is not ALWAYS a good idea.  When it comes to major financial decisions you need to have an expert, such as a financial planner, assisting in guiding you through all the options.  There are so many factors involved with a reverse mortgage that determines the value of it, that you really need have to envision the overall financial spectrum, before making a decision. 

However I do feel that reverse mortgages are often overlooked as viable financial tools.  I feel that people often look at the initial cost of executing one, and turn away without exploring how it plays in the total package.   Think about it: What if you took out $200,000 with a reverse mortgage; put it into an investment; left your home; cashed out on your investment now worth $275,000.  You could pay off your $200,000 lien and give your heirs $75,000.  So while a Reverse Mortgage is not always a good idea, I would say its always a good idea to explore one with a mortgage professional and a trusted financial planner.    

As with most things in life, people seem to take radical sides when it comes to Reverse Mortgages.  Some advocate that Reverse Mortgages are the saving grace for seniors, while others want to focus on the costs involved in a Reverse Mortgage and say these HECM Loans are praying on the elderly.   All in all, it’s a tough argument, but the reality is that it goes back to the familiar saying of “pay me now or pay me later.
 

The first thing we all need to comprehend is that mortgages aren’t free.  They are products designed to make money.  The money they make is dependent upon the risk to the bank.  Ask yourself the simple question about your own funds: If you had $200,000 to lend someone and you had no idea of who they were personally.  The only thing you had to go off of is their application and credit report.  And let’s say the first person told you, “I want to borrow $200,000 and I will repay you over 30 years at 5%.   Sounds pretty good.  You would get a constant return for the next 30 years and make over $186,000.  You would almost double you money.  The next individual asked to borrow the money but told you, “I want to borrow $200,000 but I only need it for three years.   You have to consider that the return may not by as high as a 30 year term, but you will also have your money back in three years to do something else with.  And you will still receive $30,000 in profit.  You would make over 10% profit in three years.   The next individual comes in and says, “I want you to give me $1,200 a month for the rest of my life, and I will pay you back when I leave my home or pass away.  (Ah yes, the Reverse Mortgage).  Hmm, this stops and makes you think:  What’s the value of home now, how old is the borrower, what are the odds of making money by lending it?  If I give them  $1,200 a month for 15 years I would actually loose money.  (13.9 is pretty close to the break even point in this scenario).   Your response will most likely be one of “OK, I can only do this if I get some kind of profit up front.  So I will take $20,000 up front, and I will gamble on the rest.  In the back of your mind you are playing the odds of – will this person live that long?  Will they be forced out of the home and into a nursing home? Or will some other disaster take place.  From a risk standpoint you are in pretty good shape.  You have your profit up front with a solid asset backing it; an asset so strong that it’s to your advantage if things go sour.  You may be able to take less profit because you can reinvest yourself.

Now, what gets me at times are all the folks who say Reverse Mortgages are too expensive, or are taking advantage of the elderly.  I feel taken advantage of when I read how much money I will pay out to the bank by the time I pay my mortgage off.  Its never like when I asked my brother to borrower $700 and I paid him back $700.  Yes the truth is that banks lend money to make money.  So pay the bank now or pay them later.  The reality is that giving the money up front, reduces the risk to the bank, thus the terms may be better off in the long run.

With the popularity of Reverse Mortgages, it is probably a good time to understand what exactly is a Reverse Mortgage.  Oddly enough some people think it is nothing more than a bank buying your home.  I would have to agree on the practical level there’s a great deal of truth in that.  But I guess it’s also true that the bank owns your home with any mortgage.  Many people understand the difference between an Adjustable Rate Mortgage, (ARM), and a 30 Year Fixed; in comparison I would like to take a look at the various Reverse Mortgage Products.

There are three basic types of Reverse Mortgages.  The first one is a Single-Purpose Reverse Mortgage.  These are offered by some state and local government agencies, and non-profit organizations.  They are the least expensive option in terms of the total costs of the loan, but they do come with the drawback in that they are not available everywhere and they do have restrictions as to what the loan may be used for, as specified by the lender.  For example the proceeds may only be used for taxes, home repair or home improvements.  Homeowners with low to moderate income can qualify for most Single-Purpose Reverse Mortgages.

The second is the Federally-Insured Reverse Mortgage, which is also known as the Home Equity Conversion Mortgage, or HECM (pronounced Hekum).  The HECM is backed by the U.S. Department of Housing and Urban Development (HUD).  These types of reverse mortgages are more expensive than traditional mortgages with closing costs running as much as $8,000 for a $300,000 loan amount.  However HECM Loans are widely available, have no income or medical requirements, and they can be used for any purpose.

Before applying for a HECM, you must meet with a counselor from an independent government agency to review all the financial details of the loan.  HECM Loans can be a bit more complicated as several factors go into the loan amount such as your age, type of payout, market value of your home and current interest rates.   A HECM can be paid out as lump sums, lines of credit, fixed monthly cash advances or a combination of the various types.

And finally there are Proprietary Reverse Mortgages, which are private loans backed by the entities that develop them.  Proprietary loans are more along the lines of a business making a sound decision.  These loan products can make more sense, by having additional value when your home has substantial equity and you elect for a lump sum disbursement, as you may qualify for higher loan values.   Similar to the HECM Loan, Proprietary Reverse Mortgages also take into account factors such as the age of the borrower, current interest rates, and home values. 

I remembered when I applied for my first mortgage and the infamous ARM was introduced as a possible option.   This product would allow my wife and I to borrow an additional $15,000, subsequently getting us into our first home.  I am sure as we grow older, put our children through school, weddings, (Yes I have three girls), and take care of any other financially unplanned events, that the time will come when my wife and I will apply for a Reverse Mortgage.  Looking at the traditional forward mortgages available today, (or perhaps that were available two years ago), that the Reverse Mortgage product offering will be just as prolific in years to come.  Understanding the basics now, will set a solid foundation the future. 

With the recent downturn in the stock market, many seniors who had spent years saving money and investing it, in hopes that they would be able to spend time with their grandchildren or travel the World, have found themselves in an unforeseen situation.  The money they saved has drastically been reduced, if not gone altogether.  Fortunately these same individuals have also been paying down their mortgages thus creating substantial equity in their homes, allowing them to fall back on Reverse Mortgages to assist them with their retirement goals.

Reverse Mortgages are generally available to those of age who are 62 and older.   Reverse Mortgages allow these homeowners to convert the equity in their home over to tax free income.  In true poetic justice, after paying the bank for years, now the bank pays you.   Homeowners can elect to receive their payment in a lump sum, fixed monthly installments, or a line of credit.

Despite the current housing slump, Reverse Mortgages are booming in comparison.  The number of federally insured mortgages hit 112,015 in 2008, which was up significantly from 43,082 in 2005, according to the federal housing data. 

One of the major reasons is simply that seniors are looking for cash.   Whether they are living longer, running into unanticipated expenses, or trying to keep up with inflation, the bottom line is that seniors need additional income, and their homes have become a commodity rather than in inheritance.  Nelson Rood of Equity Concepts of Arizona LLC, says, “Were suggesting a lot more of our senior clients look at reverse mortgages as a means of providing an income for the short term, allowing their portfolios to rebound from the hit they’ve taken over the past two years.  However, adds Rood, “seniors exploring reverse mortgages need to be aware of the costs involved in doing so.  Homeowners pay 2 points, or 2% on the first $200,000 they borrow, and an additional 1 point, or 1% on the remaining balance before capping out at $6,000.  Unfortunately, that’s not all.  Additional costs of a Reverse Mortgage can total as much as 10% of the value of the home.  In some instances it may be wiser to accept the consequences of withdrawing funds from a less than healthy retirement account, rather than jump into a reverse mortgage.

There is somewhat of a safe-guard with Reverse Mortgages; as long as you own the home, you are not obligated to pay back principle or interest, which continues to add to your outstanding balance over time.  When the homeowner sells the home or passes away, the note will then need to be repaid.  However in the event the home sells for less than the balance of the note, the estate inheriting the property is not liable for the difference.

All in all, Reverse Mortgages are financial tools, that when utilized properly, can provide seniors with a stable retirement, allowing them to utilize the fruits of their labor.  However, a degree of caution should be understood before running out and stripping away the equity in your home.  In addition to speaking with mortgage bankers who specialize in Reverse Mortgages, there are a variety of other resources such as the AARP, (aarp.org) and the National Reverse Mortgage Lenders Association, (reversemortgage.org), who can assist in answering any questions you may have.