Reverse Mortgage alternatives..

Some alternatives to the Reverse Mortgage….

The Reverse Mortgage (RM) is a financial tool that can be beneficial to many senior homeowners, but it is not for everybody. When speaking with clients, I will explore other options if they seem more feasible or a more make sense solution to the problem. I have no problem telling a potential client that the RM is not the best solution for them. Here are some alternatives we may discuss when considering the benefits of the RM…

·       *Traditional Refinance – In some situations looking at a traditional refinance might make sense. This may make sense if the client is looking to consolidate debt into a lower rate, and significantly lowering their overall monthly payments. If income/cash flow is not too much of an issue and the new lower payments may make the difference in comfort, this might be suggested. Main concern may be qualifying, as many seniors on a fixed income may have issues meeting the Conventional loan qualifying requirements..

·        Bank line of credit – If a senior homeowner is looking for a short term solution, a bank line of credit could make sense. A senior who knows they will be leaving the home within a year or so may find that the bank line of credit will have less upfront fees and possibly less paperwork. Most likely the homeowner will be using the line of credit to make payments on the line of credit, this option can get costly over time and the available funds could be used up pretty quickly. Also, over time the growth feature of the line of credit on the RM could make a nice difference. The amount available on the RM line of credit grows on an annual basis.

·        Private money loan – This can be a good short term option that can possibly close quickly and with a little less paperwork…Rates are not great and closing costs can also be high…Could be an option if the property is not occupied by the customer.

·        Rent rooms – If the senior homeowner is having cash flow issues and has a home with spare rooms, renting those rooms may be a solution.

·        Family assistance – Some seniors have made arrangements with family members such as an equity share situation.

·        Cut expenses – There may be areas that can be cut to make a financial difference. I have had some clients, that through research and suggestions, we have helped them cut $3-5,000 per month.

·        Sell the home – Selling the home is an option especially if the homeowner(s) are looking to move to an assisted living community. This can be a much more expensive option than an RM where it may cost from 5-8% of the sales price…To many seniors this is the last resort as they have been in their home many years and wish to live there as long as possible.

The Reverse Mortgage has been a great option for many senior homeowners. Some will say it made a significant impact on their life. It is not for everybody, and we will discuss the other possibilities as mentioned above. I am not about selling people, but am about working as a consultant. I want to help the senior homeowner, even if that means not doing business with me. 

Recognizing when a Reverse Mortgage may be a Solution

Recognizing when a Reverse Mortgage may be a solution....

Many look at the Reverse Mortgage as only a solution for senior homeowners that are low income and struggling monthly to get by. That is one problem a Reverse Mortgage can help with,  but there are many other uses that could be considered for solving problems or just as part of a financial planning tool. I will cover some different uses of the Reverse Mortgage,  but first a basic description of the Reverse Mortgage.

The Reverse Mortgage (RM)  is a financial planning tool that allows senior homeowners to stay at home and maintain a good quality of life.. It is a mortgage that has no monthly payments,  and there is minimal income and credit qualifying.  The homeowner can receive monthly payments or draw on a line of credit.. On the fixed rate option the homeowner must take all the funds up front in a lump sum. There is no set term and it's due upon the client no longer living at the home.  Technically the mortgage is due on the 150th birthday of the youngest borrower. All borrowers must be 62 or older when qualifying for the mortgage.

There is no restriction on how the funds from the RM can be used.  Here are some different uses....

* Supplementing income -  Monthly income can be set up to supplement the homeowners existing income.  This can be done for as long as the homeowner is in the property(for “life” or Tenure) or for a specific term.  The income amount will be based on a few factors... Age of borrowers (specifically,  the youngest borrower),  value of the property,  and amount of equity in the home.  

* In home care -  Many senior homeowners may need in home care whether for a few hours per day or 24/7. This can be very expensive, depleting the seniors income and savings quickly.  An RM can assist with those expenses and help extend the time the seniors can stay at home.

* Consolidate Debt -  The homeowners may have existing mortgage and consumer debt.  The RM can be utilized to consolidate this debt into one loan that has no monthly payments.  This can have a large impact on the homeowners cash flow or we should say out flow.  

* Alternative to traditional mortgage financing. -  Currently there is no income or credit qualifying for the RM.  There could be some changes to this soon.  The leniency here allows senior homeowners to qualify for the RM when they may not have qualified for traditional financing.  

* Investments -  Some seniors have used the RM to purchase investment property.  The line of credit can be used to access funds for purchase... If flipping the home,  the loan can be paid down when the property is sold.  The funds can then be used for another purchase.  If the investment is kept as a rental,  the funds used have no monthly payments.

* Supplement as needed -  Some seniors may just need funds at various times.  This could be due to unexpected expenses or maybe needing to temporarily supplement investments that are not performing.  The line of credit feature can be used to access funds as needed.

* Fun - Many seniors have utilized funds from the RM to purchase a new car,  go on trips,  take the family on vacation etc..

* Help family members -  Funds from the RM have been used to help children or grandchildren to buy a home,  purchase a car,  or other family assistance..

* Remodel the home -  Clients have used the RM to do remodels to make the home more senior friendly,  thus extending the time they can live in the home.  

These are some of the various ways a Reverse Mortgage has been utilized..Again, no restriction on how funds can be utilized, so whatever you can think of...Happy to look at numbers to see what options may be available...

Myth - The Reverse Mortgage takes all of the equity in the home...

I have often heard people say that they believe all of the equity in the home has been given away when using a Reverse Mortgage. The initial Reverse Mortgage is generally a fairly small percent of the property's value. I would say most Reverse Mortgages are around 45-70% of a property's value.

Over time the loan will grow, and hopefully the value of the home grows as well. There is a possibility down the road that the loan can be as much as the value of the home, but from the beginning there is a lot of equity remaining.

Myth - The Reverse Mortgage can only be used for refinances...

This used to be true, but in 2009 the HECM (Home Equity Conversion Mortgage) insured by FHA was approved to be used for purchases...

This allows seniors to downsize without having to utilize all of the proceeds from the sale of their previous home and still have a home with no monthly mortgage payments.

Another option this is being used for is for seniors who have enough savings that they can buy a home with 40-50%+ down and get a Reverse Mortgage for the difference, having no monthly mortgage payments. This can also come into play if the senior wants to keep their existing home as a rental.

The Reverse Mortgage is expensive...right?

All Reverse Mortgages are expensive…right?

Many people have the assumption that all Reverse Mortgages(RM) have very high initial costs. This is not true.

With a Reverse Mortgage (RM) there are standard closing costs just as with a conventional mortgage. These include title, escrow, appraisal etc. Generally the two most significant costs on an RM on top of these costs are the origination fee and the upfront FHA insurance.

The origination fee has a maximum amount of $6,000 and the FHA insurance is 2 percent of the Maximum claim amount. This would be capped at $12,500 based on current maximum claim of $625,500. So on a deal that has all the maximums, the total closing costs could be around $20,000. This is rare as the FHA insurance would only be that high on properties that are worth $625,500 or more.

In 2010, the “Saver” program was introduced. On these programs, instead of the FHA fee being in the thousands, it can be more like $60. Also on some programs the origination fee can get down to as low as $0. So if you had a Saver program with $0 origination fees, the overall closing costs could actually be a little lower than on a conventional loan. In some cases, there can even be an additional
credit to go towards the closing costs.

So why doesn’t everyone just do the “Saver” program? The drawback on the Saver program is that the client receives less funds than on a standard program. This can make a difference for some who need every penny they can get. For those that do not need all of the funds they qualify for, the “Saver” program is a great option.

The costs involved with an RM are generally not out of pocket costs other than maybe the counseling fee (which can be around $120) and maybe sometimes the appraisal fee (Could be around $500). I always try to have the appraisal fee collected at closing. The other costs would just be added to the loan balance.

The closing costs being paid are really based on the program and funding needs of the client. A client needing maximum income and funds would most likely benefit by the loan with the higher initial costs. A client consolidating existing debt and not needing all the funds they qualify for would benefit by the “Saver” low-cost option.

Many senior homeowners have used the "Saver" option along with a line of credit option as a financial planning tool, utilizing these funds and not touching current investments or deferring Social Security income.

The RM is for senior homeowners (62+) who may have a need for additional income, debt consolidation, remodelling costs, in home assisted living etc...The decision on costs can be secondary to what is the best solution for the challenge.

Good News - $625,500 extended through 2012

December 2nd, 2011  |  by Alyssa Gerace Published in News, Reverse Mortgage

The current maximum claim amount of $625,500 for Home Equity Conversion Mortgages (HECMs) has been extended through 2012, according to the Department of Housing and Urban Development (HUD).

When President Obama signed the Transportation, Housing, and Urban Development (THUD) spending bill into law on Nov. 18, effectively re-raising FHA-insured forward loan limits from $625,500 to $729,750, lenders were left wondering the plight of reverse mortgage loan limits.

Although they had previously been extended through the end of December 2011, the possibility remained that the limits would revert back to their former ceiling of $417,000.

Now, however, it looks like some lenders, especially those in high-cost areas, have gotten an early Christmas present. A Nov. 23 FHA update reminds lenders that the maximum claim amount for HECMs is not affected by the THUD spending bill (HR 2112), and says the limit remains at $625,500 as stated in Mortgagee Letters 10-40 and 11-29.

“This loan limit will remain the same for 2012 and will be included in the pending Mortgagee Letter,” says the update.

Reverse "Myth" - The home needs to be Free and Clear...

The borrower(s) can have existing financing on the property. The Reverse Mortgage can payoff the existing liens and remaining funds could come in a lump sum or income/line of credit. This consolidation can save the senior homeowner significantly as they will no longer have the monthly mortgage payments.