Reverse mortgage mistakes
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Reverse mortgage mistakes

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Reverse mortgage mistakes Reverse mortgage mistakes Document Transcript

  • 1. What really is a Reverse Mortgage? It’s a US government insured program that is only available to people 62 and older. You must own your home and have substantial equity in the house. The program was created by the lobbying efforts of AARP. Here’s a simple explanation of how it works. The program allows seniors to borrow money today against their home, and pay it back after they die or move out permanently. So no monthly mortgage payments, no cost out-of-pocket, and you still own your home. As to how much you get, it ranges from 50% – 70% of the appraised value of your home. The older you are, the more you get. The loan is paid back when one of three things happens. a. You sell the house. b. You permanently move out of the house. An example would be to go live with your kids or to move into a nursing home. You are considered to be permanently out of the house if you vacate the house for over 12 consecutive months. Once that happens, the loan is due and payable and you have approximately 12 months to repay the loan. c. Last surviving spouse dies. If one spouse dies, the loan is not due. But when the last survivingspousedies,thentheloanisdue.Thentheestate is given approximately 12 months to repay the loan. When the loan is paid back, you pay the accrued interest from the time the loan was taken out, you pay the closing costs that were added to the loan at its inception, and you pay back the amount you originally received. If you already have a mortgage on your house You can do a reverse mortgage if you already have a mortgage on your house or if you own your house free and clear. But if you have a mortgage on it, it gets paid off as part of the reverse mortgage transaction. But you have to get enough money out of the reverse mortgage to pay off your existing mortgage, unless you’re willing to come up with the difference. As a general rule, you can’t owe much more than 60% of the current appraised value of your house in order to do a reverse mortgage. How much you can get The amount you get is based on three factors, the appraised value of your house, the age of the youngest spouse, and the current interest rate. Here are the approximate current numbers: approximate % your age of value of your home 65 57% 70 60% 75 63% 80 66% The costs There are no out of pocket costs. All expenses associated with the loan are rolled into the loan. And the amount of these expenses typically are approximately $9,000 on a house worth $175,000. Qualifying for the loan It’s easier than with a traditional home loan. The reason is you don’t have any mortgage payments with a reverse mortgage. Accordingly, you don’t have to prove that you can make your mortgage payment each month. Nevertheless, you do have to show that you can pay your property taxes in the future and keep homeowners insurance on the property. Also, you have to be 62 or older, and you have to live in the home. Lastly, you have to have enough equity in your home to get enough money out of a reverse mortgage to pay off your existing loan on your house. As a general rule, you can’t owe more than about 60% of the value of your home. 2. Need to plan on staying in your home long-term(4 + years) If you take out a reverse mortgage, you should plan on staying in your house at least four years or more. If you move out within four years of taking out a reverse mortgage, it makes the loan rather expensive. Here’s why. The cost involved in getting a reverse mortgage typically runs about $9,000 – $13,000. Those costs are added to the loan. They are paid back when you sell The 5 “Must Knows” about Reverse Mortgages.
  • the house. So the longer you are in the house and can spread out the cost over many years, the cheaper the loan effectively is. Conversely, the shorter the time frame, the more expensive the loan is. That’s why ,as a general rule, you shouldn’t do a reverse mortgage unless you plan on staying in your house long-term. The loan is designed with the idea that the person taking out a reverse mortgage is going to stay in the home long-term. 3. Your 3 Responsibilities Once you take out a reverse mortgage, you must pay property taxes, homeowners insurance and live in the home. That’s really it. And it’s assumed that you will keep up your house to a reasonable standard. 4. It’s safe…but who it’s not for In this world we live in today, often times we don’t know what’s safe and what isn’t; what is a scam and what isn’t. A reverse mortgage is safe. It was created by the lobbying efforts of AARP, and it’s a US government insured program. Irrespective of the what you think about AARP or the US government, they certainly aren’t advocating scam programs. So the bottom line is reverse mortgages are safe. They are also safe because you don’t have monthly mortgage payments to default on. That’s the biggest risk most homeowners have who have a loan on their house. So who is a reverse mortgage not for? There are three primary categories of people: a. People who don’t have a lot of equity in their house. You have to own your own home and you have to have substantial equity in your house. As a general rule, if you owe more than 60% of the value of your house, generally you can’t do a reverse mortgage. b. People who want to leave the maximum amount to their kids. If you do a reverse mortgage, you’re taking some the equity out of your house today to improve your own standard of living. Accordingly, there’s less left for the kids, after you die. So if leaving the maximum amount to your kids is your highest priority, you shouldn’t do a reverse mortgage. c. People who don’t intend to stay in their house long-term. It’s an expensive loan if you take out a reverse mortgage and don’t live in the house at least four years. It isn’t really a requirement that you live in the house for 4 or more years, it just makes it an expensive loan if you don’t. 5. Interest is accruing on the loan With a reverse mortgage, you get money today and it’s paid back when you die, sell or leave the house permanently. There are no monthly mortgage payments. So what about the interest on the loan? Since there are no mortgage payments, that interest is not getting paid each month, like on a regular mortgage. Rather, it’s accruing and adding to the balance of the loan. When you die, sell or permanently leave the house, the loan is due and payable. The house is sold and the interest is paid at that time. To clarify what is repaid in total when the loan is due and payable, it’s a combination of three things. It’s the amount of money originally received. Secondly, it’s the closing costs incurred when you took out the loan. And it’s the interest on the loan (typically 3% – 5% a year) along with the FHA monthly mortgage insurance premium (which is 1.25% a year). 5 mistakes to avoid when getting a reverse mortgage. 1. Understand there is less left for the kids. As mentioned previously, when you do a reverse mortgage you are taking some of the equity out of your house today to improve your standard of living today and in the future. But that causes less to be left to your kids, after you die. For some people, that’s not a problem. They feel like they put their kids through school and helped them all they could. Now, in their retirement, they need the equity in their house to have
  • a reasonable quality of living today. So leaving less for the kids is not a problem. But other people don’t feel that way. They want to leave the maximum amount for the kids. So if they do a reverse mortgage they have to understand that there will be less left for the kids as an inheritance by them doing a reverse mortgage. 2. Don’t do a reverse mortgage if you don’t plan on living in your home long term. There is no requirement that you must live in the house a certain number of years, but the economic reality is that if you live in the house less than four years after taking out a reverse mortgage, it’s an expensive loan. Here’s why. The typical cost with the reverse mortgage runs between $9000 – $13,000. That cost is added to the loan at the inception, but no cost out-of-pocket. When you sell your house, those costs are taken out of the sale proceeds. So, if you lived in the house less than four years and you spread those costs over a limited number of years, it makes the effective cost of the loan expensive. A reverse mortgage is designed for people who intend to stay in their house long-term, typically over four years. That was the concept behind the loan when AARP lobbied Congress to create the reverse mortgage program 3. Don’t do a reverse mortgage unless both spouses are 62 or older When you do a reverse mortgage, both spouses should be over 62. When that’s the case, the loan becomes due when the last surviving spouse dies. If one spouse dies, nothing happens. Again, the loan doesn’t come due until the last surviving spouse dies. But here’s something to note. You can do a reverse mortgage if one spouse is over 62 and the other one is under 62. The problem in that case is that the loan comes due when the older spouse dies. And while only 2% of reverse mortgages involve one spouse being under 62, this situation has given reverse mortgages a bad reputation with some people and, in some cases, with the media. It’s interesting that this is the case. When one of the spouses is under 62, the younger spouse has to go throughspecialcounselingtomakesuretheyunderstand that the loan comes due when the older spouse dies. They also have to sign documents acknowledging that. Nevertheless, when the loan comes due when the older spouse dies, the younger spouse too often denies understanding that the loan was going to come due when the older spouse died. This is in spite of the special counseling and written acknowledgment of that fact. Accordingly, from a practical standpoint, the reverse mortgage industry is moving in the direction of not allowing reverse mortgages to be taken out when one spouse is over 62 and one is under 62. 4. Don’t take more money than you need. With a reverse mortgage, you have an option as to how much you can take of the total proceeds that you are entitled to. Here’s the thing I would like you to understand: Take only what you need. If you take more than you need and put it in the bank, the interest it will draw will be less thatn the interest that is accruing on the loan. As an example, if you put the excess money in the bank (over what you need), you would probably earn 1% - 2%. But the loan is accruing interest expense of 3% - 5%. 5. Don’t do a reverse mortgage if you don’t understand how it works. (Yourlevelof understandingwillbedetermined by who you choose to work with) I’ve been blessed to do over 8000 reverse mortgages. When I first started, I would do my best to explain, in simple terms, how it worked to my clients. In most cases they did understand how it works. But in my early days in the business, some would say they did… but really didn’t. That was enlightening to me. I saw that if they really didn’t understand how it worked, after they took out a reverse mortgage they would worry about it. It was that fear of the unknown. And worry is not good for your health!!! So understand reverse mortgages before you do one. And work with an advisor that can explain it three or four different ways. Reverse mortgages are not real complicated. But you need someone that makes it simple and clear for you. Just remember, some people have a knack for making things simple. Others have a knack for making things more complex than they have to be. Use an advisor who makes it simple and understandable for you.
  • 1. Do you have enough equity in your home? Here’s the general rule. You can’t owe more than about 60% of the value of your house on your existing mortgage and still be able to do a reverse mortgage. Again, that’s a general rule. The reason is because you have to get enough money out of the reverse mortgage to pay off your existing mortgage. If you don’t, to do a reverse mortgage you would have to come up with the difference in cash. Most people are not able to do that. But to help you determine more precisely if you have enough equity consider the following. The amount you get is based on three factors, the appraised value of your house, the age of the youngest spouse, and the current interest rate. Here are the approximate current numbers: approximate % your age of value of your home 65 57% 70 60% 75 63% 80 66% 2. Do you plan on living in your home over four years? While this is not a requirement to do a reverse mortgage, if you live in the house less than four years from the time you take out a reverse mortgage it ends up being an expensive loan. The reason is because the closing costs that are added to the loan at the inception typically run $9000 – $13,000. The longer you can amortize those costs over the life of the loan, the lower the effective cost of the loan is. So if you can only amortize those costs over 4 or less years, it makes the loan relatively expensive. When AARP created the reverse mortgage program, it was built on the idea that to make the effective cost reasonable, people would stay in their house long-term. So in evaluating a reverse mortgage relative to your situation, you just have to ask yourself if you intend to stay in your house long-term. If not, a reverse mortgage probably isn’t right for you. 3. Are you okay leaving less for the kids? As noted, the primary negative about doing a reverse mortgage is there’s less money left for the kids after you die. You’re taking some of the equity in your house today to improve your own quality of life today and in the future. That leaves less left for the kids. That’s a problem for some people, not for others. So the question you have to ask yourself is whether or not leaving the maximum amount to your kids is your highest priority. If it is, you probably shouldn’t do a reverse mortgage. 4. Will you continue to pay your property taxes? Here’s the reason that question is asked. When the reverse mortgage program was created many years ago, the assumption was that people taking out reverse mortgages would continue to pay their property taxes, just like they always had. They still own their home and are still obligated for those property taxes. But to the surprise of FHA and HUD, approximately 10% of people who took out a reverse mortgage stop paying their property taxes and homeowners insurance. That puts the loan in default. So, to evaluate if a reverse mortgage is appropriate for you, you have to understand that in the future you have to continue paying your property taxes. 5. Will you continue to keep homeowners insurance on your house? As noted above, approximately 10% of the people who take out a reverse mortgage have historically not paid their property taxes not maintained homeowners insurance on their house. So if you choose to do a reverse mortgage, you are legally committing to maintaining homeowners insurance on your house. So you have to be committed to that as you evaluate whether a reverse mortgage is appropriate for you. 8 Point Assessment – Is a Reverse Mortgage right for you?
  • 6. Do you plan on living in the house? The loan is paid back when one of three things happens. a. You sell the house. b. You permanently move out of the house. An example would be to go live with your kids or to move into a nursing home. You are considered to be permanently out of the house if you vacate the house for over 12 consecutive months. Once that happens, the loan is due and payable and you have approximately 12 months to repay the loan. c. Last surviving spouse dies. If one spouse dies, the loan is not due. But when the last surviving spouse dies, then the loan is due. Then the estate is in given approximately 12 months to repay the loan. This only applies when both spouses were 62 or older when they did the reverse mortgage. When the loan is paid back, you pay the accrued interest from the time the loan was taken out, you pay the closing costs that were added to the loan at its inception, and you pay back the amount you originally received. So as you evaluate a reverse mortgage, you have to fully understand when the loan is due and payable. It would also be due and payable if you didn’t pay your property taxes or maintained homeowners insurance. As long as you are comfortable with those repayment requirements, you would be suitable for a reverse mortgage. 7. No big tax liens / judgments When you do a reverse mortgage, you must pay off any federal obligations. Things like tax liens or student loans that you are obligated on. Regarding judgments like on credit card debts or medical expenses, whether you have to pay these back out of the reverse mortgage proceeds depends on the state you are located in. Most states don’t consider these non-federal obligations subject to being paid off by the reverse mortgage. But in evaluating if a reverse mortgage is right for you, you should factor these in. 8. Nursing home / moving in with the kids Do you understand that if you move in with the kids or go in a nursing home for over 12 consecutive months the reverse mortgage becomes due and payable. You may ask how does the lender know if you’re not in the house. Every month you get a statement from the lender showing you how much is owed on the reverse mortgage. If that comes back to the lender, that’s an indication that you may not be living in the house anymore. If it’s verified that you are not living in the house, then the loan becomes due and payable. And then you have approximately 12 months to repay the loan. In evaluating if a reverse mortgage is right for you, you need to fully understand this.