Howard Platte is a contributing writer and veteran of over 30 years in the mortgage business. He is recognized as an expert on Reverse Mortgage Financing as well as traditional mortgage financing. He can be reached at his offices at Golden Empire Mortgage 714.572.0727.
The reverse mortgage products offered today have gone through a major makeover of sorts in recent years in the pursuit of consumer protection. The overwhelming majority of the reverse mortgages originated in recent years are the FHA Insured Reverse Mortgage product known as the HECM, an acronym for Home Equity Conversion Mortgage. These are some of the questions I have received recently from clients.
Q: I have heard there are some new changes that have to do with qualifying. How does that work?
A: Financial Analysis is a relatively new qualifying process that is required for all new reverse mortgage borrowers after April of 2015. The purpose is to determine if the borrower will have the ability to maintain the taxes, insurance and maintenance of the home as well as meeting all of their other financial obligations and household expenses.
Q: Why was this Financial Analysis process put in place?
A: Before this process was required, anyone with sufficient equity over the age of 62 was eligible for a Reverse Mortgage as long as the property met minimum FHA property standards. This new process will help to add an additional measure of protection. It does so by helping to assure that a senior’s equity is not being wasted irresponsibly by incurring the costs of a reverse mortgage only to be faced with moving or foreclosure a short time later because they could not afford the other related obligations of homeownership and their other living expenses. One consequence of this new process is that some borrowers who thought this would be available as a financial safety net may find that it is no longer an option because they do not qualify under the new guidelines.
Q: My Financial Advisor mentioned putting a Reverse Mortgage in place now even though I don’t need one. Why is that?
A: Many Financial Advisers believe that a reverse mortgage has certain features that could provide a measure of financial security and risk avoidance. By allowing a person to access tax free income from a Reverse Mortgage instead of depleting savings or taxable retirement accounts earlier than preferred, other retirement investments are allowed to continue to grow tax free. By putting the Reverse in place now, even if not needed, the loan proceeds are available and accessible when needed regardless of any new changes that might be made to the reverse Mortgage program in the future.
Q: Wouldn’t it cost a lot of unnecessary interest by borrowing money that I do not yet need?
A: The money that is available but not yet accessed remains in a line of credit to be used in the future. Interest charges only accrue on the money actually drawn and borrowed. No interest is charged on the funds available but not yet drawn.
Q: Wouldn’t there be more money available if I just wait until I am older?
A: One of the unique features of a Reverse Mortgage line of credit is that the unused portion of the line of credit continues to increase every month that it is not accessed. So by putting it in place before it is needed, the amount available for future use is actually growing each year and may even be higher than would have been available by waiting to obtain it in later years.
Q: I would like to meet with my financial adviser to discuss this. Is it possible for you to meet with both of us to discuss this?
A: Yes. We work very closely with legal and financial advisers of all types including CPA’s, Certified Financial Planners, Estate Planning Attorneys and Insurance Specialists as well as any other family members to be sure that the financial goals of our clients are achieved.
Q: Is it true that a Reverse Mortgage can pay off my present mortgage and provide me with additional monthly income?
A: The proper answer is - it depends. There are specific maximum limits for the amount of funds available for both these purposes. These limits are based on the payoff balance of your present mortgage, the present value of your home and your age.
There are many other questions that should be carefully considered by anyone facing this important decision. It needs to be done with an eye towards your personal situation and the individual goals you seek to attain. Whenever possible, it is helpful if that decision can be made with your other trusted advisers included in the conversation.
The Case Study below is an excellent example of the FHA Reverse Mortgage Program being used as valuable retirement planning tool.
Harold and Betty are clients that I have known for many years that have also grown to be good friends. I have helped them finance their homes and investment properties for many years.
Harold and Betty are 62 years old and thinking about retirement in a few years. They are very concerned they will not be able to retire in the lifestyle they are accustomed to. They spent much of their working life providing for their family, their 2 children’s education and generally making a good life for the four of them. Neither have a private pension and only have Social Security to look forward to as retirement income. Unfortunately they have not funded their own IRA or 401K to a level that is sufficient to allow them to live comfortably when they are eligible for full retirement benefits.
They pay $1827 per month on their $325,000 mortgage with 25 more years to go to pay it in full. Harold plans working another 5-8 years at most, but certainly not 25. Their home is valued at about $625,000. Although it seems as though they have $300,000 equity if they were to sell their home, the commissions and closing costs of selling and buying another home would reduce their net proceeds to approximately $250,000. So if they do not wish to have a mortgage payment, one choice is to sell their home and buy a $250,000 home. The problem is that none of the choices a $250,000 priced home provides are acceptable to them. Their friends, family and entire lives revolve around staying in their present home and real estate prices do not include good options for $250,000 homes in their area.
And, they cannot comfortably retire if they still have a mortgage payment.
Betty called me to see if a reverse mortgage could somehow help them face a better retirement in the future. She had seen the many TV commercials but did not know how it could possibly relate to their situation. We talked for a while, and set an appointment to meet in person to determine their options and see if they qualify under the new guidelines.
After our initial phone call I determined they could qualify for a an FHA Insured Reverse Mortgage. The new Reverse mortgage was able to pay off their present mortgage and stop the required monthly payments immediately. Harold was able increase his 401k retirement savings at work to the maximum $2,000 per month contribution since he no longer had to pay an $1827 mortgage payment.
According to their financial planner, over the next 8 years before retirement Harold and Betty will be able to save somewhere between $200,000 to $250,000 in their 401k retirement account instead of making payments to a mortgage. With this new plan in place, eight years from now when they retire, they will have an additional $250,000 in their retirement account as well as have the right to stay in their beloved home as long as they wish. Their only cash expenses of owning are exactly the same as if they owned the home free and clear. That is taxes, insurance and maintenance.
Harold and Betty are able to remain in their family home, without any new mortgage payment for as long as they live. If their home had already been paid for free and clear, there would be many other alternatives that could supplement their income. These include a lifetime tax free monthly income or an open line of credit. Either with no monthly payment required. Each borrower’s qualification and potential loan amount is based on his or her age, income and financial capacity. The numbers illustrated above are not the same for each scenario and cannot be relied upon in your own situation.
The FHA Reverse Mortgage is a valuable tool in planning for retirement. It should be carefully considered as a viable option to supplement retirement income or preserve access to the equity in a retiree’s home.
Today’s reverse mortgages may include a line of credit that can have very flexible features. Many people are unaware of these features. This article provides a simple feature comparison of these two very different products. The advantages and disadvantages are compared side by side.
Some homeowners are facing the very unfortunate consequences of having obtained a typical Home Equity Line of Credit (HELOC) from a bank that has now terminated and requires large monthly payments. Let’s compare that to a Reverse Line.
Both of these loans have starting interest rates that are guaranteed for a specific period of time. The difference is that the Reverse Mortgage has an interest rate that can change only once every 12 months with a maximum increase of 2% per year, therefore the rate is guaranteed for one full year at a time. The traditional conventional line of credit that banks issue can change its interest rate as often as every month and there is no limit how much the rate can change during a year, other than the lifetime interest cap.
In a worst case scenario the Reverse Mortgage can only increase 5% higher than the starting interest rate in the entire life of the loan. Even that would take 3 years because of the annual 2% increase cap. A regular Home Equity Line of Credit the Banks Issue (HELOC) could reach that level without any time restriction.
Depending on many factors a Reverse Mortgage can have little or no fees associated with it after the lender credits the borrower for the Margin and initial draw. It can also cost many thousands of dollars of costs in other scenarios. Only a discussion directly with your lender can disclose your options for your individual situation based on your circumstances and individual choices.
A Reverse Mortgage requires timely payment of property taxes, homeowners insurance and HOA dues just like any other loan. But it does not ever require regular monthly payments of principal or interest as long as at least one of the borrower’s continues to reside in the home and the loan is not in default. Compare this to a Bank HELOC – it requires interest payments every month for usually a period of 10-15 years. Then the loan requires full principal and interest payments to be made over the next 15-20 years. This means that when the typical Bank HELOC loan enters the repayment period in the 10th or 15th year the monthly payment increase required can be astronomical. Many borrower’s are unable to pay the new amortized payments on their retirement income. It is also a very high risk in a rising interest rate environment.
Reverse mortgage loans have an annual premium of 1,25% that is accrued to the loan balance to cover the risk of the program and assure its availability in the future. It is a cost that should be considered because these fees are not payable on conventional HELOCs.
What this means is that the amount of money available to the borrower on a line of credit is guaranteed to be available to the borrower by the US Department of Housing and Urban Development (HUD).
The financial stability of the mortgage company issuing the loan now or in the future is not factor because of this guarantee. All of this is possible by the insurance premiums pooled by HUD to cover losses. Regular lines of credit from a Bank can be cancelled if the lender believes you are no longer credit worthy or their security (equity) is impaired. During the last economic downturn of 2008 thousand of Americans with regular HELOCs received letters abruptly canceling their lines of credit. This would never happen on a reverse mortgage.
In fact, one of the most unique features of a reverse mortgage is that any unused line of credit will actually increase the amount that is available year after year, Guaranteed by HUD, without re-qualifying in any way.
These mortgages can be a viable financial solution for many seniors. But they must be considered carefully and structured for specific to your individual needs. This is not a product for one size fits all. When done properly it can truly be a blessing.
|Reverse Mortgage||Bank HELOC|
|Annual rate cap||2.000%||Unlimited|
|Maximum life cap||5.000%||18.00%|
|Frequency rate change||Annually||Monthly|
|Fees to acquire||$575||$275|
|Termination date||None||10 yr|
|Minimum monthly Payment||None||Yes|
|Amortization required||None||20 yr|
|Mortgage insurance premium||1.25%||None|
The recent Case Study below is about a client that we were able to help achieve her goals for retirement through implementing the use of the FHA insured reverse mortgage program. Many people are unaware of how a reverse mortgage can be used to purchase a new home rather than being used to stay in their present home. Such is the case with the beginning of this story. It is the end of the story that makes this such a great example of a Reverse Mortgage success.
Kathy was a client that I have known for many years. I have helped her and various other members of her family to purchase and refinance many homes and investment properties over the years. But this time it was different.
Kathy called inquiring about how she could possibly qualify to downsize to a less expensive home in anticipation of retirement. She was not quite ready for retirement but was anticipating doing so in the coming years. She had recently changed jobs and she was no longer comfortable with the idea of keeping up mortgage payments on her North Orange County home.
The idea was to sell her present home and purchase a less expensive home with a smaller mortgage or none at all. She had a first mortgage of about $330,000 and a second mortgage of about $72,000. She had already secured a buyer who would pay her approximately $750,000 for the property. After all the expenses of sale were paid, Kathy was going to net about $310,000.
There were actually two problems standing between Kathy and her goals. The first was that with only $310,000 to purchase a new home her choices were very limited or almost impossible in Orange County. That amount of money would only buy a condominium in Orange County. She was accustomed to a single family home and wanted room for visiting family members.
The second problem was that she didn’t want a mortgage payment. Although she was still working, she wanted her earnings to be used to build her savings for retirement.
After an initial meeting I suggested the FHA Reverse Mortgage Purchase program for Kathy. She was completely unaware of how we could use this method to purchase a home. Her Realtor had never heard of the program either. After another meeting with her and her Realtor we were able to give her a loan pre-approval based on this little known program. We explained that based on her particular qualifying situation she could buy a home with about 45% down and put have no monthly mortgage payment as long as she remained in the home and paid the taxes and insurance.
Kathy was able to find a $482,000 single family home and put $232,000 as a down payment.* This new home required no monthly mortgage payments at all. She was able to then use the other $78,000 from the sale of her home to pay off all of her other debts. We also helped Kathy understand how to transfer her low proposition 13 taxes from her previous home to her new one.
Our client was able to remain in a single family home, do so without any new mortgage payment, retain her old super low property tax basis and prepare herself for a much more comfortable retirement. We were able to work closely with her Realtor, the listing Realtor and her financial planner to understand how this could be achieved and how it was a win-win for all concerned. Then we followed through and executed the plan. Another great result accomplished by careful planning and a coordinated effort.
*Each borrower’s qualification and potential loan amount is based on his or her age, income and financial capacity. The numbers illustrated above are not the same for each scenario and cannot be relied upon in your own situation.