- Consider a Reverse Mortgage!!!
SOME FACTS ON THE “NEW RETIREMENT”:
§ Retirements are getting longer and people are outliving planned retirement savings. People are living on average 4 months longer every year.
§ Retirement expenses are increasing due to spiraling health care and medicine costs. The Center for Retirement Research at Boston College announced recently that 43% of working households were in danger of having too little income to fund their retirement needs.
§ Even now, people in the 85 and over age group are the fast growing group entering serious financial distress.
§ As over-achieving baby boomers enter retirement, there will be greater emphasis on doing more with retirement than ever before.
§ Homes often represent the largest asset for retirees and over 80% of these people own their homes. People in the 65 and over age group are sitting on over $2,900,000,000,000.00 in untapped home equity while at the same time having the lowest median income.
WHAT IS A REVERSE MORTGAGE?
A Reverse Mortgage is a special type of “loan” that lets senior homeowners convert a portion of the equity in their home to cash. These loans are regulated and in most cases backed by the Federal Government in order to protect the homeowner. To qualify, the homeowner simply has to be over 62 years old, own his/her own home and have significant equity in their home (usually 50% or more). There are NO credit or income requirements or health check requirements.
Under a reverse mortgage the homeowner makes NO monthly payments, but just like a conventional “forward” mortgage the homeowner retains the title to the home while the property is pledged to the lender as security for the upfront loan. The homeowner remains responsible to pay taxes, insurance, and any other obligations that might create a lien on the property as well as to maintain the property. Some or all of the costs of setting up the loan can be paid with loan proceeds advanced at closing.
WHAT CAN THE LOAN BE USED FOR?
Reverse Mortgages can give older homeowners the funds they need in order to lead a more secure, independent retirement! Proceeds from a reverse mortgage are very flexible and can be used for any purpose the homeowner wishes. Many older adults are having trouble making monthly ends meet due outliving their retirements and/or experiencing surprising, costly health care bills. Beyond basic life needs, many older homeowners find they need cash for a variety of other reasons.
- Payoff existing mortgage.
- Home repair or modification.
- Purchasing better health insurance or long term care insurance.
- Upgrading primary residence or purchasing a second home
- Purchasing a higher value life insurance policy to enhance their estate.
- Travel
- Gifts for children or philanthropy
- Reducing estate tax base and/or funding estate tax payments.
These benefits come without the older adult touching their retirement assets and without tax on the loan proceeds, all while keeping the homeowner in their home for as long as they would like!
HOW DOES THE AVAILABLE LOAN AMOUNT GET DETERMINED?
The amount of loan proceeds available to the homeowner on their age, the appraised value of home, the costs associated with the loan and regulations set by the Federal Housing Administration or loan investors. Generally speaking, the older the homeowner is and the more equity they have in their home, the more cash they can receive. The higher the home value, generally the higher the loan amount for which the homeowner may qualify. Interest rates are set by the federal government and do change over time.
Lower rates allow more cash to the homeowner.
HOW DOES REPAYMENT WORK?
Over time the loan balance on a reverse mortgage will rise. It rises because the homeowner is being advanced money and is being charged interest. BUT, no payments are being made, so the homeowner’s equity slowly drops over time.
No repayment is required under a reverse mortgage as long as the homeowner lives in the home as their primary residence. When the last surviving homeowner passes away, sells the home or moves away, the full loan balance comes due. The loan balance can never exceed the value of the home (after deducting costs of sale) at the time that the loan becomes due. Reverse mortgages are non-recourse loans. These loan types protect the homeowner AND the estate from owing more than the property is worth.
DIFFERENT TYPES OF REVERSE MORTGAGES
There are two basic types of reverse mortgages. First is the federally insured Home Equity Conversion Mortgage (HECM) which accounts for over 80% of all reverse mortgages in the United States. Second, there are proprietary reverse mortgage products developed by individual lenders; the “Home Keeper” sponsored by Fannie Mae and the “Cash Account” sponsored by Financial Freedom Corporation (a specialized division of IndyMac Bank Corp.) are the more popular options.
The proprietary products tend to be best for homeowners with high value homes. A quick conversation and review of your particular financial situation with one of our counselors will help determine which product is right for you.
WHAT ARE THE OPTIONS FOR GETTING THE LOAN PROCEEDS?
Homeowners can generally choose among different options for receipt of their loan proceeds. Payment options can be changed at any time on remaining non-disbursed loan proceeds. Listed below are the options for receipt of proceeds:
Tenure – The homeowner receives equal monthly payments from the lender as long as the home is occupied as the owner’s primary residence.
Term – The homeowner receives equal monthly payments for a period of months selected by the homeowner.
Line of Credit – The homeowner may draw loan proceeds in amounts and at times he/she chooses until the credit line is exhausted.
Lump Sum – The homeowner may draw all or any lesser amount available from the loan proceeds at the time of closing.
Modified Term – The homeowner may combine a line of credit with monthly payments for a number of months selected by the homeowner.
Modified Tenure – The homeowner may combine a line of credit with monthly payments as long as the home is occupied as the homeowner’s primary residence.
WHAT ARE THE COSTS OF A REVERSE MORTGAGE?
Many of the costs and fees necessary to obtain a conventional forward mortgage apply to obtaining a reverse mortgage. You can expect to be charged an origination fee, up-front mortgage insurance premium (for HECM only), an appraisal fee and certain other standard closing costs. Generally the reverse mortgage is a good solution for those seniors that intend to remain in their homes for at least several more years. More attractive options may be available for those with short-term capital needs. The longer a reverse mortgage is in place, the cheaper it gets!
Important to note! In most cases loan costs are capped by federal regulations and may be financed as part of the reverse mortgage itself. The government requires the lender to provide a FULL DISCLOSURE of loan costs known as the Total Annual Loan Cost RATE (commonly referred to as TALC). The TALC is similar to an APR on a forward mortgage; this rate includes all loan costs and is the average annual rate that would generate the total amount owed at any point if it were charged against the disbursed proceeds to that point. These TALC rates are an approximate “cost of capital” and can be used to evaluate the suitability of a reverse mortgage vs. other financing options! Contact one of our counselors for an in-depth explanation of each type of fee and resulting loan cost!
SOME COMMON MISPERCEPTIONS
In recent years, the federal government has more tightly regulated reverse mortgages in order to strengthen their ability to help older adults navigate retirement. Some common misperceptions are:
“The lender takes the house!” – FALSE - The homeowner always retains the title to the house. A reverse mortgage is only a loan.
“I can be thrown out of my home” – FALSE – The homeowner stays in the house until a maturity event occurs.
“I or my estate can owe more than the home is worth.” – FALSE - A reverse mortgage is a non-recourse loan. The homeowner can NEVER owe more than the home is worth.
“My heirs will never support this idea!” – FALSE - Experience has shown that children, other family members and advisors are more concerned about retirees’ present quality of life and ability to make ends meet than about future inheritance.
GET MORE FACTS!
Reverse mortgages can be used not only to meet the immediate financial needs of older adults but are also useful tools in planning the long term needs of those close to retirement. If this has been an interesting report for you, please take the time to contact your real estate financial experts at Legacy Financial Services. We encourage you to involve your trusted advisors as well; family, friends, financial advisors, legal advisors and tax advisors. Importantly, if you decide to proceed with learning more, homeowners are required to attend counseling from an independent HUD-approved counseling agency. Any questions you have should be addressed during that session. Again, bring along your advisors!
The financial security and independence provided by a reverse mortgage can allow many older adults to enjoy retirement in the comfort of their own home when many otherwise could not. Let us help you decide if a reverse is right for you!
We at Legacy Mutual Mortgage hope you have enjoyed this special report. Should you need more information, please go to the website at www.texasreverse.net or call Melinda Hipp, Reverse Mortgage Specialist at (877) 492-4900.
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