Reverse Mortgage - What are your objections?

[pianoman9701]

There have been a lot of changes to reverse mortgages since 2012 and people are under a lot of misconceptions about what they are and how they work.  Please let me know what your objections to them are. Maybe I can clear up a few points.

[Magnum_Willys]

Do higher interest rates help when getting a reverse mortgage like they would if I was carrying the contract on a for sale by owner house?

[pianoman9701]

Do higher interest rates help when getting a reverse mortgage like they would if I was carrying the contract on a for sale by owner house?

For sale by owner will have no effect on higher rates if the buyer doesn't pay cash and takes out a mortgage. You, as the seller, would save real estate commissions but might lose that or more at the negotiation table. I always recommend having a good realtor in your corner when selling a home.

A higher rate with a "forward" mortgage means that you pay higher interest each month than you would with a lower rate. With a reverse mortgage, you make no payments. So, depending on the appreciation of your property, a higher rate can bite into your equity more over time.

[Skillet]

Interesting topic.  I think MW is saying that in a higher interest rate situation, an owner contact sale (relator or fsbo) would mean more money in his pocket due to the higher interest rates. So in a reverse mortgage situation, do the higher interest rates mean more cash flow back to the owner while they live in the home vs doing a reverse in lower interest rate scenarios?

Distilled - how do higher interest rates affect cash flow in the reverse mortgage deal vs lower interest rates?

[pianoman9701]

Distilled - how do higher interest rates affect cash flow in the reverse mortgage deal vs lower interest rates?

Interest rates are a part of what's figured into the formula for the benefits and a higher rate would consume equity at a faster rate. Other factors are age (62 minimum) and the amount of equity at closing. So, for example, a reverse at 7% would consume the equity slower than a reverse at 10%. The lower the rate, the more access the homeowner has to the equity, either at closing (Fixed or ARM), or ongoing through the life of the loan (ARM only).

Forward mortgage - equity usually increases. Reverse Mortgage - equity usually decreases. In both cases, higher rates cost the homeowner more money.

[pianoman9701]

Reverse mortgages eliminate your monthly mortgage payment (unless you choose to make payments for maintaining equity). The reverse ends when a maturity event occurs - the borrowers die, the borrowers go into care for more than a year, the borrowers move, or the borrowers don't pay taxes, insurance, or don't keep up the repairs of the house according to FHA health and safety standards. If both spouses are borrowing, the maturity event happens when the surviving spouse reaches a maturity event (above). In these cases, the mortgage ends and the owners or heirs are able to sell the house and take advantage of any remaining equity, if any remains.

[Wetwoodshunter]

Scamming elderly out of their life savings - What are your objections?

[Magnum_Willys]

Thks Skillet, yes I did mean owner-carried contract.  Sounds like higher rates are bad for any type of mortgage.   

I think I get it now.  A reverse mortgage is a loan taken out in lump sum of payments and paid back out of the houses equity when sold or owners passes away.   The higher the interest rate on the loan the faster itveats up equity.

Nothing like an owner carried contract with delayed possession like I thought it might be.

[pianoman9701]

Scamming elderly out of their life savings - What are your objections?

Please explain.

Doesn't feel like you're going to respond with specifics.  First of all, I wouldn't do any job that's a scam, but you don't know me so it's a concern for you. I get it. I DO feel that in the past, they've seemed a bit predatory. Since 2012, reverse mortgages have changed greatly and the changes are designed to protect the consumer. One such rule is that it's now a non-recourse loan. That means that if the borrower(s) outlives the home's equity, the loan still continues until a maturity event occurs (see above). In addition, the heirs aren't responsible for negative equity upon a maturity event. The banks and the FHA are responsible for the negative equity - no one else.

Not everyone needs a reverse. But some elderly, including myself, find themselves at retirement with a limited income, some very little. Something like 45% of people over 65 have savings of less than $10K. They have a house with a lot of equity and are unable to refinance to access that equity  because of their limited income and inability to repay. That gives them a few choices. Sell the home and buy a smaller one. Live with their kids. Have the home foreclosed on. Take in a renter. Get a reverse mortgage and be able to stay in their home without making another payment no matter how long they live.

Some people have enough to get by each month but little extra to pay for going out with friends or dinner, travel, or household projects they'd like to do. The quality of life is reduced by limited income. In some cases, a reverse can help change that. Just eliminating the monthly mortgage payment makes a huge difference without even considering cash disbursements or a line of credit that never has to be repaid. Some have no ability to pay for long-term care insurance and would be stuck if something happened. This might allow them to pay for it.

So, I'm unsure what you mean by "scamming the elderly", but this aint it. There are also massive protections against taking advantage of people with cognitive decline. Someone with power of attorney can get a reverse for their parent(s) only if the POA was given a year or more BEFORE the physician's diagnosis of cognitive decline. Otherwise, they must be granted a conservatorship by the courts, which takes a minimum of 3-6 months. Everyone who applies for a reverse must go through an FHA-approved counseling before being allowed to go forward, to make sure they understand every aspect of what's going to happen. I also interview the perspective borrower to find out if they'll actually be able to live in this house as their mobility declines or if they really want this as their forever home. If they have children/heirs, I want them to be present, as well.

I'd be happy to answer any specific questions you have, either here or on the phone. PM me if you'd like my number or find it on any of my past posts that have flyers.

[pianoman9701]

Thks Skillet, yes I did mean owner-carried contract.  Sounds like higher rates are bad for any type of mortgage.   

I think I get it now.  A reverse mortgage is a loan taken out in lump sum of payments and paid back out of the houses equity when sold or owners passes away.   The higher the interest rate on the loan the faster itveats up equity.

Nothing like an owner carried contract with delayed possession like I thought it might be.

That depends on the type of reverse. A fixed rate reverse, with very few exceptions, pays out a cash disbursement at closing and and you never make a payment again regardless of how long you live or until a maturity event. An adjustable rate reverse has several additional options (that's why over 90% of reverse mortgages are ARMs). You can take a cash disbursement at closing and after one year, have a line of credit to draw from (which will grow), or take term cash monthly payments (terms are like for 5 years or ten years), or monthly tenure payments (payments for the life of the loan), or a combination of some or all of these options, depending on your age, needs, and equity...and you never make a payment again regardless of how long you live or until a maturity event. And YOU own your house, not the bank. The bank has a lien, just like a forward mortgage. And you're on the title, just like a forward mortgage.

[CP]

Since you asked.

I object to any mortgage.  Owning your home free and clear is a big part of true financial freedom.  We should all strive to own our homes outright without any liens or encumbrances.

 

[pianoman9701]

Since you asked.

I object to any mortgage.  Owning your home free and clear is a big part of true financial freedom.  We should all strive to own our homes outright without any liens or encumbrances.

 

I agree. Unfortunately, not everyone can do that. 

[Shawn Ryan]

I deal with a fair amount of reverse mortgages at the point of foreclosure. That means the maturity event has happened: typically, the owner has died or moved to a care facility. Those foreclosures would likely have happened while the borrower still wanted to live in the house, but for the benefits and restrictions of the reverse mortgage. IME, reverse mortgages keep people living in their homes longer than they could without the reverse mortgage.

[pianoman9701]

I deal with a fair amount of reverse mortgages at the point of foreclosure. That means the maturity event has happened: typically, the owner has died or moved to a care facility. Those foreclosures would likely have happened while the borrower still wanted to live in the house, but for the benefits and restrictions of the reverse mortgage. IME, reverse mortgages keep people living in their homes longer than they could without the reverse mortgage.

Thank you for adding a perspective from a professional point of view.  Those are exactly some of the people who benefit. If you can't pay your taxes and insurance or can't keep your house up and are unable to refinance because of your financial situation, you'll lose your home. It's that simple. That's with any kind of mortgage. Even if you own your home outright and can't afford your taxes, the county puts a lien on your house and eventually, you end up being forced to sell, often at a loss.

One of the borrower safeguards a reverse lender uses is called LESA - life expectancy set aside. When the financial assessment of your situation is done and it is determined that you won't be able to keep up with taxes and insurance, money is put aside from the proceeds to pay those in perpetuity, along with eliminating your mortgage payment. There are several safeguards that lenders are required to do to ensure the borrower stays in their home as long as they want or can. Most of these have been added by the government in the last 20 years, but especially since 2012 and 2014.

[Buckhunter24]

Not exactly on topic, but I think if someone elderly is struggling with increased property taxes that there are exemptions/reductions available. Ive seen some properties that have super low tax rates in pretty high tax areas. This goes for disabled too I believe. Good to hear reverse mortgages have had some policy changes, they definitely trapped some people in the past

[pianoman9701]

Good point. By county, there is relief available for property taxes for seniors and disabled on low income. I believe it's a sliding scale depending on your income. I know mine have been increasing by 10-15% per year, which is completely unsustainable.

[Magnum_Willys]

If your kids are well off and don’t need an inheritance at a certain age it seems like a no-brainer?   Basically a home-equity loan with no payments. 

My Mother-in-law took a couple hundred thou out for bills and medical and then when she sold the home that got deducted from proceeds.  Was a real help. 

[Magnum_Willys]

Oregon limits annual property tax increases to like 1% which is a godsend.  Unfortunately Oregon has the highest Income taxes in the country which if you own a business it takes half your income.

[pianoman9701]

If your kids are well off and don’t need an inheritance at a certain age it seems like a no-brainer?   Basically a home-equity loan with no payments. 

My Mother-in-law took a couple hundred thou out for bills and medical and then when she sold the home that got deducted from proceeds.  Was a real help.

I always include the heirs and ask the borrowers if they intend to pass the home on as part of their estate. There are as many reasons why someone shouldn't get a reverse as should. I try to iron that out in the initial conversation. I spoke with a couple yesterday who has a daughter in her 30s, single mom working an administration position, not making great money. They want to pass the home onto her and they're both receiving pensions which afford them a comfortable life in retirement. Lots of equity in their home and a small mortgage remaining. They were just looking at getting some more cash on hand. We had a nice talk for about an hour and I told them reverse isn't right for their situation. They decided they'd just liquidate some stocks for the cash. I will never do any mortgage that's not right for the borrower(s). I've done that quite a few times for HuntWA people. I sleep well.

[CP]

Dave has an opinion, and he’s not shy about sharing it. 

He may use a bit of hyperbole, but he brings up some good points to consider.

[Magnum_Willys]

Any financial instrument could be a godsend or a scam depending on terms of the deal. 

[pianoman9701]

I'll watch this tomorrow. It's fight night. Thanks for posting.

[Wetwoodshunter]

 

Dave has an opinion, and he’s not shy about sharing it. 

He may use a bit of hyperbole, but he brings up some good points to consider.

[pianoman9701]

A few points. Ramsey was correct about a few things. Closing costs are higher. One reason is that the brokerage commission is not included in the rate as with most forward loans. Another is the Life Expectancy Set Asides (LESA). This is the amount of money taken from the proceeds to pay the taxes and insurance up to the maturity event for those who don't show the ability with their present financial situation to pay these on their own. If you can, imagine the cost of taxes and insurance for 15-20 years. It's a big amount. Remember that if you don't pay your taxes and insurance on ANY kind of mortgage, the mortgage will eventually go into default. It's no different with a reverse. You must also maintain your home up to FHA health & safety standards. With that woman's equity (the one calling in), she wouldn't be able to get a reverse mortgage. Remember that she stated that they wanted to stay in their home and they had no heirs. The rates are higher, as with any specialty loan - rental, fix&flip, second home, hard money, asset depletion - all have higher rates.

For those who are financially short in retirement, have no heirs or have heirs who don't need their home after their passing, a reverse can mean a better quality of life with no mortgage payment every month, staying in the house they want to spend the rest of their lives in. Depending on the equity they have, they can get a cash disbursement and with an ARM, a line of credit after the first year which grows and never has to be paid back and/or monthly cash payments for term (usually 5 or 10 years), or tenure. Keep in mind, if they can't afford their cost of living now, and their income is too low to qualify for a refinance, they're going to have to either sell their home for something cheaper, or default on their present mortgage without outside assistance.

Look, not every situation is right for a reverse. And if it isn't, I won't do it.

[scotsman]

My mom took out a reverse mortgage. 20 years later when she had to leave the house to live in assisted care I had to sell the house. It sold for 1.5 million….. I then paid off the 1 million owed to the reverse mortgage company, 200,000 in capital gains taxes, 150,000 in realtors fees then more to escrow etc. By the time I finished paying everything there was just over $150,000 left, most of which which went for high quality assisted care at $6,000  / month. So it worked ok for her but not much left for heirs. Your mileage may vary.

[pianoman9701]

My mom took out a reverse mortgage. 20 years later when she had to leave the house to live in assisted care I had to sell the house. It sold for 1.5 million….. I then paid off the 1 million owed to the reverse mortgage company, 200,000 in capital gains taxes, 150,000 in realtors fees then more to escrow etc. By the time I finished paying everything there was just over $150,000 left, most of which which went for high quality assisted care at $6,000  / month. So it worked ok for her but not much left for heirs. Your mileage may vary.

Heirs are always an important consideration with reverse. If there are any, I want them at the table - no surprises!

[Twispriver]

As a requirement, I would like to see a consumer advocate assigned to represent anyone contemplating a reverse mortgage. People that find themselves in this situation are often the very definition of a population vulnerable to predatory lenders and may not fully comprehend the details of the process. A good rule of thumb is to never trust anyone who takes a commission based on the amount of the transaction to be acting in your best interest. 

[pianoman9701]

As a requirement, I would like to see a consumer advocate assigned to represent anyone contemplating a reverse mortgage. People that find themselves in this situation are often the very definition of a population vulnerable to predatory lenders and may not fully comprehend the details of the process. A good rule of thumb is to never trust anyone who takes a commission based on the amount of the transaction to be acting in your best interest. 

It's a requirement. The FHA requires an independent counselor who is required to confirm that they know what they're getting into. They ask questions regarding the details of the transaction and if they can't answer them, on their own, they fail the counseling and are unable to proceed. This is to ensure that not only do the borrowers understand the product, but that they're of clear and complete cognizance.

[Stein]

I deal with a fair amount of reverse mortgages at the point of foreclosure. That means the maturity event has happened: typically, the owner has died or moved to a care facility. Those foreclosures would likely have happened while the borrower still wanted to live in the house, but for the benefits and restrictions of the reverse mortgage. IME, reverse mortgages keep people living in their homes longer than they could without the reverse mortgage.

Would it keep them in the house longer than if they either refinanced or took out a new mortgage?  Borrow at 7% or whatever current rates are, stick the lump sum in an Apple account paying 4.1% and pull enough out monthly to make the payment and whatever extra you need to live.  You could even do interest only.  A simple spreadsheet could run all the calculations.

I would bet that is substantially cheaper than a reverse.

Either way you need a bunch of equity.

Reverse mortgages are similar to an auto lease in that it's very difficult to determine exactly what effective rate you are paying to use someone's money.  In my mind, when a bank creates a product that is difficult to understand and explain, it usually isn't in the best interest of the person signing the contract.

[pianoman9701]

Many of the people utilizing reverse can't qualify with income for a refi AND the refi increases their payment, making it more difficult to meet their obligations.

[Knocker of rocks]

Like annuities, reverse mortgages require a little bit of financial savy to work. And like annuities, most of the issues can be explained by the purchaser not understanding the product, and this is probably even more pronounced in reverse mortgages than in annuitized products.

Dave Ramsey is an interesting character, but I would say that his target audience is one that needs or needed financial protection from themselves. The very people who should also not participate in a reverse mortgage

[Magnum_Willys]

Ideally compare Reverse to Option B - refi and make payments out of the refi money - but you tell a bank your elderly folks have no extra income but are going to make the payments out of the amount borrowed and watch the bankers  eyes get big!

[Stein]

Like annuities, reverse mortgages require a little bit of financial savy to work. And like annuities, most of the issues can be explained by the purchaser not understanding the product, and this is probably even more pronounced in reverse mortgages than in annuitized products.

Dave Ramsey is an interesting character, but I would say that his target audience is one that needs or needed financial protection from themselves. The very people who should also not participate in a reverse mortgage

By the time you get to looking into a reverse, there isn't much Dave Ramsey or anyone else can do as far as advice.  If you are retired, have little income, can't/won't work and little to no assets outside the equity in your house there aren't many options.  I believe that's the selling point for reverse mortgages, you either do that or sell the house and move into a much cheaper house or rent.

[Dan-o]

Like annuities, reverse mortgages require a little bit of financial savy to work. And like annuities, most of the issues can be explained by the purchaser not understanding the product, and this is probably even more pronounced in reverse mortgages than in annuitized products.

Dave Ramsey is an interesting character, but I would say that his target audience is one that needs or needed financial protection from themselves. The very people who should also not participate in a reverse mortgage

By the time you get to looking into a reverse, there isn't much Dave Ramsey or anyone else can do as far as advice.  If you are retired, have little income, can't/won't work and little to no assets outside the equity in your house there aren't many options.  I believe that's the selling point for reverse mortgages, you either do that or sell the house and move into a much cheaper house or rent.

Great point. 

I'm sure it's a good option for some people to stay in their game longer.