You’ve probably seen a few articles answering:
“Is a reverse mortgage right for you?”
Are you tired of each and every article ending with, “it depends?”
I know when I see that prelude to the answer it tells me that the author doesn’t have a clue. They’re simply covering their ass while they write an article when they haven’t bothered to really research.
How would you like for someone to actually answer this question directly?
Between 2005 and 2008 I personally used to originate reverse mortgages so I have an intimate knowledge of the program. In 2008 I exited the origination business due to the overly burdensome and costly changes the Federal government imposed on the program.
I have no vested interest in whether you decide to take out a reverse mortgage or not.
My business is buying homes and leasing them back to the seller.
(If you need access to your equity but don’t qualify for a reverse mortgage, I’d be happy to talk to you more about that program later…)
For now, let’s stay with the questions regarding a reverse mortgage.
5 Considerations To Determine if Reverse Mortgages are a “Scam”
Are Reverse Mortgage Loans From The US Government?
The US Government does not make any mortgage loans.
HECM loans (commonly known as reverse mortgages) are mortgages that are insured by the Government to be repaid by the borrower to the lender.
If the loan is not repaid in full, the government (through its FHA branch) is on the hook for the balance. That’s why reverse mortgages have such a huge number of restrictions and regulations.
Note: Most loans are paid in full so it costs our government nothing and Uncle Sam typically make a profit via insurance premiums.
Is The Reverse Mortgage Program a Scam?
Few consumer based programs are as heavily regulated, scrutinized, policed, or have more protections for the consumer than the HECM reverse mortgage loan.
Over 30 years ago, the senior advocate association AARP realized that the majority of seniors had the majority of their net worth tied up in the “illiquid equity” in their homes.
AARP then lobbied congress to find a way to release some of that equity without the need to sell the house.
The result was the reverse mortgage – a loan against your home with no monthly payment and no repayment until you no longer live in your home.
To make that possible, the loan is insured and administered by HUD.
Because of this connection the loan falls under government regulation which means that the originators authorized to provide the loan are under constant scrutiny by Big Brother.
99.99% of these originators are good and honest people who would not think of doing anything that might jeopardize their license to do business. Unfortunately, the .01% that have done something unscrupulous attracts 99% of the press.
(Saying that the HECM loan is a scam because of this miniscule group is like saying that since Casey Anthony lived in Florida, everyone in Florida must also be a child killer).
Are Reverse Mortgages Expensive?
Yes… but no more expensive than any other government backed loan.
In addition to loan origination fees and other closing costs such as title, escrow, stamp tax, etc, there is insurance paid to the FHA (both at origination and also as a monthly fee).
On the closing statement these fees added together look high and can be a real turn off.
But here’s the real story:
A Reverse Mortgage has an artificially low interest rate because of the FHA insurance.
Since the lender has literally no risk, a “risk premium” is not added to the loan’s interest rate. If not for the FHA involvement, the risk premium would typically add between 3% to 5% to the base interest rate and trust me when I tell you that it will have a huge impact on reducing the equity left in the home.
Since the loan balance grows every month, will a reverse mortgage eventually eat up any equity left in the home?
Before telling you about my “real” experience with my mother’s home, let me say that the program was designed so the appreciation of the house should equal the increasing loan amount.
In other words if the loan is growing by $6,000 per year, the value of the home should also be appreciating by at least that same amount (if not more), so the remaining equity stays constant throughout the life of the loan.
Now, let me tell you about my mother’s house.
In 2008 my mom had suffered large losses in the two recent stock market crashes. She worried that the economic events related to the subprime debacle would reduce her liquidity and possibly wipe out a large amount of equity in her home.
As a hedge against these calamities, I encouraged her to obtain a reverse mortgage.
Her house appraised at about $450,000 and at her age she was able to get $225,000 in cash out. After closing costs the loan started at about $235,000 which meant that there was still $215,000 in equity left in the house before the loan started to grow.
Six years later my Mother moved into a senior care facility and my siblings and I sold the house for $650,000.
After all expenses including paying off the reverse mortgage, the net proceeds to my Mother was $325,000 so not only was the original equity maintained but also gained about $100,000.
Is A Reverse Mortgage Right for Me?
It’s really simple.
If you really don’t need the cash or are thinking of taking the money to invest in something else (other than a second home) the answer is absolutely not.
Nothing that you could invest in with “low risk” would offset the cost of interest on the loan so using a reverse mortgage to fund an investment would be a terrible decision.
In fact, any reputable reverse mortgage originator would refuse to write the loan after becoming aware of this intended purpose.
On the other hand, if you plan to:
- Stay in your home for longer than two years
- Need access to supplemental cash to enhance your living standards
- Or need to pay for necessities such as in-home assistance
The answer is YES – Absolutely.
Nothing else (other selling your house) will allow you to take equity (your money) out of your home with less risk.
More importantly, this loan is the ultimate “pick a payment” program.
Did you know that you can actually make payments on the reverse mortgage?
If you’re bothered by the monthly payment being added to the loan balance and have the capability to make a payment go ahead and do that.
If you want to pay interest only, do that.
The choice is yours. A great feature of reverse mortgages is giving you choices at a time when you might think that your options are limited.
On the next blog we’ll discuss the new rules and changes to reverse mortgage qualifications.
In the meantime, if you’d like to be placed in touch with the best originator in your area I can help you with that. On the other hand, if you don’t want or can’t qualify for a reverse mortgage and would like to sell your home but stay in it by leasing back I can help with that too.
For more information click the picture below and fill out the form or call us at 800-407-5696.