REVERSE MORTGAGES Myths … Misunderstandings … and the Truth! By Steve Tytler Owner, Best Mortgage Inc. License # CL‐112608 Loan Originator NMLS ID #118852 Call for a personal reverse mortgage consultation at our office in Bellevue:
(425) 649‐6000 (Toll‐free: 1‐800‐870‐4570) You may have heard some “horror stories” about reverse mortgages. I started Best Mortgage more than 22 years ago, and for many years I believed the horror stories myself and that’s why I did not offer the reverse mortgage program to my clients. But when I finally took the time to get past the myths about reverse mortgages, I discovered that it is a fantastic loan program that offers senior homeowners a way to access the valuable equity in their homes without having to sell their home or take out a traditional mortgage that requires monthly payments. In short, it’s a perfect loan for homeowners 62 years old and older who are “house rich but cash poor.” But you don’t have to be “poor” to take advantage of a reverse mortgage. We recently closed a reverse mortgage for a client whose home appraised for $1.28 million dollars! There are many great uses for the reverse mortgage program … so what about all those “horror stories” you may have seen?
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 1
Here are some scary headlines I’ve seen in “news” stories warning about the dangers of reverse mortgages:
“Lifetime Income” stops if you sell your house or move! You can Lose Your Home! Wife forced out of home after older husband dies! If you owe more than the value of your home, you or your heirs have to make up the difference! Crazy High Loan Fees! Don’t sign your home over to the bank!
If reverse mortgages were really as bad as some critics say, I would never offer them to my mortgage clients. Let me address each one of those headlines one at a time:
“Lifetime Income” stops if you sell your house or move!
Yes, that is technically true. But the reality is that very few reverse mortgage borrowers choose the “lifetime income” option because the monthly payment is so small (often only a few hundred dollars per month). And because those monthly payments are so small, the reverse mortgage balance does not grow very fast. That means there is often a lot of equity left when the reverse mortgage borrower sells their home. And like any other home sale, they get to keep all the cash that is left over after paying selling expenses and paying off the reverse mortgage balance. Rather than receive a small monthly payment, all of our reverse mortgage clients (so far) have chosen the “home equity line of credit” option where they can take out a lump sum of cash, just like any other home equity loan – but they never have to pay it back! And that brings up another very important point that many people who criticize reverse mortgages do not understand: There are very strict limits on the amount of home equity that can be borrowed using a reverse mortgage. Unlike traditional mortgages which allow you to borrow up to 95% or more of your home’s appraised value, reverse mortgages are limited to only about 52% to 75% of the home’s value, depending on age of the borrower. The minimum age to qualify for a reverse mortgage is 62 years old and the younger you are, the less money you can borrow.
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 2
The reason is simple: the bank wants to make sure there is more than enough equity to pay the accrued interest expense on the reverse mortgage and the younger you are the longer you will live in the home and therefore more equity is needed. As I like to say to my clients during a reverse mortgage consultation, “the house makes the mortgage payment for you.” The rules on how much money you can draw out the first year of a reverse mortgage and kind of complicated, so I strongly encourage you to come into Best Mortgage for a personal reverse mortgage consultation and I will spend a couple hours going over all the options with you face‐ to‐face. It’s much better than trying to find the answers by surfing the Internet or talking to some kid in an out‐of‐state call center. The bottom line is that all Best Mortgage clients are thoroughly educated about how much equity they can take out of their home for a reverse mortgage. We show you amortization charts which illustrate that in most cases you will still have a good percentage of equity left in your home even 20 or 30 years into a reverse mortgage, thanks to modest home appreciation. And that brings me to scare headline #2:
You can Lose Your Home!
What happens if home prices do NOT go up in the future? What if we have another “housing crash”? You could end up “underwater” in your home owning more money on your reverse mortgage balance than the home is worth. That’s a common fear. But fortunately, that fear is totally unfounded. That’s because the only reverse mortgage program that we offer at Best Mortgage is the FHA reverse program sponsored by HUD called a “Home Equity Conversion Mortgage” (HECM). If you have an FHA HECM loan, you can never be forced out of your home no matter how far “underwater” you might be with your reverse mortgage balance compared to your home’s value. That’s one of the many consumer‐protection features of the FHA HECM loan. It is a “nonrecourse loan” which means neither you nor your heirs ever have to make up any shortfall if your house is worth less than reverse mortgage balance at the time you sell or move out of your home. As long as you live in the home encumbered by the reverse mortgage as your “primary residence” (live there 6 months or more per year) you never have to make a mortgage payment
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 3
and you can never be forced out of your home as long as you maintain the property and pay your property taxes and homeowners insurance. But what about “horror stories” like this?
Wife forced out of home after older husband dies!
The only way a spouse can be force out of a home with a reverse mortgage is if that spouse is not on the loan. At Best Mortgage, we only do reverse mortgages (HECM) with both spouses on the loan. That ensures that neither spouse can ever be forced out of the home when one of them passes. Unfortunately, there have been cases at shady mortgage companies where unscrupulous loan officers have advised couples to do the reverse mortgage in the name of the oldest spouse only (leaving the younger spouse off the loan) in order to maximize the amount of cash that can be borrowed out of the home equity. For example, if the husband is 82 and the wife is only 68, at Best Mortgage we would use the youngest spouse’s age for calculating the reverse mortgage limit and have both the husband and wife sign the loan documents. That would result in a much lower loan amount than the couple could get if the calculation was based on the husband’s age only. But if the wife were left off the loan documents to get that higher reverse mortgage limit, she could possibly be forced out of the house if the husbanded passed first because she would not be on the loan. That’s the kind of important information that many reverse mortgage “salesmen” leave out of their presentation, and that’s why it’s important to talk to Best Mortgage where you will get “Honest Advice You Can Trust.”® So the key fact to remember is that if you are married and both of you are borrowers on the reverse mortgage, you never have to make any mortgage payments or pay off the loan as long as at least one of you is living in the home as your “primary residence.” We even do reverse mortgage loans with brothers and/or sisters living together in the same home. We have all of the occupants of the home sign the reverse mortgage loan documents
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 4
and the loan amount is determined by the age of the youngest sibling, just as we use the age of the youngest spouse for a married couple. But what about this scary headline?
If you owe more than the value of your home, you or your heirs have to make up the difference!
I covered this previously when I explained that the FHA HECM loan program is a “nonrecourse loan” which means that neither you nor your heirs can be held liable to make up the difference if the home sells for less than the reverse mortgage balance. When the time comes that the last borrower on the reverse mortgage moves out of the home (for more than 1 year) for whatever reason, you and/or your heirs have up to 1 year to sell the home to pay off the reverse mortgage balance. But the home does not have to be sold. If any of the heirs want to keep the home, they just have to refinance to get a standard mortgage loan to pay off the existing reverse mortgage balance. We have done loans like that for our clients at Best Mortgage. They got a new loan to pay off the existing reverse mortgage balance and bought out their siblings’ share of the equity in the home. So stories about heirs being stuck with big bills to pay off the reverse mortgage on their parents’ home are not true in the case of FHA HECM loans, which is the only type of reverse mortgage that we offer at Best Mortgage. There were some private money reverse mortgage programs in the past 10‐20 years that had different rules, and many of the “horror stories” you hear or read about in the news are related to those private money reverse mortgage loans and incompetent and/or unethical loan officers. Again, this is another reason why it’s important to work with a LOCAL reverse mortgage expert like Best Mortgage where you are working with the owner of the company and not a hired loan officer. Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 5
But what about this scary headline?
Crazy High Loan Fees!
In the past, there were privately funded reverse mortgage programs that did in fact have pretty high loan fees attached to them. But the loan origination fees on an FHA HECM reverse mortgage are strictly regulated by the federal government (HUD). The loan origination fee is limited to $2,500 to $6,000 depending on the size of the loan. $6,000 is the maximum loan origination fee legally allowed on a reverse mortgage. By comparison, there is no maximum origination fee limit on standard FHA loans often used by first‐time home buyers. The “closing costs” for an FHA HECM loan are about the same as for a standard FHA or “conventional” (Fannie Mae) mortgage and typically total approximately $3,000. The other cost associated with a FHA HECM reverse mortgage is the Up Front Mortgage Insurance Premium (UFMIP). This is the government insurance that is used to protect the banks from losses if there is insufficient equity to pay off the balance of the reverse mortgage for whatever reason. If you currently owe little or no mortgage balance on your home, you would pay a UFMIP rate of only 0.5% of the appraised value of your home (up to a maximum of $625,000 home value). That’s far less than that 1.75% UFMIP rate that homebuyers pay for standard FHA purchase loan to buy a home. If your current mortgage balance is equal to approximately 35% to 45% or more of your home’s appraised value (depending on your age) you would pay a higher UFMIP rate of 2.5% on your reverse mortgage because you would be borrowing a higher percentage of your home’s value to pay off your current mortgage. But even then the UFMIP rate is only 42% higher than the rate paid by home buyers using a standard FHA loan. As you can see, the numbers get very complicated, so I strongly encourage you to come to our office in Bellevue (right next to the I‐90 freeway) for an in‐person consultation to understand how these numbers are calculated. The bottom line is that it’s true that the closing costs and fees for a reverse mortgage are higher than the cost of a “conventional” loan, they are not much higher than the cost of a standard FHA purchase loan and often less expensive. And don’t forget that unlike a conventional loan, with a reverse mortgage you never have to pay it back! Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 6
But what about ominous warnings like this headline?
Don’t sign your home over to the bank!
Contrary to some stories you may have read about reverse mortgages, you do not sign over legal title to your property when getting an FHA HECM loan. You remain on title as the legal owner of the property, just as you would under a standard mortgage. That bank puts a “lien” on your property, just like a regular mortgage, and that lien gives the bank the right to sell your home to recover its money in the event that you are not making your mortgage payments on time. But remember, with a reverse mortgage you never make a loan payment! Therefore, the bank never has a right to seize your property and sell it as long as you are living in it as your primary residence (more than 6 months per year). People often misunderstand how the property title system works. You may hear someone say “the bank owns my house” by which they mean that they have a mortgage on their home and they are making monthly loan payments to a bank. But if you go down to the local county records department and look up the legal owner of that property, you will see your friends’ name listed as the legal owner of that property NOT the bank! So to recap what I have covered so far … When you get a reverse mortgage you are taking out a loan against your house just as you did when you originally purchased the home (or refinanced the mortgage), but you never have to pay the loan back as long as you live in the home as your primary residence more than 6 months of the year. Sounds too good to be true, right? I hear that all the time from my reverse mortgage clients. There are many uses for a reverse mortgage: 1. You can take out a lump sum of cash to tap into the equity of your home without having to sell or take out a traditional mortgage. 2. You can use a reverse mortgage to pay off your existing mortgage. You may or may not receive additional cash at closing, but you will never have to make a mortgage payment again.
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 7
3. You can use a reverse mortgage to PURCHASE a home. Many people do not realize that reverse mortgages are NOT just for refinancing your current home. For example, I’ve had clients who are down‐sizing from a $500,000 home down to a $300,000 home. They use a reverse mortgage to cover at least 50% of the cost of the new home and that allows them to keep a large percentage of the sales proceeds from their previous home in the bank as cash reserves. And they never have to make a mortgage payment on their new home. 4. You can draw a monthly payment for life, as long as you live in the home as your primary residence. This is the least popular use of a reverse mortgage but the one that most people think of when they hear about reverse mortgages. Frankly, I have never had a reverse mortgage client choose this option because it’s not a very good deal. Any money you receive at closing from the proceeds of a reverse mortgage is TAX‐FREE. That’s because it is not “income” it is borrowed money. Of course, with a reverse mortgage you never have to pay it back (until you sell or move out of the home). So if there are so many great benefits to the reverse mortgage program, you may be thinking: “what’s the catch?” There must be some downside, right? As the old saying goes, “If it sounds too good to be true it probably is.” Unlike most reverse mortgage “salesmen,” I always make sure I cover the positive AND negative aspects of a reverse mortgage whenever I meet with clients at my office in a personal reverse mortgage consultation. I want to make sure they fully understand the program, how it works and whether it is a good fit for their personal financial needs and goals. There are really only two “negatives” to getting a reverse mortgage: 1. The fees are higher than a conventional loan such as a standard 30‐year fixed “Fannie Mae” loan. But as I already explained above, the fees are NOT as wildly excessive as some would have you believe. It’s a government‐insured loan program so you must pay for that government insurance in addition to the typical loan closing costs. However, the overall loan costs are just a little higher than the costs of getting a standard FHA purchase loan, and LESS than the cost of an FHA purchase loan if you currently owe little or no mortgage balance on your home.
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 8
2. You are spending your children’s inheritance. Yes, it’s true that you will leave less money to your heirs if you take out a reverse mortgage loan on your home. The loan balance will get bigger each year, using up a portion of the home’s equity. But frankly, most of my clients are not very concerned about that. They have worked hard all of their lives and want to enjoy the fruits of their labors while they are still around to enjoy it. In most cases, their “kids” will be in their 60’s or older and they figure that they should be able to take care of themselves. However, if leaving a large estate to your children is very important to you, a reverse mortgage may not be the best way to go. So there you have it. There are really only a couple of “negative” aspects associated with reverse mortgages weighed against all the great benefits. Another factor to keep in mind is that the reverse mortgage program is designed for people who want to stay in their home long term (10 years or more). Many of my clients have been in their current homes for 20, 30 or 40 years and they never intend to move. They are perfect candidates for a reverse mortgage. DO NOT get a reverse mortgage if you plan to sell your home in the next 5 years! While a reverse mortgage is a great program for seniors who never want to leave their current home, it’s NOT a good option if you plan to sell your house soon. Because of the closing costs involved and the accrued interest adding to the loan balance, you would use up some of the equity that could be used to buy your next home. You would be better off not taking out any loan and waiting until you sell your home to get the full sale proceeds. You could then use a reverse mortgage purchase loan to buy your next home IF that will be your last home. The reverse mortgage program is intended to be used on your final home. That is, the place you intend to spend the rest of your life.
Consumer Protection Features of the HECM Loan Program Because it is an FHA government loan program, there are several consumer protection features built into the HECM reverse mortgage program.
You must go through counseling conducted by a neutral, third‐party nonprofit agency to make sure you fully understand all the rules and ramifications of getting a reverse mortgage. We are not allowed to do any processing of your reverse mortgage
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 9
application until you provide us with a signed copy of the certificate proving that you have completed your government‐required counseling. You are not allowed to take out more than 60% of your reverse mortgage loan limit at closing of escrow on your HECM loan, you must wait one year before you can access the rest of your reverse mortgage equity loan. The reason for this rule is protect seniors who have been victimized in the past when a relative convinced them to do a reverse mortgage and then ran off with all the cash from the loan proceeds. Under current rules, only 60% of your available funds can be taken at closing, so you can’t be totally wiped out.
At Best Mortgage, our company motto is “Honest Advice You Can Trust!” ® I hope you appreciate the time and effort that went into this report. We want to make sure all of our clients fully understand all the rules and regulations, and pros and cons of the reverse mortgage program before they decide to move forward. I look forward to meeting with you face‐to‐face at a personal reverse mortgage consultation appointment in our office. We are conveniently located near the I‐90 freeway in the Factoria area of Bellevue. Go to this web page for directions: http://www.bestmortgage.com/directions.html Please give us a call and schedule an appointment:
(425) 649‐6000 Toll‐free: 1‐800‐870‐4570
Reverse Mortgage Truth Report ©Best Mortgage Inc. (425) 649‐6000
Page 10