Reverse Mortgages 101

My grandfather liked to use clever sayings to make a point. One of his favorites was, “the same thing, only different!” As we pulled together this article, I immediately thought of how his funny little saying applied.

The Same Thing…

When you buy an annuity, you give a private company a sum of money in exchange for its promise to pay you a fixed amount every month until you die. As an investment, it’s not likely to pay off – unless you happen to outlive your expected mortality – but it may still be a good idea. And if you’re one of the lucky folks who outlive their actuarial life expectancy, an annuity can turn out to be a terrific investment.

A reverse mortgage is quite similar. But instead of writing a big check to an insurance company, you give the bank a mortgage on your home based on your current equity. In return, the mortgage company agrees to pay you a certain amount every month for some period of time: until you die, move out, or celebrate your 100th birthday (more on that later). For a reverse mortgage to be a good investment, you have to outlive your expected mortality and stay in your home.

It may not turn out be a good investment, but under certain circumstances it could still be a good idea. We’ll examine what a reverse mortgage is and how to determine if one is right for you. We also consider many of the risks involved, suggest steps to improve your position, and pass along tips on how to get the best possible deal available.

Reverse mortgages have many individualized, variable components. For our purposes, we are sticking to the basic concepts. If you think you are a good candidate, make sure to consult a licensed, professional HUD counselor to help tailor the product to your needs.

…Only Different

I’ve looked into reverse mortgages several times, and they always made me uncomfortable. The value of owning your home free and clear is one of my core beliefs.

Personally, paying off my mortgage was a tremendous emotional relief. Now it’s time to challenge that idea.

What if you could mortgage your home and no matter how high the balance on that mortgage got, no one could throw you out of your home? As long as you kept up your home and paid your taxes and insurance, you could live there as long as you wanted. What if the property value became less than the balance of the mortgage, yet if you moved out and sold the home, you would not have to make up the difference? Or, when the house sells, the reverse mortgage is paid off, and you get the balance of any remaining equity?

In essence, these are the ideas behind a reverse mortgage. But just as insurance companies tilt the odds in their favor by setting the monthly payouts, the same is true for banks that hold reverse mortgages.

However, the “only different” part is this. Some reverse mortgages may be capped at a certain age (generally 100).  The rules are constantly changing so be sure you check if you apply for one.  With the advances in modern medicine, this could become a factor.. Unlike an annuity that continues to pay every month no matter how long you live, the payments from a reverse mortgage may have a stopping point. You still own your home after that and you can still live there until you die or it is no longer your principal residence, but you no longer receive monthly payments. 

The banks do very well financially on most reverse mortgages. Most folks send checks to the bank for 25 years or more before they own their home outright. With a reverse mortgage, the bank will own all – or a major part – of the equity in your home, and in much less time. You still have title to the property, but your equity could be depleted. The good news is they must continue to send you monthly checks which is the risk they take. 

Reverse mortgages are not right for everyone. While you may be feeling the pinch, there may be better remedies for your situation. If you are a good candidate, we can help you understand some of the common pitfalls and mistakes so that the monthly check can help you have “money forever.”

Back to Basics

A reverse mortgage is a special type of home-equity loan sold to homeowners 62 and older. It gives a homeowner access to some of the equity in their home in the form of monthly payments, with the protection of knowing that they can stay in their home as long as they pay their taxes and maintain the property.

When you die or move out, the mortgage must be repaid. The Federal Trade Commission report Reverse Mortgages states:

“The loan must be repaid when the borrower dies, sells the home, or no longer lives in the home as a principal residence. … Most reverse mortgages have a ‘nonrecourse’ clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold.”

Federally insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), are backed by the US Department of Housing and Urban Development (HUD). The National Council on Aging reports that HECMs represent 95% of reverse mortgages originated in the US. Since HECMs make up the vast majority of reverse mortgages, they are the focus of our report.

HUD Counseling and Other First Steps

Before a homeowner begins the application process, they must go to a HUD-approved counseling agency to learn about the cost and features of these loans. As you read on, you will probably agree that the cost of HUD counseling is money well spent. Most agencies charge around $125. The fees can be added to the loan proceeds, and you cannot be turned away if you cannot afford the fee.

The lender’s upfront fees can be quite expensive. Nevertheless, there are two types of HECMs: the HECM Standard Loan; and the HECM Saver Loan, which has a lower closing fee. For example, if a homeowner has a $250,000 home with no existing mortgage, the standard fee at closing (which is added to the mortgage) is $14,721. The HECM Saver Loan fee is $9,746.

The amount of monthly payments also varies. A 65-year-old with a Standard Loan would receive $754/month, while that same person with a Saver Loan would receive $730/month. In addition, there is a capped monthly service fee of $35 or $420 per year added to the loan to cover servicing costs.

The monthly payment also varies by the age of the homeowner when he takes out the loan. If you own a $250,000 home and you take out a HECM standard loan at age 65, your payouts will be $754/month. If you wait until age 75, they’ll be $950/month and $1,380/month if you hold off until age 85. The offered amounts fluctuate weekly with interest rates, just as mortgage interest rates do.

Please note that we recommend that both spouses be on a reverse mortgage. If there’s an age difference, the monthly amount is based on the age of the younger spouse.

So… should I get one?

Just because you qualify for a reverse mortgage doesn’t mean you should get one. Before you consider a reverse mortgage, you should check out our unbiased report that will give you all of the details for evaluating whether this is a good step for you. You’ll learn:

• How a reverse mortgage is different from what you probably think it is, and why the number “100” is the most important number to consider… page 5.
• The two types of reverse mortgages that comprise 95% of the market; pick the wrong one and you could have to shell out nearly 50% more in fees without even knowing it… page 6.
• The three questions you must answer before you take on a reverse mortgage; ignore them and you could be trapped in your home forever… page 9.
• The six-part checklist you need to ask your spouse or housemate to see if both of you can actually stay in your home… page 10.
• The risks that come with a reverse mortgage: these are the ones the companies will never tell you about, but they’re real… page 13.
• Who’s getting a reverse mortgage these days? The answer may surprise you, but it’s a reflection of the times… page 19.
• Other realistic options to a reverse mortgage; miss these and you could make mistake you’ll never recover from… page 23.