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A Reverse Mortgage is NOT a Sale:
The deed is still in your name—the bank never owns the house and has no say as to what you do with the house as long as you keep it insured, pay the taxes, maintain it, and of course, live there. If you want to remodel it, paint it a different color, or even sell it, you are the one in control because your name is on the deed—just like it is now.
The money you receive is required to be paid back when you permanently move out of the house with the interest agreed upon in the beginning. The difference is that YOU will never be required to pay the loan back out of your money or your heir’s money. It will be paid back by equity in the house which may increase with inflation over time. If it does not, the FHA will be responsible for the pay-off if your home does not have enough equity. You can never be required to pay more than what your home value is worth no matter what the time period or economic conditions at the time you want to move or you pass away. Your heirs can never owe more than the value of your home.
You can move whenever you want. As a lender, we cannot ask you to ever move or sell your home earlier than you want to as long as you continue to pay your taxes, insurance, and maintenance. We have to honor that commitment for life or as long as you live in your home and abide by all terms of the loan. However, you are allowed to change your mind and sell the home whenever you want if you wish to move to warmer climates, a smaller home, or closer to your children—whatever your choice may be. Only you will make that decision, not the lender or the government.
The HECM program is what is called in government-speak “Revenue Neutral”. That means the guarantees are authorized by the government but the costs are paid by FHA mortgage insurance premiums which are part of every loan that is done and paid out of the equity of the home. The taxpayers do not fund the HECM program, it is simply made possible by the Federal Housing Administration which monitors lenders to make sure seniors are being treated fairly and equitably.
Many folks think a reverse mortgage should only be used when all other accounts and options are exhausted. This could not be further from the truth. While it is a great tool to save a senior’s home that has fallen into foreclosure or other hard times, it is much better used earlier in retirement to avoid future problems and keep the home safe and the retiree “aging in place”.
**The information on this page does not constitute tax and/or financial planning advice. Please consult a tax and/or advisor regarding your situation.
A Loan that Converts Equity to Cash for Many Different Uses:
Increases cash flow or pays off a forward mortgage when the payments are no longer as easy to make. As mentioned in the last section, the primary reason to use a reverse mortgage should be proactive not reactive to a cash flow problem. When things are good, it is a great time to get a lifesaver in case the financial waters get rough later in life.
Everyone likes a raise so you can do some of the things that are fun and create memories that you will be glad to have at the sunset of life. It is sad when folks sit at home on top of thousands of dollars in equity and miss vacations, grandchildren’s college graduations, or even a dinner out because the budget is too tight. No well-meaning child would ever ask you to pinch pennies so they could have a larger home equity inheritance when you pass away. They would rather have you enjoy life with them instead of dying a rich man or woman in the cemetery. Just ask them!
Many clients will tell us that they are doing fine and they just don’t need to use the equity that a reverse mortgage would give them. That is a wonderful place to be that affords many opportunities. No one wants their hard earned home equity to go to the nursing home, probate attorneys or the IRS. Yet that is what often happens. If you don’t have an estate plan, the state has one for you. It is so much more enjoyable to gift your money now when you can offer wisdom and guidance while teaching your children and grandchildren some valuable lessons about what money can do for them. Ask your loan officer about the book or movie “The Ultimate Gift”. Is it more important to leave a legacy of wisdom and great memories when you leave this earth or an empty paid-off home?
In any rough economic times, there are many things that you can take advantage of if you have cash. You can purchase a vacation home in Arizona or a condo in Florida when you see below market prices! You could help a grandchild save their home from foreclosure or help them with college as costs soar over $20,000 per year at public universities. Think about it—if you had an extra $100,000 in your hand today, whom would you give it to and what could you do with it? With your wisdom and experience, we know you can think of lots of options that you can accomplish.
When you work with a professional financial advisor in the life insurance industry, you will find there are many products designed for the wealthy that have excess cash. These products, when used as part of an overall estate plan, can transfer wealth tax free and accomplish more than a paid-off house could by itself. There are also many new products that offer living benefits in case you need to handle long-term care costs without losing your home in the process.
Of course you know the longer you defer filing for Social Security, the greater your monthly benefit. The more money you take out of your IRA or 401k in the early stages, especially when the market is down, the less you will have in your later retirement years, perhaps when you need it the most. If you use a reverse mortgage in your 60’s the math will show that you will have more
money in your 70’s and 80’s because of compound interest. A reverse mortgage can help you strategically avoid paying more taxes on your IRA than you need to because you only take money out when you keep it in the lowest tax bracket percentage. Ask a qualified, reverse mortgage educated advisor for more details. A reverse mortgage can help with health insurance from 62-65 before Medicare kicks in.
It is very simple. In the beginning before HUD and FHA were involved, some private reverse mortgages had fraud problems that hurt some retirees. Reverse mortgage loans as a whole are better and now heavily regulated making it much easier to understand than years ago, but some of those old stories are still circulating. People have always been afraid of the dark because there is uncertainty of what is there. You need to turn on the light when there is darkness to find out whether there are dangers or not. When you turn on the light, you will find a very different product – quite unlike the rumors and misunderstandings promoted by the news media and the simple gossip. Some of the people that pass on negative things about reverse mortgages are not mean spirited or purposely lying—they are simply misinformed and it is our job to give you the best education available with the most up to date facts so you can make a clear and unemotional decision. Our loan officers are very experienced and well trained in a variety of senior, real estate, and retirement issues so you can feel much more secure about making a decision with one of your most valuable assets—your home.
MYTH: I could lose my home and be forced to move.
FACT: The terms of the loan state that as long as you live in your home as your primary residence, you maintain the home, pay taxes and insurance, you cannot be forced out.*
MYTH: Your home will be taken away when you pass away and the family loses the rights to the property.
FACT: Because the house is in your name, you or your heirs make the decision to sell or pay off the mortgage balance. If the mortgage balance is too high, your payoff is limited to the value of the house and the remaining amount is paid by the FHA mortgage insurance fund. Remember that your heirs can always purchase the home for 95% of the appraised value or the mortgage balance, whichever is lower.
MYTH: Your house must be debt-free to qualify for a reverse mortgage.
FACT: You can use a reverse mortgage to pay off a current mortgage provided the available FHA borrowing limit is high enough to cover your balance.
MYTH: The wisest thing is a house “free and clear”.
FACT: In the event of an extended nursing home stay or a lawsuit, all your home equity can be lost that you spent your whole life to create. A reverse mortgage can unlock that equity and allow you to properly manage it for the benefit of your family and protect you from nursing home expenses.
MYTH: I will be giving up the deed to my home and I won’t own it anymore
FACT: The deed always stays in your name and you have all the rights that you do now. You can sell it, remodel
it, and keep any equity that is left when you move.
MYTH: I can’t afford making a payment on a mortgage—that’s why I don’t have a mortgage now!
FACT: You will have no monthly mortgage payments for as long as you live in the home—no matter what. You will just
pay the taxes and the insurance just like you do now, and maintain the home. A reverse mortgage is a “payment optional” mortgage. You can continue to make payments for tax purposes or manage equity when and for how much you want.
MYTH: Reverse mortgages are too expensive.
FACT: There have been major changes in the HECM program in the last couple of years that dramatically reduced costs. For example, lender’s loan originator fees are capped, based on the value of the home. While reverse mortgages are more expensive than a traditional mortgage at the outset, they are more flexible and provide more options for senior lifestyles than any other mortgage available, including no mortgage payments and a rising credit line. (You must continue to pay taxes, insurance and maintenance.)
MYTH: My children could get stuck with a big mortgage debt if I live too long.
FACT: Your children can never be liable for any amount over the value of the home because the loan is guaranteed by the FHA Mortgage Insurance Fund (FHA/HUD).
MYTH: Only people that are in financial trouble get a reverse mortgage.
FACT: While we are always here to assist those who have run into some financial rough spots, many people use a reverse mortgage as part of their financial plan to better their lives today and their children’s in the future.
If you check yes to 2 or more of the questions below, we need to talk soon!
When you have a reverse mortgage, who owns your house (whose name is on the title/deed)?
You remain the owner of your property. There is no change to the deed or title of your home when completing a reverse mortgage.
There are several “payment options” or ways to get money from a reverse mortgage. Which payment option do you think will best meet your needs?
It depends on your situation. Our trained loan officers have helped hundreds of seniors pick the best option for
their personal situation. You can do a lump sum payment, ongoing monthly payment, or you may also choose a line of credit allowing you to access your money as you need it. Your line of credit will be guaranteed to grow every year that you don’t use it.
What happens if you change your mind later and want to change your payment plan?
As long as you still have money available to borrow from your reverse mortgage, you can change your disbursement option for a small, one-time fee. Remember when the value of the loan is higher than the home value it does not trigger an early payoff or due date.
When you have a reverse mortgage, do you have to make a monthly mortgage payment to the bank?
No, but for tax or cash flow purposes including Medicaid planning you may wish to do so.
What basic responsibilities will you continue to have after you get a reverse mortgage?
The homeowner remains responsible for the payment of property taxes and homeowner’s insurance as well as basic upkeep of the property. In addition, you must continue to live in the home as your primary residence.
What may happen if you do not keep up these responsibilities as a borrower?
If you do not abide by all terms of the loan, the lender is required by HUD to foreclose.
When does the reverse mortgage have to be paid back?
Your reverse mortgage will become due when one of these things happen:
1. You sell your home.
2. You permanently move out of your home.
3. The last surviving borrower or spouse passes away. Your heirs will have two options. They can choose to sell the property, pay off the reverse mortgage balance and keep any remaining equity, or they can choose to keep the property by refinancing the balance of your reverse mortgage with a new mortgage in their name. Remember if the loan balance ever exceeds the home value, it does NOT trigger an early payoff or cause you to have to move out of your home.
If you took all of the money from the reverse mortgage in a lump sum and spent every bit of it, would you be able to go on living in your home?
Yes, your reverse mortgage will not become due until you pass away, sell your home, are no longer living in the home, or no longer abide by all other loan terms. If you use all of the available proceeds, you would not have any more money available and interest would accrue until one of the three events referenced above occurred.
What happens if at any time the amount you owe under a reverse mortgage is greater than what your home is worth?
Nothing as long as you still live in your home and pay taxes, homeowners insurance, and maintenance.
If you get a reverse mortgage, how does that change the amount of money that you will leave to your children (or other heirs)?
Most likely, it will decrease the amount of money the heirs will receive from the value of the home. However,
your overall net worth could potentially get better, because you will not be spending as much from your other accounts.
What if I live in Florida for half the year?
That’s fine, you just need to live in your primary residence for six months and a day.
Will your children receive more or less after you pass away, than they would without the reverse mortgage?
It depends on what you do with your overall finances. Most families may receive more by being more efficient with the use of their entire portfolio of assets.
What if I go into a nursing home?
As long as you are simply rehabilitating and getting better, your home and reverse mortgage are still yours unless you have been away from your home for more than twelve months.
If you refinance your current HECM, will you still have to pay mortgage insurance? How does this work?
In general, mortgage insurance is paid for with an “up-front” premium that is included with your closing costs and a monthly premium that is added to your loan balance each month. When you refinance a reverse mortgage you will receive credit for the up-front premium you paid on the original loan; you would only have to pay mortgage insurance on the increased value of your home since you took out the original HECM.
What are some additional costs you will incur with a refinance?
Other than the reduced up-front mortgage insurance premium, closing costs associated with a HECM refinance are the same or lower as on your original loan. You may be charged an origination fee and all other third-party costs (appraisal, title insurance, etc).
Not Available in All States
When you purchase a home with a HECM, will the HECM be held on your existing home or your newly purchased home?
The HECM will be held on the newly purchased home as your primary residence. The down payment you will need to bring to closing is usually between 35-55%.
How will the lender determine how much money you will need at closing?
The down payment you will need to bring to closing will be determined based on your age, interest rates at the time and the sales price (or appraised value, whichever is less) of the home you are buying.
What sources of funds (money) are allowed when you purchase a home with a HECM?
The money must come from your own liquid assets (bank accounts, CD’s, retirement accounts, etc.) or from the documented sale of other assets you may have (your present home for example).
Why is my down payment higher with a reverse mortgage?
Your down payment is higher initially because you will never be required to make a monthly payment (except for taxes, insurance, and maintenance). With a traditional mortgage you will lose much more in cash flow over the years because of the consistent required payments. Remember the HECM for Purchase also can allow you to purchase a more expensive home than what
you would otherwise be willing to commit to in payments for the next 20-30 years.
Many people feel that paying off their home and having no mortgage with lots of equity is the Holy Grail of retirement. Several people wait until their home is paid off before they retire and then feel they are safe to do so. The truth is that home equity is good— but it is not great because it is not liquid. In the face of fluctuating home prices along with nursing home and long-term care threats, it is typically better to have your equity in cash and in a form that you can control instead of relying on uncontrollable factors. With people losing their homes in the depression era of the 30s and in the latest round of the housing foreclosure crisis starting in 2008, there are many people who feel that having a paid off home in retirement is the safest way to go. The fact is that when a reverse mortgage enters the picture, the rules change because there is no mortgage payment and no risk of foreclosure as long as you live in the home as your primary residence and pay insurance, property taxes, and maintenance. (Of course you have to pay these expenses even if you don’t have a reverse mortgage.) If you can use home equity without risk of foreclosure from missing mortgage payments, then the old rule of having a paid-off home in order to be secure may no longer be the best option. The truth is that a home is a great place to store memories but not a great place to store assets.
Once you understand that home equity is good, but cash is better, then the three buckets illustrated above will make a great deal of sense. During our earning years, we take money from the first bucket–W-2 Income– and put it into the second bucket– Retirement. What we also do is put quite a bit of our income into the third bucket– our home– purchasing it, making payments, improving it, etc. When we come to retirement, it is normal and expected to start drawing from bucket #2 (and stop contributing) when our first bucket decreases into just Social Security and pension income. However, most people continue to put money into bucket #3 when they don’t need to. They sometimes continue to make payments, pay for taxes and maintenance when there is more than enough equity in bucket #3 that they should let that bucket take care of its own expenses as well as give them a cash flow that is not usually taxable. What they don’t realize is that with a reverse mortgage, they can take cash out of bucket #3 just like bucket #2. Note the direction of the arrows and how they should change to maximize your retirement income on the lower rectangle. If you adopt this strategy as proven by the Texas Tech research1 and Boston College for Retirement Research2, your retirement funds will give you more income and be far more likely to outlast you! This is a big mental paradigm change. But, it is very important for you to understand that retirement rules, from taxation to home equity and especially long term care issues are simply very different from what happened during your earning years. Retirement is a different game and has different rules. The better you understand those rules, the better your retirement income will be. Let us explain why bucket #3 is so valuable for your retirement.
1Pfeiffer, S., Ph.D., Salter, J., Ph.D., CFP®, AIFA®, & Evensky, H., CFP®, AIF®. (2013). Increasing the sustainable withdrawal rate using the standby reverse mortgage. 2Ellis, C. D., Munnell, A. H., & Eschtruth, A. D. (2014). Falling Short: The Coming Retirement Crisis and What to Do About It.
Most financial advisors will encourage you to have a line of credit for unexpected (or planned) purchases or shortfalls in cash flow. However, a HECM has a clear-cut advantage over the traditional credit line, which is the guaranteed growth which applies to the unused funds in your credit line. While the cost of setup for a HECM is higher, the advantages quickly outweigh any costs. Your credit line is guaranteed to grow regardless of the general economy, interest rates, or the underlying value of your home. If you take out a HECM at age 62 instead of 82, it’s quite likely that your credit line could grow to be greater than the value of your home, especially in areas of the country where values don’t increase substantially.
The earlier you set up your line of credit, the more compounding occurs so you will have a substantial available line in your later years when you may need it the most. Even though your cash flow and your investments are fine now, 20 to 30 years of retirement is a long time which is why it’s prudent to ensure that your home equity, an important part of your nest egg, is readily available in cash without having to sell your home. You can draw out the home equity and still live in your home by only paying your taxes, insurance, and maintenance. This is an example of having your cake and eating it too!
Most common uses of a reverse mortgage loan when you don’t need the money now:
Everyone has a different situation, sets of needs, wants, and challenges. It will be well worth your time to meet with one of our loan originators to receive personalized advice that can improve your retirement.