Getting a Reverse Mortgage:
Reverse Mortgages Are Increasing Debt, Decreasing Equity Loans
Features of the reverse MORTGAGE PROGRAM
The Reverse Mortgage program was created for Seniors 62 and older to access part of the built up equity in their home. The features promised in the TV commercials include: “A reverse mortgage is a safe government insured loan, allows borrowers to remain in their home for life, no mortgage payments, create a stable secure retirement, provide additional income, a better quality of life. Lenders encourage the Borrower to spend the money to payoff credit cards, take a trip, pay-off health care costs, pay for grand-kids college, and/or meet the borrowers wishes for their estate.”
Do you know 99% of consumers have no idea if a reverse mortgage will benefit or financially ruin them (the day they sign the contract)?
As you hear in the commercials "A Reverse Mortgage is not for everyone". Don't assume it is right for you because the features sound good. Appealing features are not reasons to get a reverse mortgage. A Reverse Mortgage is a complex financial product that comes with lifelong consequences. YOU must make absolutely sure a reverse mortgage is "right" for you. This is called "Suitability".
Simply put SUITABILITY determines if "a reverse mortgage is safe, "right", and beneficial for your unique circumstances". Suitability ensures you make a wise decision based on the facts, consequences, costs, and benefits for your circumstances.
This page is focused on "What you need to do" and "What you need to know" to help you understand if a reverse mortgage is safe, right for you, and will be in your best interest.
WHAT YOU NEED TO DO: 5 Steps to Determine Suitability
1. CREATE A FINANCIAL PLAN
Create a long term comprehensive Financial Plan based on your current age, financial goals and needs, payment of required property charges, personal & health circumstances/costs, and wishes for your estate. A Reverse Mortgage needs to be part of your long term financial strategy. Project your financial plan out for a minimum of 5 years and 10 years is better. If you expect to live for 10, 20 or 30 years estimate your financial plan income and expenses for that time.
Your Reverse Mortgage account is not a savings account. Have a separate savings account.
TIP: The younger you are the less equity you can access. Be realistic. If you are 62 and expect to live for 30 years you should financially plan accordingly.
2. REVOCABLE TRUST
Get a Revocable TRUST. Put your property in the Trust. A Trustee or Successor Trustee has automatic legal authority to represent your interest while you are living and represent your wishes for your property when you die. Even if your property is your only asset it is more more cost effective to have a Trust rather than go through probate to meet your wishes for your property.
TIP: I recommend Suze Orman's Must Have Documents which includes a Revocable Trust.
IMPORTANT NOTE: If you become incapacitated in your lifetime, have a will or die intestate the Loan Servicer will not allow your heirs or estate representative to sell, purchase, or deed the property without a guardianship, probate or a court order. This could cost thousands and thousands of dollars, take a long time to accomplish, and could prevent your wishes for your property to be carried out.
3. TRUSTED ADVISORS
Include Trusted Advisors in your decision making process. With any complex financial product you are wise to get advice. Trusted Advisors can include family members, your attorney, financial advisor, tax advisor, trusted friends, etc. Think of it this way: Would you use your home as collateral to purchase "derivatives" because someone told you it was good for you?
4. HOW MUCH EQUITY YOU CAN ACCESS?
HECM Reverse Mortgages have a maximum lending limit of $679,650. This does not mean you will get $679,650. Use the free reverse mortgage calculator to see how much equity and what options are available to you. Include the reverse mortgage funds in your Financial Plan.
TIP: Use a free reverse mortgage calculator to see how much equity you can access after you pay off your existing mortgage (if any), any property liens, and deduct the loan origination costs.
5. EXPLORE ALL YOUR OPTIONS BEFORE MAKING A DECISION:
- Lease your Home
- Sell your Home
- Refinance your current mortgage
- Get a Line of Credit
- Family Loan/Peer to Peer Loan
- Rent a portion of your Home
- Reverse Mortgage
You have lots of options! Explore all of them. Be open to choosing the option in your best interest over the long term.
WARNING: Failing to determine suitability puts you at risk of losing your property, equity, retirement, quality of life and everything you worked for all your life - at a time in life you can least afford to make a financially devastating mistake and are least able to recover.
WHAT YOU NEED TO KNOW:
HOME EQUITY CONVERSION MORTGAGES (HECM)
Most reverse mortgages are federally insured Home Equity Conversion Mortgages (HECM). HECM Reverse Mortgages have a lending limit called a maximum claim amount of $679,650.00. You will not get $679,650.00. The amount of equity you can access depends on the age of the youngest borrower, the value of the property and current interest rate.
If you get a HECM loan you will not have monthly mortgage payments. All pre-existing liens on your property must be paid off by your reverse mortgage funds. Originating costs can be up to $25,000. The loan balance on day 1 of your reverse mortgage will include: payoff of existing liens/mortgage, origination costs, up front mortgage insurance premium (MIP), and any of the reverse mortgage funds you take up front. Reverse Mortgages have compounding interest on the loan balance in either a fixed rate loan or variable interest rate loan.
PROPRIETARY OR JUMBO REVERSE MORTGAGES
PROPRIETARY or JUMBO Reverse Mortgages are not federally insured and do not have the very few consumer protections of a HECM reverse mortgage. Generally these mortgages have a maximum claim amount of 40% of the property value and are often used when the property value is $1,000,000 or more.
THE COUNSELOR AND THE LENDER:
The role of the Certified HUD Counselor and the Lender is to educate you on the reverse mortgage process and different reverse mortgage programs available to you.
1. The Lender's role is to educate you on how a reverse mortgage works. The product options they sell, the amount of funds you can access from your equity, funding options - lump sum, monthly income, line of credit or a combination of these options.
2. The Counselor's role is education on the reverse mortgage process. Because Counselors use the Financial Interview Tool (FIT) the borrower has the illusion they are receiving financial and legal advice. The FIT tool came into place to protect the FHA insurance fund from losses by qualifying borrowers who can show they are able to pay required fees like taxes and insurance.
3. Neither the Lender or the Certified HUD Counselor can give you any legal or financial advice. They cannot answer the single most important question for you: Is a reverse mortgage “right” or “harmful” for me?
IMPORTANT TERMS: For more details on these terms and others
REVERSE MORTGAGE FUNDS
You can take the reverse mortgage funds in a variety of ways - a lump sum payment, a line of credit, or a monthly income or a combination of these options. Include in your financial plan
TIP: Use a free reverse mortgage calculator to see how much equity you can access and the funding options available.
TYPE OF REVERSE MORTGAGE
- Fixed rate or variable interest rate
- Tenure - for the borrower's life
- Term - for a specific number of years - becomes due at end of term. Risk - outliving the term
OCCUPANCY – The borrower is required to occupy the property as their primary residence. The borrower is required to sign and return an annual occupancy certificate. The borrower can be out of the property for 12 consecutive months for medical or any other reason. The Lender is required to foreclose if the borrower does not occupy the property as their primary residence.
TAXES, INSURANCE AND HOA – The borrower is required to be current on property taxes, hazard insurance, and HOA fees (if any). Be sure to calculate required property charges in your financial plan.
PROPERTY MAINTENANCE – You are required to maintain the property to the Lenders standard. This means you must pay for repairs such as a new roof. Include any upcoming repairs in your financial plan.
INCREASING DEBT, DECREASING EQUITY LOAN – Can you afford increasing debt? Use your financial plan to determine the impact.
"SAFE GOVERNMENT INSURED" actually means the borrower pays the FHA insurance premium to protect the lender and ensures they will recover 100% of the loan, fees and costs. It does not protect the borrower in any way and is a significant cost to the borrower.
FOR MORE DETAILS ON THE REVERSE MORTGAGE PROCESS AND HOW THESE TERMS WORK - VIEW Consumer Financial Protection Bureau Reverse Mortgage Guide
REVERSE MORTGAGE VS TRADITIONAL MORTGAGE DIFFERENCES
Reverse Mortgages are increasing Debt, Decreasing Equity loans.
Traditional Mortgages are Increasing Equity, Decreasing Debt loans.
The fundamental differences in a reverse mortgage include:
- Reverse Mortgages are only sold to those 62 and older
- The contract, terms and consequences have a Lifelong Impact
- You lose most of your traditional Homeowner's Rights
- The Lender or Counselor cannot tell you if a reverse mortgage is "right" or harmful for you
- Interest is compounding on the fees, costs, principal, and mortgage insurance.
- There are very few consumer protections, no agencies to get help from, no enforcement or oversight of the very few regulations designed to protect the consumer interest, and no recourse once signed. It's almost impossible to get out of a reverse mortgage without a huge financial loss.
- There can be no other liens on your property so what you get from the reverse mortgage is all the equity you will be able to access over the term of the loan.
REASONS NOT TO GET A REVERSE MORTGAGE:
- A short term solution to a financial problem.
- Never remove a spouse from title
- Do not get a reverse mortgage at 62
- If you are in your 80's or 90's do not get a fixed rate reverse mortgage
Get everything in writing from the Lender. Get a copy of all signed and executed documents at origination closing. Verbal promises, even well intentioned ones are made all the time and are not enforceable by law. Verbal promises may violate State or Federal law and you will have no recourse on a verbal statement.
Most of the problems/issues Borrowers or family members experience happen a few years after the loan was originated or sooner if the Borrower dies. For that reason if you have a reverse mortgage learn more on the Servicing and Foreclosure pages.
Disclaimer: I am not an attorney and not giving legal advice. Legal Authority varies State by State and the borrower should consult with an attorney to understand how to do this in the most cost effective way while originating the loan. The suggestion of a Trust is based on thousands of consumers who have been obstructed from satisfying their reverse mortgage and lost the home to foreclosure.