Tag: Reverse Mortgage

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Mortgage, News, Retirement

The Risky Way Retirees Use Reverse Mortgages for Extra Income

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

If you’re approaching retirement, you’re probably already aware that taking Social Security at age 62 results in getting a much smaller benefit than someone who waits until full retirement age. For most retirees today, full retirement age is 66 or 67, but you can earn an even larger pay out if you can wait till age 70 to start tapping in to your benefits.

Living off your existing savings while you wait the extra eight years to start receiving Social Security benefits can be challenging. For that reason, an increasing number of financial experts are encouraging retirees to use a reverse mortgage as a source of additional income while they wait to start drawing on their Social Security benefits.

Using a reverse mortgage for extra income in retirement can be risky — so risky, in fact, that the Consumer Financial Protection Bureau (CFPB) recently spoke out against it.

“A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” CFPB Director Richard Cordray said in a statement. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”

Still, retirees with significant equity built up in their homes might be tempted to tap into that equity to bridge the gap between when they retire and when they can maximize their Social Security benefit.

A quick recap of what a reverse mortgage is and how it works:

A reverse mortgage is a special type of home loan that allows homeowners age 62 and over to withdraw a portion of the equity they have in the home. Instead of paying interest and fees each month that amount is added to your overall loan balance. When you no longer live in the home, the total loan must be paid back and you will pay no more than the value of the house. With a reverse mortgage you are no longer responsible for the regular monthly payments on your mortgage loan but you are required to keep the home in good condition, as well as paying the property taxes and homeowner’s insurance.

Most reverse mortgages are federally insured by the Home Equity Conversion Mortgage (HECM) program, which requires a strict set of rules and regulations that must be met in order to qualify. Some of those requirements include: occupying the property as your principal residence, continuing to live in the home and not being delinquent on any federal debt. The U.S. Department of Housing and Urban Development has a full list of requirements here.

The pros of using a reverse mortgage

Using a reverse mortgage can provide some additional, predictable income during retirement. Whereas relying solely on your investments could result in unstable returns depending on your portfolio. But a reverse mortgage loan isn’t a bottomless source of cash.

The amount of money you can receive from a reverse mortgage first depends on your principal limit. That’s the amount a lender will be willing to loan you based on a several factors, like your age, the value of the home and the interest rate on your loan. This is where older borrowers have an advantage. According to the CFPB, “loans with older borrowers, higher-priced homes, and lower interest rates will have higher principal limits than loans with younger borrowers, lower-priced homes, and higher interest rates.”

Another big advantage of reverse mortgages are that the proceeds are generally tax free and will not affect Medicare payments.

The risks of a reverse mortgage

It reduces the amount of equity you have in the home, which can complicate a future sale. The equity in your home is generally defined as the amount of ownership you have in a property less any remaining debt. With a regular mortgage you borrow money from the bank and pay down the balance over time. With each payment the loan balance goes down and your equity increases.

You’ll lose home equity. Since a reverse mortgage allows you to borrow from the equity you have in the home, your debt on the home increases and the equity is lowered. A reverse mortgage may limit the options for someone looking to sell their home in retirement, because the loan must be paid upon the sale and there may not be enough equity left to purchase a new home.

It increases your overall debt. As seen in the images above, a reverse mortgage reduces the amount that you own in your home and adds that amount back into your loan balance. This increases your overall debt.

The cost of a reverse mortgage can outweigh the benefits of increasing your Social Security payments. Though you are borrowing from the money you’ve paid into your home, a reverse mortgage isn’t free. Just like your regular initial mortgage you will have to pay interest and fees. Reverse mortgages are very similar and usually include costs such as: mortgage insurance premiums (MIP), interest, upfront origination fees, closing costs and monthly servicing fees.

In the figure above, the CFPB estimates a reverse mortgage will cost $21,600 for someone who uses the option from age 62 to age 67; but the lifetime gain in Social Security from 62 to 67 is $29,640.

Monetarily, in this scenario a reverse mortgage makes sense. However most borrowers use a reverse mortgage for seven years not five as in the previous example. This would bring the cost to $31,900, approximately $3,900 which is more than the lifetime benefit of waiting until 67 for Social Security.

You’re putting your home at risk. You could also lose your home if you no longer meet the loan requirements. This includes not living in the home for the majority of the year for non-medical reasons or living outside of the home for 12 consecutive months for healthcare reasons.

You’re putting your heirs at risk.  When you pass away your heirs will have to pay back the loan, usually by selling home. If there is money left over after the sale, they can keep the difference. However, if the loan balance is more than the value of the home and they want to keep the home they will need to pay the full loan balance or 95% of the appraised value, whichever is less according to the CFPB.

When does it make sense to use a reverse mortgage for income in retirement?

In general, Chartered Financial Analyst Joseph Hough says reverse mortgages are best for retirees who are in good health and expect to live long after retirement. Also, it can be one of the few options retirees have when their retirement income is simply not high enough to cover their basic needs.

Speak with a financial advisor who can help you weigh the particular pros and cons with your specific situation. Every person is different, and there is no one size fits all answer.

When does it not make sense?

A reverse mortgage may not be a good fit for those in bad health due to the risk of losing the home. If you’re planning on selling your home, having a reverse mortgage can complicate the issue because it reduces the amount of equity you have. You could be left in a scenario where the proceeds of the sale do not cover a purchase of a new home because of the cost and fees associated with reverse mortgages.

What are some other ways I can maximize my SS benefit?

Working beyond 62 may be the best option to maximize your Social Security benefit. Doing so allows more time to save for retirement and pay off any debt. You could potentially increase your overall Social Security benefits if your latest year of earnings is one of your highest. Also, if you’re married, consider coordinating your Social Security decisions with your spouse. Other alternatives to a reverse mortgage include selling your home and downsizing to a less expensive place or selling your home to your adult children on the condition you get to live rent-free, says Houge.

Kevin Matthews II
Kevin Matthews II |

Kevin Matthews II is a writer at MagnifyMoney. You can email Kevin here

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Mortgage

Guide to Reverse Mortgages: Is the Income Worth the Risk?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

old senior couple at home house on couch

If you own a home, chances are you’ve heard of a reverse mortgage. Despite increased attention and regulation, many homeowners still struggle to understand what reverse mortgages are and who should consider one. This guide will provide an in-depth understanding of exactly what a reverse mortgage is and the pros and cons of this complex financial product.

What is a reverse mortgage?

Most homeowners are familiar with a regular mortgage: You borrow money from a lender to purchase a home, then repay the loan in monthly installments over the course of several decades.

With a reverse mortgage, the lender pays you by taking some of your home’s equity and converting it into monthly payments to you. As long as you live, remain in your home, and continue to meet other obligations of the mortgage (discussed in more detail later), you do not have to pay the money back.

When you die, sell the home, or move out, you or your spouse or estate will have to repay the loan. If you signed the loan paperwork but your spouse didn’t, your spouse may be able to continue living in the home after you die, as long as they continue to pay property taxes, insurance, and maintenance costs. However, your spouse will cease to receive monthly payments from the reverse mortgage, since he or she wasn’t a part of the loan agreement. Once your spouse passes away or moves out of the home, your family or heirs may need to sell the home to repay the loan.

Example of how a reverse mortgage works

James and Mary, ages 73 and 72, are a retired couple who own their home outright. They want to stay in their home but need to supplement their monthly income from Social Security and James’s pension. They would also like to remodel their kitchen. James and Mary’s home is valued at $250,000, and they do not have a mortgage.

The total amount that James and Mary can borrow using a reverse mortgage is limited by the Federal Department of Housing and Urban Development (HUD) and is based on the age of the youngest spouse, current mortgage rates, and the value of the home.

Let’s run a hypothetical scenario through the National Reverse Mortgage Lenders Association’s reverse mortgage calculator.

Value of the home $250,000
Loan principal limit $150,000
Closing costs -$7,800
Net principal limit $142,200
Lump sum cash for kitchen remodel -$20,000
Remaining for monthly advance $122,200
Monthly advance $750

James and Mary have been mortgage-free for a year. The current value of their home is $250,000, and they are applying for a $150,000 reverse mortgage. After accounting for closing costs of approximately $7,800, the remaining available principal is $142,200. James and Mary would like to have $20,000 of that up front for the kitchen remodel, leaving $122,200 available for monthly installments. Based on this scenario, the amount James and Mary would receive monthly is approximately $750.

Reverse mortgage requirements

Businesswoman pushing button on touch screen

To qualify for a reverse mortgage, you must:

  • Be age 62 or older
  • Own your home outright or have a small mortgage (meaning the amount you owe on the mortgage is less than the amount you qualify for under the reverse mortgage program)
  • Use the home as your primary residence
  • Not be delinquent on any federal debt, such as back taxes, federally backed student loans, SBA loans, or HUD-insured loans.
  • Have the financial resources to continue to meet obligations such as property taxes, homeowners insurance, association dues, and repairs
  • Participate in an information session with a HUD-approved Home Equity Conversion Mortgages counselor

Meeting these basic requirements doesn’t necessarily mean a reverse mortgage is right for you.

3 questions to ask yourself when considering a reverse mortgage

  • Do you want or need to move? This question should help you understand whether or not your home will continue to meet your needs for the foreseeable future. If your home is physically difficult for you to navigate and maintain, you may be better off selling the home and downsizing to a home that is better suited to your retirement years. A reverse mortgage requires you to continue to reside in and maintain the home. If you are physically or financially unable to do that, you may have to sell the home to pay off the loan balance.
  • Can you afford to continue paying real estate taxes, homeowners insurance, association dues, and maintenance? While a reverse mortgage will boost your monthly income, consider whether that additional cash flow will be enough to continue covering real estate taxes, insurance, association dues, and home maintenance. Keeping up with these obligations is a requirement of a reverse mortgage. If you cannot afford to keep up with these expenses and your other bills, including health care, utilities, and other living expenses, a reverse mortgage may not make sense.
  • Are you planning on leaving your home to your children, grandchildren, or other heirs? When you pass, your heirs may have to sell the home to pay off the reverse mortgage. Other assets, such as investments or life insurance, may be available to pay off the loan balance. If your sole motivation for staying in the home is to pass it on to heirs, consider whether they’ll be able to hold on to it after you are gone.

Robin Faison is a licensed mortgage loan officer specializing in reverse mortgages with Open Mortgage in Scottsdale, Az. Faison also teaches a Reverse Mortgage for Purchase class accredited through the Arizona Department of Real Estate.

Faison says reverse mortgage borrowers typically fall on a spectrum, from those who are facing foreclosure and need a reverse mortgage to keep their homes, to those who are not in any financial difficulty and use a reverse mortgage line of credit strategically as a part of their overall retirement plan.

Reverse mortgage risks

A reverse mortgage is a financial product, and all financial products come with risks. Make sure you understand those risks before signing any paperwork. Those risks may include the following.

Fewer assets for heirs

Some homeowners dream of holding on to the family home and passing it down to their children or grandchildren. If this is part of your estate plan, consider whether your heirs will need to sell the home to pay off the reverse mortgage.

Even if you have life insurance proceeds or other assets that can be tapped to pay off the reverse mortgage after your death, those assets may be depleted, leaving less for your family members. Work with your financial adviser and a reputable reverse mortgage specialist to make sure that a reverse mortgage works with your overall estate plan.

Fees and other costs

Real estate investment. House and coins on table

Just like with a conventional mortgage, you will pay closing costs, mortgage insurance premiums, origination fees, and other costs to close on a reverse mortgage. According to the Consumer Financial Protection Bureau (CFPB), the fees and other costs of a reverse mortgage vary based “on the type of loan you choose, how much money you take out up front, and the lender you choose.”

Faison says lenders also receive a premium for servicing your loan (typically from Fannie Mae or Freddie Mac), which can be used to offset closing costs. However, regulations have made it more difficult for banks to offset costs on a fixed rate loan. Your lender will have more leeway for offsetting closing costs with that premium on an adjustable rate mortgage, but then the borrower bears the risk of rising interest rates.

Will owe more over time

As you receive money from the reverse mortgage, interest is added to the balance you owe each month. The amount you owe grows as interest on the loan balance adds up over time. Faison says many borrowers choose to make some payments on their reverse mortgage in order to keep the loan balance down.

Variable rates

Most reverse mortgages have variable rates. While these loans have more flexibility than fixed rate mortgages, your rate can rise quickly and dramatically.

HUD publishes statistics on all federally backed reverse mortgages each month. For October 2016 (the most recent month for which information is available at the time of this writing), interest rates on adjustable rate reverse mortgages range from 2.507% to 6.045%.

Interest is not tax deductible

Unlike a traditional mortgage, the interest you’ll pay on a reverse mortgage is not tax deductible until the loan is paid partially or in full.

Need to continue paying other obligations

You will still be responsible for paying property taxes, insurance, utilities, fuel, maintenance, and other standard costs of keeping up the home, just as you would with a conventional or no mortgage. If you cannot or do not continue to pay real estate taxes or insurance or to maintain the home, the lender may require repayment of the reverse mortgage.

May require “set-aside” amounts

Lenders are required to conduct a financial assessment to ensure borrowers have the financial capacity to continue paying obligations such as property taxes, homeowners insurance, and maintenance. If the lender determines that the borrower may not be able to keep up with such payments, they may require “set-aside” amounts to cover future obligations.

The set-aside amount is based on a formula that takes into account your current property taxes and homeowners insurance premiums, projected increases to taxes and insurance rates, monthly interest rates, and the life expectancy of the youngest borrower. While set-aside amounts help ensure borrowers can continue to meet loan obligations, those amounts will reduce your payment amounts.

Unscrupulous advice

Some unscrupulous advisers try to pressure borrowers into using proceeds from a reverse mortgage to purchase other financial investments. The Financial Industry Regulatory Authority (FINRA) warns consumers to be skeptical of such advice. If those other investments lose value, you or your heirs may not have the means to pay off the reverse mortgage balance and may have to sell the home.

Primary residence requirement

Faison says she also reminds all of her clients about the obligation to continue using the home as your primary residence. You only need to live in the home for six months and one day out of the year for the home to qualify as a primary residence.

Annually, the lender will mail an affidavit that the borrower needs to complete, sign, and send back to confirm they are still there. Make sure to respond to those notices. Otherwise, the lender may believe you are no longer living in the home and take steps to collect on the loan balance.

How to shop for a reverse mortgage

Reverse mortgages are not one-size-fits-all products. Here are a few things to keep in mind when selecting a reverse mortgage.

Types of reverse mortgages

  • Single-purpose reverse mortgages. These are offered by some state and federal agencies and nonprofit organizations. As the name implies, the loans can be used for only one purpose, such as home repairs or improvements or property taxes.
  • Proprietary reverse mortgages. These are private loans without federal backing. Owners of higher-valued homes may receive bigger advances from a proprietary reverse mortgage.
  • Home Equity Conversion Mortgages (HECMs). HECMs are federally insured and backed by HUD. Proceeds can be used for any purpose. An HECM may be more expensive than a traditional home loan, but they offer more flexibility. Borrowers can choose several payment options, including:
    • Single disbursement
    • Fixed monthly advances over a specified period of time
    • Fixed monthly advances as long as you live in your home
    • A line of credit
    • A combination line of credit and monthly payments

Other considerations for choosing a reverse mortgage

Faison recommends working with a local licensed loan officer who specializes in reverse mortgages or HECMs. “It’s fine to work with companies you hear about on TV,” Faison says, “but I often work with people who heard about reverse mortgages on the television but then decide they want to work with someone local.”

No matter who you work with, make sure you understand all costs involved. Loan expenses, including origination fees, interest rates, closing costs, and servicing fees, can vary among lenders. Make sure you fully understand the total cost of the loan.

How long do reverse mortgages take?

Clock time deadline

Depending on where you live and how busy appraisers are in your area, it could take two months or more just to get an appraisal on your home, which is only the first step in the process.

Faison also recommends asking your loan consultant how long the reverse mortgage process will take. If you are facing foreclosure or need money right away, a reverse mortgage may take more time than you have. Faison says some lenders may take 60 days or more, depending on the appraisal. “The appraisal industry has undergone a lot of change recently, and there are fewer appraisers available,” Faison says.

Alternatives to a reverse mortgage

A reverse mortgage isn’t right for everyone. Faison speaks with many people who ultimately are not good candidates. Credit issues may stand in the way of passing a financial assessment. In other cases, homes haven’t been maintained and are unable to pass the appraisal process. These problems can be resolved. However, if they are impossible to overcome, alternatives to a reverse mortgage include the following.

Refinance existing mortgage

If you have an existing home loan, you may be able to refinance your mortgage to reduce your monthly payments and free up some cash.

Take out a home equity loan or line of credit

If you own your home outright, you may be able to take out a home equity loan or line of credit. You will still be responsible for monthly payments, but the interest on the loan is usually tax deductible up to $100,000.

Sell your home and downsize or rent

If you are willing and able to move, selling your home to downsize or rent will free up the equity in your home, giving you extra cash to save, invest, or spend. You could also sell the home to your kids or another family member. Often, people who sell the home to a family member use a sale leaseback agreement where they rent back the home using proceeds from the sale.

REX agreement

A REX agreement is an alternative to a home equity line of credit. It allows you to access the equity in your home, giving you a cash payment of a percentage of your home’s market value (typically 12% to 17%) in exchange for 50% of the increase in your home’s value when it is sold. For example, if the home is worth $100,000 when the REX agreement is signed, the homeowner may receive a cash payment of $12,000 to $17,000. If the home increases in value by $50,000 over the next 10 years, when the home is sold, the company receives $25,000 (50% of the $50,000 increase).

Rent out part of your home

If you want to stay in your home but need some additional income, you may be able to rent out a part of your home to a roommate. Be sure to screen candidates carefully.

The bottom line

If you are considering a reverse mortgage of any kind, make sure you understand the pros and cons of this complex financial product before you sign. The television commercials may make it look easy, but a reverse mortgage is a serious financial commitment that comes at a cost and may impact potential heirs.

If you do not have the money to continue living in your current home at your current lifestyle, borrowing money against your home equity may not be the best option. Discuss your situation with a trusted adviser and a reputable, licensed loan officer with experience in reverse mortgages and HECMs. If you do decide that a reverse mortgage is right for you, review the different types of reverse mortgages and shop around for the best terms and rates. Do some research to find a counselor or company who will take the time to help you understand the costs and obligations before making any decisions.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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CFPB Warns Consumers of Reverse Mortgage Problems

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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As more Americans age, reverse mortgages are growing in popularity as a way for retirees to unlock the investment in their homes. 41% of Americans age 55-64 have no retirement savings account, and even those that do have a median balance of only $103,000. Yet homeowners over age 62 have nearly $4 trillion in equity in their homes, and that’s the source of retirement savings most people will ultimately rely on.

While smiling celebrity pitches make reverse mortgages them sound safe and appealing, they are riddled with fine print and traps for the uninitiated.

The Consumer Financial Protection Bureau (CFPB) recently released a report highlighting consumer complaints relating to reverse mortgages.

Some of the most common issues include:

Not being aware the loan can’t be taken over. When the last borrow dies, the loan comes due and must be repaid – either at the balance remaining or 95% of the property’s assessed value. That often means the house must be sold to cover the loan. Many surviving family members are unaware of this, and struggle with the fact that the home they were counting on keeping must be sold, as they are not eligible to take over the payments on the loan.

Not keeping up with property taxes and insurance. Many complaints arise when lenders claim property taxes are overdue, which put the mortgage in default, even though the taxes were paid. Families need to be diligent about making sure the loan servicer is keeping accurate records.

Younger generations living in the home and being surprised. Mortgage servicers want payment as soon as possible after the last borrower dies, leaving family members who may live in the borrower’s house in the lurch. They may feel pressured to take action that’s not in their best interest, and not understand all of the options available. In this situation, the CFPB advises contacting a Housing and Urban Development counselor to get a free assessment. You can find one near you here.

Inflated appraisals. Within 30 days of notification that the loan is due, the lender will send an appraiser to determine the home’s current value. The amount heirs have to pay is the lower of 95% of that appraised value or the remaining balance on the mortgage. Many complaints involve appraisals that are inflated and the don’t accurately reflect the value of the home, leaving the family paying more than it’s truly worth. This is especially a problem in situations when house prices have declined since the reverse mortgage was taken, and the appraised value is lower than the remaining balance of the loan.

Even the best planning won’t avoid every sticky issue with a reverse mortgage.

If your family is having problems with a reverse mortgage, and the servicer is giving you the runaround, the CFPB is available to help.

Simply use the CFPB complaint form to tell them about your problem, and who the servicer is.

The servicer will be required to respond to the CFPB with the status of your complaint by law, and you’ll often get a faster response than if you try contacting the servicer on your own.

Brian Karimzad
Brian Karimzad |

Brian Karimzad is a writer at MagnifyMoney. You can email Brian at brian@magnifymoney.com

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