REVERSE MORTGAGES FOR KUPUNAS?
I don't have a financial practice anymore, but since I am closer to the grave than most folks, I often get calls and inquiries from people asking about reverse mortgages. This is a financial tool that can be very helpful to an elderly person under certain circumstances. Note that I am not offering financial advice or consultation but am merely offering some insight on what a reverse mortgage is.
Many mortgage brokers offer reverse mortgages without knowing the circumstances of the individual. As do many movie stars, T.V. stars and the cousins and well-meaning relatives who offer unsolicited advice.
A reverse mortgage is a method where a homeowner uses some of the equity in the home and makes no payments for the cash received from the mortgage. Let's say the house is worth $550,000 and there is a $200,000 mortgage on the property and the homeowner is 70 years old. Roughly, $144,000 is available to the homeowner after paying off the $200,000 mortgage balance.
The homeowner has about 3 options on the $144,000. He may take it as a lump sum, as a monthly payment for life for as long as he lives in the home or keep it as a line of credit in case of emergencies. No monthly payments are required, however, the amounts the homeowner receives, plus annual interest is added to the loan balance. This balance is paid after the homeowner dies or sells the home. The homeowner or heirs will never owe more than what the home is worth no matter how many payments are received or how high the interest rates go. This means that any amount owed above the market value of the home is "non-recourse" and the lender doesn't have any legal recourse to anything other than the house.
The reason this can be done is because in the example provided, they're only lending $344,000 ($144,000 plus the $200,000 mortgage to be paid off) on a house worth $550,000. As interest and fees are added each year, it'll take a while before the market value of $550,000 is reached. They also believe that the property will appreciate in value over the years.
Reverse mortgages generally have higher closing costs than regular mortgages. The loan origination fees are higher, mortgage insurance is required and the interest rates are adjustable although some lenders are offering fixed-rate interest. Currently, they use the interest rate of the 1 year T-Bill, LIBOR index or 1 year CMT. Other costs for the FHA- Insured Home Equity Conversion Mortgage are Title Insurance costs, Title Attorney and Recording fees, Property Appraisal and survey costs. There is also a monthly service charge (about $30) added to the balance of the loan. If the senior depends on welfare and Medicaid, the reverse mortgage payment may be factored in when eligibility tests are made for welfare qualification.
Qualifying is generally easy since credit scores and income are not part of the equation. The senior must be 62 years old, own the home and be living in the home as a primary residence. The amounts available depends on the age, interest rates and the value of the home. Currently, the maximum value of the home is capped at $625,000 until the end of 2010. In other words, calculations on how much one can borrow is based on the lesser of the market value of the home or $625,000.
If you use a reverse mortgage to increase your standard of living, you would be wasting a tool that is intended for emergency situations, such as needing resources for medical care as you age. If you use the cash to give money to your children or grandchildren, you will not have this tool left to take care of yourself. My experience with elders is that once the younger generation gets the elderly person's assets, the elderly is left to fend for himself. Harsh, but true in 50% of the situations I've dealt with.
Many seniors are going into reverse mortgages so they can take trips to Las Vegas or around the world. Again, this is, in my opinion, not what reverse mortgages ought to be used for. Further, as is noted in the example I provided, one only gets to use a small portion of one's equity with a reverse mortgage. It may be better to move to a smaller place and get the full equity out of one's property. Because the interest is not paid, it is compounded annually so the longer the kupuna lives, the more likely that the entire home equity will be depleted.
Fortunately, the kupuna is required to attend counseling sessions by an independent HUD (Housing and Urban Development) counselor prior to receiving a reverse mortgage. Many of these counselors only know the details of the reverse mortgage so I would recommend that the kupuna also seek the advice of a financial planner who does not deal with reverse mortgages so there is no conflict of interest or ethical violation. Such a planner can determine whether the program fits the kupuna's financial situation.