Reverse Mortgages

How does a Reverse Mortgage work?

how reverse mortgages work

if I asked you what you know about reverse mortgages…

… what’s the first thing that comes to mind?

Like most  people old enough to qualify, your answer is probably:

“That’s the program where the bank takes your house when you die…”

reverse-mortgage-bank-takes-home

If so, you join the majority in being dead wrong…

Question #2:

Where does the money for a reverse mortgage come from?

Most people believe the government loans the money to banks who then distribute it.

This is also a common misconception.

Last Question:

How much money has the government lost on reverse mortgages?

bank-reverse-mortgage-losses

Not one penny.

Why all the Reverse Mortgage Misconceptions?

Preconceived ideas make all of us believe what we think we know even when it’s obviously wrong.

For example:

What color is a stop sign?

You said “red” right?stop sign

I’ll get back to the color question just a second…

…but first…

…let’s talk about some of the preconceived ideas about reverse mortgages.

You see… about 20 years ago, some of these reverse mortgages ideas were true…

Transamerica gives Reverse Mortgages a Black Eye:

transamerica-reverse-mortgage

Remember Transamerica? 

They were a financial icon during the 60’s and 70’s.

Transamerica created one of the first non-government sponsored reverse mortgage programs. 

It was called a “shared appreciation” mortgage and instead of charging a set interest rate the company would share in the increasing equity of the home when the owner died and the home was sold. 

Here’s one example of the damage that this company did:

 “A lawsuit filed by the San Mateo County Public Guardian on behalf of Berta Grey, an 83-year old woman, alleged that Transamerica Corporation unfairly and unconscionably charged her what was in effect a shared appreciation fee.

This fee gave Transamerica an automatic 50% interest in the difference between the base value of the home when the loan was signed and the appreciated value of the home when the loan terminated, even though the fee bore no relation to the amount she actually borrowed. Additionally, the cost of Berta Grey’s reverse mortgage soared when she was required to purchase an annuity in conjunction with her reverse mortgage.

An annuity is an insurance product financed out of the home’s equity to provide monthly payments to the borrower immediately or after a certain number of years. The San Mateo County Public Guardian alleged that Transamerica charged Berta Gray the cost of the annuity immediately and that interest began compounding on that fee even though she was not due to receive any payment on the annuity until six years after the loan began, at age 89. Under this arrangement, if Ms. Gray died before the six-year period ended, her estate would see no benefit from the annuity purchase, although she had paid in full for it.”

 Source: http://consumersunion.org/pdf/reverse.pdf

 Transamerica was not the only unscrupulous financial institution to exploit seniors with these schemes …

…but they were the most publicly reported on simply because of the both the size of the company and their hypocritical marketing slogan that “you could trust the Pyramid…” 

Those negative stories were burned in our memories and remained long after the likes of these scammers were eliminated from the market. 

Now…

I’ll ask you the second color question…

What color is a Yield sign?

Keep that answer in mind while I talk about today’s safe program:

Far from a liberal government giveaway program…

ronald-reagan-reverse-mortgage

In 1988, HUD gains the authority to insure reverse mortgages through the FHA when President Ronald Reagan signs the reverse mortgage bill into law. The reverse mortgage government insured loan is established.

Do you think any program the government is involved in has to be a liberal giveaway?

Did you know… it was actually Mr. Conservative himself, Ronald Reagan that signed the reverse mortgage bill into law?

This allowed the department of Housing and Urban Development (HUD) through its FHA branch to insure reverse mortgages making them more viable for banks to offer since the risk became minimal. 

This was really a second phase of the FHA program created following world war II to help returning GIs buy a home with very little down payment.  The original loan helped gain the home and the second loan (a reverse mortgage) would help them to stay in it during the retirement years. 

So, Reverse Mortgages Are Safe Now?

reverse-mortgages-safe

A critical component to this endorsement by HUD was to bring safety to the product. 

Very specific rules were dictated by HUD/FHA to all vendors who wished to offer the program. Not complying with these rules meant stiff penalties including fines and loss of authorization to continue in the program.

No reputable lender wanted to risk gaining the penalty attention from HUD and disreputable originators like Transamerica quickly exited the business. 

These rules included:

  • Mandatory counseling by a 3rd party HUD approved councilor to insure the borrower was not misled by the lender and that they completely understood the cost involved.
  • A mandated maximum origination fee which limited what the originator could charge.
  • A mandatory statement demonstrating the exact amount the loan would grow every month as the unpaid interest was being added to the principle amount.
  • And lastly, a three day right to cancel without fees if the borrower changes their mind up to three days after the loan closed.  

 

In other words, HUD has gone overboard to insure the program is safe and offered by reputable vendors. 

So, why is there still such a negative impression about them? 

The answer is very much like the color question regarding the yield sign.

I’ll bet you said “YELLOW….”

Look familiar? 

yield-red

Would it surprise you to know that the government dictated that ALL yield signs must be red and white…

…over 30 years ago…

and we’ve been driving by them every day since, but since they were actually yellow in our early years of driving that is still our preconceived idea:

Untitled design

Now for how reverse mortgages work:

how-reverse-mortgages-work

Most articles about reverse mortgage start with the comment that they are very complicated.

The truth is…

….they’re really not complicated at all. 

I can’t understand why people try to make them so complicated?

It’s really easy…

You borrow money today…

…and don’t need to make any payments unless you move, sell the home or die.

As to how much you can borrow…

It starts with these six things:

  1. What’s your home worth today?
  1. How much do you owe on it today?
  1. When you subtract those two numbers how much equity do you have?
  1. How old are you and your spouse?
  1. Lastly what is the interest rate?

All of these variables go into a calculator and out comes the amount that you can borrow.

These calculators are available all over the internet.

The one that I like is: http://rmc.ibisreverse.com/  because you can get a calculation without risking being hassled by a sales rep after you enter your information.

When you apply for a reverse mortgage it works pretty much the same as if you were applying for a standard FHA mortgage with the exception that you’re not going to make a monthly payment. 

Instead the amount of the payment will be added the loan balance so the loan will grow every month. 

The loan is designed so that as long as the interest rate and appreciation growth rate of your home stay within norms, the growing value of your home off sets the loan growth and the remaining equity stays constant…

Erosion of Equity on FHA Reverse Mortgages

Like I mentioned here ….

This is by no means guaranteed and if event like 2008 happen again where home values fall rather than increase the equity could be consumed by the growing loan. 

Having said that, it’s a feature of the HECM loan that even if the equity is exhausted you remain in your home for as long as you or your spouse is able to maintain it.   

A recent change to the program that might have a big impact on whether the HECM reverse mortgage program is right for you is the newly enacted Financial Assessment. 

Prior to this new requirement there was no requirement to qualify with either income or credit history. 

However, in 2014, HUD began to finalize guidelines for Financial Assessment, which began to be implemented in 2015.

Financial Assessment requires lenders to analyze potential borrowers’ income sources and credit history to determine whether or not borrowers must have a mandatory set-aside of funds from proceeds to cover necessary expenses such as property taxes and homeowners insurance.

These steps are expected to yet again protect consumers and reduce the number of borrowers who might fall into default from failing to comply with loan terms like continuing to pay for taxes and insurance.

No calculator will answer the question of whether or not the financial assessment with impact your ability to qualify.

Only a conversation with a qualified originator and answer that question and we can help with that.   

reverse mortgage options

 

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