One of the great challenges I face working with reverse mortgages is educating the public how reverse mortgages work and how they may help them. While doing so, I find most seniors are skeptical, and often have misconceptions based on what they’ve heard, read or seen on TV. In the past year, I had the pleasure of helping many clients, and will discuss two situations, in particular, where there were different “needs” and “wants.”
Case #1 – “Funds Needed to Make End Meet”
Phil and Alice Shelton were very skeptical about a reverse mortgage. Phil said “I didn’t know what it was. Someone is going to give me money, and it isn’t going to cost me anything?”
Alice had been ill, and the medical bills were mounting; they also wanted to pay off high-interest credit cards. “I’m a blue-collar man…worked in construction all my life,” he says, “and Alice was always a stay-at-home mom. I didn’t know what to do.”
Since he didn’t understand what a Reverse Mortgage was, he decided to find out. With my help and by attending the required independent counseling session, he gained confidence that a reverse mortgage was just what he needed. After counseling, he said “They told me the same things you told me John, but it was comforting to know that we were making the right decision.”
Phil retired at 72 and was dependent on a small pension and social security benefits; thankfully, he had enough equity in his home to get the cash they needed without being obligated to make monthly mortgage payments. In fact, the reverse mortgage also allowed them to keep funds in a non-interest bearing line of credit to use as an emergency fund.
Case #2 – “Funds Wanted to Relocate and Buy a Home”
Another couple wanted to downsize, but certainly did not want to put all the proceeds from the sale of their home into the new one. After discussing their situation, I advised they select the reverse mortgage called a HECM for Purchase, since this minimized their down payment and also provided funds they needed to pay for the relocation, and wanted to decorate their new home.
Based on their age, they qualified for a HECM for Purchase mortgage of 55% of their new home’s appraised value. After paying the Mortgage Insurance Premium and traditional mortgage closing costs, the Hill’s put $125,000 down of their new home which costs $260,000, and still had $130,000 remaining from the sale to put into their savings account. They also loved the fact that they were not required to make monthly mortgage payments. Of course, they did have to pay their homeowners’ insurance and property taxes, which is required under any reverse mortgage, as it is under a traditional forward mortgage.
So they had the downsized home with lower maintenance, they lived closer to their children and grandchildren, and had the money set aside to help them live more comfortably and less financially concerned.
Important Information
The formal name for a federally-insured reverse mortgage is a Home Equity Conversion Mortgage (“HECM”). When applying for a reverse mortgage, the borrowers’ credit scores are not considered, and there are usually no income requirements, but they must have substantial equity in their home.
Mortgage insurance Premium (“MIP”) is charged because HECM loans are federally-insured, which guarantees that neither the homeowners nor their heirs will ever owe more than the home’s value at the time it is sold. It is paid at closing and also accrues over the life of the mortgage.
Borrower(s) must be 62 or older. The HECM (reverse mortgage) is a loan that must be repaid, when the home is no longer the primary residence, is sold, or if the homeowner fails to pay the property taxes, insurance, or related property fees. The home must be maintained to FHA standards. Failure to meet these requirements may subject the home to foreclosure. It is recommended that the borrower consults with their tax advisor.