Reverse Mortgages Are a Good Thing For the Right Homeowner

April 10, 2009

Finance

I hear people say all the time, ?Oh, a reverse mortgage? I’ve heard those are bad,? or some variation. I?d like to tell you why they can be a lifesaver for the right person.

First, Who Is Not Right for a Reverse Mortgage

For instance, my parents are debt free, and pay for everything in cash. They aren?t rich, mind you?my dad was a union plumber, and my mom stayed at home with us, and they have a modest house which they have lived in my whole life and which has only had one mortgage on it that was never refinanced?but they were very good with their money. If there was something they wanted to buy, they saved up until they had enough to buy it. So they have two cars free and clear, and a free and clear title to their house. They now subside on a monthly social security check and a plumber?s pension, which is more than enough for their monthly bills and a couple of dinners out a month. They are not the kind of people who would benefit from a reverse mortgage. I wouldn?t even bring it up to them.

Description of Someone Who Could Use a Reverse Mortgage

Then there?s my uncle. He buys a new truck every few years and finances it. He refinanced his mortgage a couple of times in the last several years to take some cash out for home improvements and to lower his interest rate. I don?t know his exact age, but he?s a little bit younger than my father, and is going to be coming up on retirement age soon. I don?t know exact figures, but I can give you a ballpark of what his income will be upon retirement. Probably somewhere in the neighborhood of $1000 a month for social security, and $2000 a month for pension, give or take. So, he might have a mortgage payment of $1200 per month, and a car payment of $600 per month for the SUV. And if he?s been making $60,000 per year, he has been making his payments no problem. So, he retires, and figures he?ll have enough coming in that he shouldn?t have any problems. But all of the little things add up-gas bill, electric bill, cable bill, water bill, phone bill, cellular bill, sewer and waste bill, etc. And let?s not forget about the normal maintenance items that we have: car tires, oil changes, license plate renewals once a year, repairs and maintenance around the house (water heater, furnace, air conditioner, windows, paint, etc), a new lawn mower or snow blower every so often. You get the idea. And before you know it, he has almost nothing left in savings, and is scraping by and juggling monthly bills.

If you?ve never really been broke and struggling, you probably don?t appreciate what a terrible place it really is to be in. And there are probably people you know: friends, relatives, people you see at church or at your child?s school who are in a very bad place financially, but you?d never know it. They might be embarrassed or ashamed, or be private people, and nobody would ever know what they are going through. And it?s a pretty easy place to slip into, especially for seniors living on a fixed income who can?t just go out and get a job.

Many Seniors Can Use Some Help

Retirement can be a long journey

Retirement can be a long journey

I grew up in Northeastern Wisconsin, a little south of Green Bay. Our neighborhood?our whole town in fact?was very middle class. When I was a kid, I had a paper route. It was $3.50 a week, or $14.00 month, for the daily paper, including Sundays. (Yes, it was over 20 years ago, and I am showing my age.) I had a lot of older couples on my route. I had one lady pay me every week with all change-and no quarters. She?d give me a little baggy with pennies, nickels, and dimes, with exactly $3.50 in it every week. I had a few customers that I could only collect after the 3rd or 5th of every month?after their check came in. Looking back, I didn?t realize at the time that many of them were fairly strapped financially.

Now, let?s fast forward, back to today. Let?s take a senior living solely on social security (which probably won?t be around by the time I retire, but that?s a whole other article entirely), and a modest pension. Over the last several months, nearly all investments have taken a serious beating, so their retirement checks are likely less than what they were getting. And if somebody has some serious medical problems, it can throw the seniors into a tailspin. There can be medications or rehab that isn?t entirely covered by insurance. Or if one of the partners has to go into a nursing home, it can be devastating. Now you have somebody who had a modest living, and has been thrown into a desperate situation.

If that person has a home worth $150,000 with a mortgage of $50,000 on it, they probably have payments somewhere around $500 a month. They?ve lived in that house forever, and really don?t want to move. They can do a reverse mortgage, get $50,000 cash, and have their mortgage payment gone forever. And the title to the house stays with them, and they can?t be foreclosed on. Now, you just replenished their savings, enabled them to be in control of their monthly expenses, and helped enormously with their security and peace of mind.

What’s the Other Side of the Coin?

This sounds too good to be true? What?s the downside, you ask? Of course, there is no free lunch?ever. Yes, it is a mortgage, it is a loan, and yes, there is interest on it. It is a negatively amortizing loan, which means the balance goes up over time because no payments are being made. But, if it ever ended up being upside down, the homeowner is not responsible for that amount. They can sell the house, and HUD eats the difference. Reverse mortgages are fully government insured, backed by HUD and FHA, and have many protections in place for the seniors.

Looking at Some Myths About Reverse Mortgages

  • MYTH: They can take my house away from me.
  • FACT: As long as one of the seniors lives in the house, the loan stays in place, and they retain title indefinitely. They can leave the property to the heirs.
  • MYTH: I can end up owing more than the house is worth.
  • FACT: If the balance increases, or home values go down, and the balance is higher than the current value, the homeowner will only owe what the house is worth, or what they can sell it for. If the borrower(s) should pass, the heirs have a full year to sell the house or refinance the loan into their name.
  • MYTH: I will have to pay all that money back.
  • FACT: The loan is only secured by the property, and as long as one of the borrowers is living there, nothing can change, even if one passes, or is moved to a care facility.
  • MYTH: I will have to pay taxes on that money.
  • FACT: The money is taken from the equity in the house, and does not count as income, and will not be taxed.

What Does It Take to Qualify for a Reverse Mortgage

So many of the things you may have suspected or heard are likely untrue. Ok, so reverse mortgages aren?t all bad; who qualifies for them? The qualifications are fairly simple:

  • There is no credit requirement. Somebody could have poor credit, or the house could even be going into foreclosure, and they can get a reverse mortgage.
  • There are no income requirements. Since the loan never has to be repaid, there are no income requirements to qualify. The only requirements are age and equity.
  • The homeowners have to be at least 62 years old. If one is 62 or older, and the spouse is not yet 62, it probably makes sense to wait until both are 62, so both can be put on the loan, and both are covered.
  • Generally, the maximum loan to value (LTV) is around 60%, so there has to be a good amount of equity. They can bring money to the closing to get down the necessary amount if they don?t have enough equity in the house.
  • Reverse mortgages can be used to purchase a home. Instead of buying a $300,000 home, putting down $150,000, and making mortgage payments on $150,000, they could do a $150,000 reverse mortgage and never have to make a mortgage payment.

I?d personally never try to give somebody a reverse mortgage if I didn?t believe 100% that they were the right kind of candidates for it. And the government has put protections into place for the seniors, including required counseling before closing, to help guard them. Feel free to contact me with any questions, concerns, or comments.

The Chicago 77 would like to thank la4ko for today’s photo which he shared via the Creative Commons License.

Email This Post To a Friend. Email This Post To a Friend.
, , , ,

About Brad Walbrun

Brad Walbrun grew up in northeastern Wisconsin, moving to Chicagoland over a decade ago, and never to return, although he remains an avid Packer fan. He is married, with 3 children, living in Schaumburg. Brad's passions are fitness, MMA, and mortgages. He has been in the mortgage industry since before the refi boom, for almost 10 years now. You can reach Brad at (847) 975-4440 or bradwalbrun@hotmail.com.

View all posts by Brad Walbrun

3 Responses to “Reverse Mortgages Are a Good Thing For the Right Homeowner”

  1. Kevin McNichol Says:

    Regarding the writers parents and his staement that he would never even bring up the topic of a reverse mortgage:

    What was their home worth 3 years ago? What is it worth today?

    If they had done a RM 3 years ago they would have put a floor under the value of their home with unlimited upside potential. Would that make it worthwhile for people like your parents to consider a RM?

    I was working with two neighbors 3 and half years ago. One decided to do a RM, the other decided not to. Both homes were worth $300,000. The guy who did the RM got about 170k (more than what his neighbors house is worth today). He used a small amount as a one time payment of premium on a life insurance policy with his children as beneficiary for $100,000. He replaced his roof and windows with the latest technology saving tons on heating and cooling and getting a substantial discount on his homeowners insurance. He and his wife took a 2 week second honeymoon cruise. The hundred or so he left in the credit line is now about $120,000. His home is worth 200k because of the upgrades he made and his neighbors is worth 150k. His neighbor also lost his corporate pension and health care coverage and is now applying for a RM.

    Who do you think made the best decision?

    Kevin@affordablereversemortgage.com

  2. Brad Walbrun Says:

    My parents just buy cars, tools, boats, etc cash. They usually have $20-30k in the bank, and have never carried debt. He still nets about $3k a month with no debt, so they don’t need any extra cash. The house is free and clear, and has been for almost 20 yrs now. A reverse doesn’t make sense for somebody with NO debt, unless they just want to cash out and travel the world, or party like a rock star. Sure, in hindsight it looks like the one neighbor made a better decision, and if the other neighbor could go back in time, he would do it. But if he has money in bank, no debt, all the home improvements he needs, he doesn’t have to. If I was in my father’s shoes, I’d probably take the cash, and damn the equity, but he likes living free and clear, and wants to leave the house to his kids. Plus, they live in bufu WI, and haven’t seen drastic price changes, either on the upswing, or on the way back down, so the house is still worth about the same.

    I think that Kevin’s scenario is probably theoretical. And sure, in FL (where he is) the second guy might be kicking himself for not doing it sooner. But I think for somebody like him to push a RM on somebody who really doesn’t need it (like my parents) is part of the reason mortgage guys have gotten a bad name. It’s like somebody doing a stated income deal to purchase a house they can’t afford “because your house is the single largest investment you are ever going to make, so you should buy the maximum that you can”. I see it as predatory. It’s like if somebody was going to buy a car, and they are looking at a Honda Civic. The salesman asks “well, do you like fishing?”, and the reply is “sure, but I don’t have a boat”, so the salesman says “well, maybe you should get this $60,000 Suburban 2500 in case you decide to get a boat so you can fish more often instead of the Civic”. But he doesn’t even own a boat yet, and even if he gets one, it maight not be big enough to justify a two and a half ton truck. You can try to make an argument or reason for just about anything if you want to.

Trackbacks/Pingbacks

  1. Reverse Mortgage Loan Blog » Reverse Mortgages Are a Good Thing For the Right Homeowner - April 10, 2009

    […] here. Sphere: Related Content Bookmark It Hide Sites $$(‘div.d602’).each( […]