Reverse Mortgages The Good, The Bad and The Ugly; and why they really aren’t that bad or ugly.
Written by Courtland Young Senior Real Estate Specialist and Loan Officer CAL. BRE# 01468400 NMLS# 1962428
Visit our San Diego Mortgage Site at www.SanDiegoRealEstateandMortgage.com
NMLS#1692428 CAL BRE#01468400
Courtland helps seniors in San Diego with a reverse mortgage. A reverse mortgage is a type of loan for seniors that are 62 years of age or older. A reverse mortgage is a type of loan that allows you to pull equity out of your home without having the obligation to make a monthly mortgage payment.A reverse mortgage works very similar to a traditional mortgage, except in reverse. Instead of the homeowner paying the lender each month, the lender pays the homeowner. As long as the homeowner continues to live in the home, no repayment is necessary. A reverse mortgage may be right for you if you would like to take out equity in your home and/or you would like to stop paying a mortgage every month. The money you receive can be put toward just about anything. You have worked hard your whole life and you deserve to have a good retirement. Take a trip, pay expenses and just enjoy life without worrying about money all the time. I know we have all heard that reverse mortgages are a bad deal, well that used to very true, but things have changed, and the federal government now regulates many of the reverse mortgage programs.
Don’t get me wrong the interest rate is still higher than traditional programs, but the interest rate does have a cap, so it can’t go past a certain point. Also, if something happens to you and/or your spouse because you and/or your spouse can no longer live in your home or you pass away your heirs have the ability to pay off the loan either by refinancing (if they qualify) or paying off the loan with the proceeds from the house sale.
Just a side note on this, when you pass away your heirs will receive a stepped up basis on the purchase price of the home thereby eliminating many of the tax burdens associated with selling your home while you are still living.
I understand that most of us want to leave a legacy to our heirs and may shun the thought of doing a reverse mortgage for just that reason. When in fact, it may just be the best financial move you could make depending on your situation.
A Reverse Mortgage or (HECM) Home Equity Conversion Mortgage isn’t right for everyone and every situation. But, who may a reverse mortgage be right for?
Who are they right for?
- Someone 62 years or older.
- The home must be your primary residence.
- You must own your home and have a sufficient amount of equity (generally 50% or more). Reverse Mortgage lenders require that their mortgage is in first position on title. Meaning that they are the first ones to get paid if your house goes into default or there is a lien put against it. If you have a traditional mortgage on your home, you will need to get enough out of the reverse mortgage to pay off the existing loan.
- Your home must be a single-family-residence, two to four-unit home with at least one unit occupied by you, condominium, or townhouse. You usually cannot get a reverse mortgage on a mobile home or a cooperative.
- The home must be completely constructed, and you must obtain a certificate of occupancy.
- Your homes condition cannot fall below HUDS minimum Property Standards.
- You must complete counselling through a HUD approved counselling agency.
- Your credit score and income have no bearing on whether you are approved for the loan. Your home equity is the qualifier
How is a reverse mortgage paid out?
The older you are the more money you can qualify for!
- Line of credit. You can take the whole amount you are awarded in one lump sum, or whatever amount you want, whenever you want until you have withdrawn the whole credit amount available. With a HECM the amount that is available to you grows
- Term. You receive set payments each month for a specific number of years. The longer the term, the lees cash you will receive.
- Tenure. You receive set payments each month for as long as you live in the home.
- Modified Term. You receive a set payment each month for the term you choose and have a line of credit as well. The higher the line of credit is, the less you will receive in set payments
- Modified Tenure. You receive a set payment each month for as long as you live in the home and have a line of credit as well. The higher the line of credit is the less you will receive in set payments.
All of these options are in the form of an adjustable rate mortgage except the lump sum option which can be a fixed rate.
*Remember* You only accrue interest on the money you have taken out: not what’s available.
THE BAD and The Ugly, AKA “THE FINE PRINT”
The loan is not due until everyone on the title of the house has not lived in the house for six consecutive months (Twelve months if gone for medical reasons) or died. It is standard for the lenders to give the borrowers or heirs six months to repay the loan or sell the house before starting foreclosure proceedings. However, in some special circumstances your loan may become due while you are still in the house.
These circumstances can include:
- Failure to pay property taxes or insurance. You are responsible for paying these items even if you have a reverse mortgage, although you can certainly pay for them with the proceeds from the reverse mortgage.
- Failure to maintain and repair home.
- Donation, condemnation or abandonment of home.
- Declaration of bankruptcy.
- Perpetuation of fraud or misrepresentation.
- Renting out your entire home or doing a short term rental like Airbnb. You can still have roommates or rent out rooms in your house as long as you are still living in the home
- Adding a new owner to the home’s title.
- Taking out new debt against the home.
ALL HECM LOANS ARE NON-RECOURSE LOANS – Meaning that if you owe more on your home than it’s worth when you and/or your spouse move to a long-term care facility or pass away the only recourse the lender has is to ask for the current value of your home. Obviously if you owe less than the house is worth your heirs can sell the house or refinance (if they qualify) and pay off the loan and either keep the house or take the remainder of the proceeds from the house sale with a step up in basis.
For more information about the Home Equity Conversion Mortgages for Seniors Click Here to Contact Us or Call 858-337-6317