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.

Reverse "Myth" - The borrowers can owe more than the property is worth

The Reverse Mortgage is a Non-Recourse loan. The borrowers can not owe more than the property is worth

Reverse "Myth" - Funds from Reverse can effect Social Security income and Medicare

Funds from the Reverse Mortgage are loan proceeds and not considered income. There might be certain affects on Medicaid. Discuss this with your advisor..

NOT a Last Resort....

When people ask me about Reverse Mortgages,  a lot of the time they will say something to the effect of "That’s just a last resort thing, right?" or " I would never want to have to get one of those."

These kind of statements are usually a result of misunderstanding of the Reverse Mortgage (RM)

In reality, for many senior homeowners their true last resort is having to sell the house that they have been living in for a significant portion of their life. In many cases the only reason to do either (Sell or get a reverse mortgage) is to access the equity (difference between the value and any liens) to be able to live more comfortably.

Selling may make more sense if the homeowner must go to an assisted living community for services. If in-home assisted living is possible, the RM can help, allowing the senior to remain at home. If needs are income based, and the senior needs to sell the house so they can live off the proceeds, the RM may do the same, but allowing them to stay in the home they are comfortable in.

If costs are a concern, the costs of selling a home could be much greater than that of doing the RM..Using an example of a $400,000 home, a sales commission might be between $20-25,000. However, closing costs on an RM can be as low as $2-3,000 and upwards of $18,000 depending on program.

Many senior homeowners still have financing on the property. This may have been done when they were fully employed, but are now depending on Social Security and whatever retirement savings they have. The economy has hit the retirement savings pretty hard for a good number of people, with it no longer lasting a lifetime. These seniors may be in a position that they look at selling the house as they can no longer are able to keep up with the mortgage payments.

If the equity in the property is enough, the RM can payoff the existing loan(s) allowing the senior to stay at home and not have monthly payments. To them selling would have been a last resort, which would have put them in a position of having to move into a place with no memories etc.

Recently I helped a couple who had already packed their boxes, thinking selling was their only solution. He had been laid off and was not finding work. They had a mortgage over $350,000 with payments of $1,900+. They were finding it very tough to make the payments each month, and thought selling was the only answer. This was a home that was her parents' before they lived there. We discussed the RM options and it was an incredible discovery for them. An RM was done that paid off the existing financing leaving them with a mortgage with no monthly payments. There were also funds which allowed them to do some home improvements.

Another last resort that could come up is having to move to an assisted living community as there is no income for in-home assisted living. With the right amount of equity, an RM can be done where the lender actually sends the borrower funds each month. Depending on the age of the borrower(s), the value of the home, and current interest rates, this monthly amount could be
significant. Again, this option allows the senior homeowner to stay at home
where they are comfortable.

Aside from these uses, the RM has been used many ways as discussed before. These can include purchasing a home, purchasing investments, helping family, or just having fun…I have spoken and worked with many people who did not see it as a last resort, but one for opportunity and to extend a quality of life..

Some North Bay Senior Resources...

Several resources for seniors in the North Bay...Please let me know if you would like to see some others added..

Council on Aging – 707-525-0143 – www.councilonaging.com

Elder Financial Protection Network – 888-436-3600

Seniors Inc – 707-542-1228

Sonoma County Area Agency on Aging – 707-565-5950

Institute on Aging – 415-456-8692

For information and referral services for older adults and their family members in Marin County call Senior Information at (415) 457-INFO (4636).

Marin Multi-Service Centers:

Bernard Osher Marin Jewish Community Center	(415) 479-2000
Canal Community Alliance	(415) 454-2640
Community Action Marin	(415) 457-2522
Homeward Bound	(415) 457-2114
Margaret Todd Senior Center	(415) 893-7940
Marguerita Johnson Senior Center	(415) 332-9323
Marin Senior Coordinating Council (Whistlestop)	(415) 456-9062
Ritter House	(415) 457-8182
Salvation Army Center	(415) 898-8797 or 459-4520
Spectrum Gay, Lesbian & Bisexual Center	(415) 457-1115
West Marin Community Resource Center	(415) 663-8361

Napa Resources:

BERRYESSA SENIOR CENTER, ................................................... 966-0206

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CALIFORNIA STATE PARKS & RECREATION (Bothe National State Park) ............. 942-4575

CALISTOGA SENIOR ASSOCIATION ........................................................................ 942-2760

NAPA SENIOR CENTER, 1500 Jefferson Street, Napa 94559 ............................... 255-1800

NAPA VALLEY FOOD BANK .................................................................... 253-6128

NATIONAL ASSOCIATION OF ACTIVE AND RETIRED FEDERAL EMPLOYEES (NARFE)................................. (Leave message) 257-2228

RIANDA HOUSE, 1475 Main Street, St. Helena, CA ………………...963-8555

SENIOR NUTRITION COMMUNITY ACTION OF NAPA VALLEY, 2310 Laurel Street, Napa 94559 ............... 253-6111

Reverse "Myth" - There are restrictions on how I can use the funds

Reverse Myth - There are restrictions on how I can use my funds - The borrower(s) of a Reverse Mortgage can do what they want with the funds. Mostly these are conservative uses such as consolidating debt or supplementing income. Some additional uses have included purchasing a rental property, purchasing a vacation home, making investments, helping family, buying a boat, buying a car, travelling, remodeling, in home assisted living, etc...   

Reverse "Myth" - I can not get a Reverse Mortgage if I owe money on the home.

Myth - I can not get a Reverse Mortgage if I have a loan on the property - Many Reverse Mortgages being done today are being used to payoff an existing loan, leaving the borrower(s) with a mortgage with no monthly payments. As the Reverse Mortgage will generally not be much higher than 60-75% of the property's value, the size of the loan being paid off could be a challenge. The Reverse Mortgage goes in first position and there can not be any mortgage liens behind it...

Reverse "Myth" - The lender owns my home..

Myth - The lender owns my home - The Reverse Mortgage borrower holds title just like on a normal mortgage. Upon sale or passing of the last borrower, the balance (principal + costs+ interest) is due. If there is remaining equity, the borrower(s) or heirs would keep this upon sale. If there is no equity (loan is more than value of the home), this is a non-recourse loan and the borrower/estate/heirs can not owe more than the market value of the home.   

Some North Bay Senior Centers...

Senior Centers are a great place for the local senior community to gather, socialize, exercise, learn, eat etc...I am usually at the Petaluma Senior Center every Wednesday morning and am always amazed at the activities and how lively it can get. Below is information for some Senior Centers in the North Bay..

Cloverdale – 311 Main St – 707-894-4826 – www.colverdalseniorcenter.com

Healdsburg – 133 Matheson St. – 707-431-3224 – www.ci.healdsburg.ca.us

Napa – 1500 Jefferson St – 707-255-1800 - www.cityofnapa.org

Novato – 1560 Hill Rd. – 415-899-8290 - www.ci.novato.ca.us

Petaluma – 211 Novak Dr. – 707-778-4399 – www.cityofpetaluma.net

Rohnert Park – 6800 Hunter Dr. – 707-585-6786 - www.rpcity.org

Russian River – 15010 Armstrong Woods Rd, Guerneville – 707-869-0618 – www.westcountyservices.com

San Rafael – 618 B St. – 415-485-3348 – www.cityofsanrafael.org

Santa Rosa – 704 Bennett Valley Rd. – 707-545-8608 – www.srcity.org

Sebastopol – 167 N High St. – 707-829-2440 – www.sebastopolseniorcenter.org

Please let me know if your favorite North Bay Senior Center is missing from this list, and I will add it...

Some uses...

There are many reasons why a senior home owner might be looking at an option of the Reverse Mortgage...

Many people think it is solely for the use of a senior that is low income and in need of more income. This is a use, but there are many other ways that one can take advantage of the Reverse Mortgage. Some of these include:

• Debt consolidation - consolidate mortgage and consumer debt into a mortgage that has no monthly payments.
• In Home Assisted Living - Generate monthly income to pay for in home assisted living, adding no more to monthly debt payments.
• Supplementing income - Some may have periods here and there when they fall a bit short on income. They can use the equity line piece of the reverse to fill in this short fall.
• Purchase a home - A Reverse can be used to purchase a home. This is usually in the case of the senior home owner needing to downsize and not wanting to use all of their funds from the previous house for their new purchase. They can conserve funds and still have a mortgage with no monthly payments. Seniors with good cash reserves can also look at purchasing a home with these reserves
• Purchase a vacation or rental property - The Reverse Mortgage needs to be on your primary residence, but some have used funds from this to then go purchase a vacation or rental property now having two properties with no monthly mortgage payments.
• Help family members - Senior home owners can can assist children or grandchildren purchase a home or whatever needs they may have, while not increasing their monthly debt payments or having to go to savings .
• 
  

These are a few of the ways that a senior home owner might use a Reverse Mortgage...There are many other ways funds have been used...

Happy to discuss your ideas....

Brian 

The Reverse.....

It seems as if it used to be a given that we would work until we are 60 and then retire from the job we have been on for as long as we can remember and live comfortably on a pension and sit on the front porch whittling sticks and, well, whatever you do when you retire.

These days, that is more of a dream for many people than a reality. Pensions are almost non existent while IRAs and 401ks that were supposed to last a lifetime, may have dwindled to only last 5-10 years if used as a source of income.

In this day, living off Social Security is a stretch at best. Many seniors also got caught up in the refinance craze of a few years ago, taking advantage of very low rates and minimal qualifying, but now stuck with payments that are tougher to make on a fixed income.

The dream of being comfortable for your retirement is not as much a “sure thing” as it once seemed. A lot of senior homeowners have to go back to work or look at the possibility of selling their home.

The Reverse Mortgage is one financial tool that can help many senior homeowners. I am going to touch on this over the next several Blogs, discussing the basic definition with follow up posts discussing uses and myths surrounding the Reverse Mortgage.

It is not the only solution and there might be other solutions for the financial challenges of a senior homeowner. But it is a solution that has helped many senior homeowners be in a better place.

The Reverse Mortgage
As the name suggests, the Reverse Mortgage is "reverse" of what a normal mortgage is. In a typical mortgage, the borrower writes a check to the bank each month paying a piece of interest and a piece of the balance of the loan (i.e principal).

With a reverse mortgage, the borrower does not write a check to the lender. It is a loan with no monthly payments due and in many cases the lender sends a monthly check to the borrower depending on what the needs are. This comes from the equity of the home. The payments and interest grow over time and are added to the balance. Upon the borrower moving, passing away or just deciding to payoff the loan, the total balance is due.

If the home is sold the borrower or heirs get whatever equity there may be. This is a called a "non-recourse" loan which means the borrower will not owe more than the property is worth upon sale. For example, if the home sells for $400,000, but the RM has grown to $500,000, the borrower would not owe more than the $400,000.

The reverse mortgage, or RM, is a financial tool that allows senior (62+) homeowners to stay at home and maintain a good quality of life. It has no monthly payments due, no income qualifying, and no credit score qualifying. There are two basic purposes of the RM: debt consolidation and income supplementation.
These can then be broken down into many more uses. A third possibility is for buying a home. This is a newer use of the RM and will be touched on in a later post. A fourth possibility is just having fun (buying a vacation home, a boat, a fancy car etc.) with no additional monthly payments.

Many senior homeowners get to retirement, but instead of burning the deed on their home, they may still have 20+ years left on a mortgage after refinancing multiple times. On a fixed income, meeting the monthly mortgage payments can be more challenging.

For some consolidating the existing mortgage and other debt into a loan that has no monthly payments makes a huge difference for the senior homeowner, allowing them to not have to rely on investments as much and breathe a little more.

Some seniors may need to subsidize their existing income for various reasons, including in home-assisted living, unexpected expenses, or just quality of life.

Funds for a RM can come in a lump sum, monthly income (for life or a specific time frame), or a line of credit. In some cases, a senior may take an upfront lump sum, have a specific monthly income and have funds left available in a line of credit. There is flexibility depending on what the needs of the senior are. There are no limitations on what the funds can be used for.

Currently, almost all RM’s are FHA (Federal Housing Administration) insured and have many protections for the senior, including upfront counseling. I will cover this in a little more detail in future blog posts.

For local senior events and activities, you can check out the Senior Center newsletter. The August issue can be found here.

I am usually at the Senior Center every Wednesday from 9:30-12:30 to answer any questions regarding Reverse Mortgages.