Real Life Reverse Mortgages

by

Amy Catling, C.S.A.
GIA Mortgage
1-800-476-2858 or 1-207-251-0633
acatling@seacoastreversemortgage.com

Mr. and Mrs. Kenney (not their real names) were recently referred to me by one of my clients. After speaking with them over the phone and gathering some initial information, we decided to meet over a cup of tea at their home to go over the details of a reverse mortgage.

When I sat down with them, the first thing I asked was “could you tell me the reasons you are considering a reverse mortgage?” Over a conversation at their kitchen table, the three of us began to assess their needs and wants to determine whether a reverse mortgage was a viable option for them.

I then asked them if they were planning on staying in their home for the foreseeable future. Although no one has a crystal ball to predict the future, their answer let me know whether they were planning on aging in their home and maintaining it as their primary residence for as long as possible. Just as when they obtained a regular mortgage, there are costs associated with setting up a reverse mortgage. And as with most mortgage refinances, the transaction is most cost effective the longer they stay in the home. If they had answered “No, we want to move to an assisted living facility next year” I would have told them that a reverse mortgage was probably not the best way for them to reach that goal. If they told me they wanted to leave all of the equity in their home to their heirs, they would also not be good candidates for a reverse mortgage, as they will be using some of this equity while they live in the home.

Once I had an idea of their goals, we assessed the Kenneys current financial situation. They had a mortgage and each month they paid the mortgage out of their retirement funds. Yet their retirement funds, like so many others, had decreased sharply due to the current market crisis. Although they were not struggling at the moment to make the payments, they knew they were at risk of losing their home if at some point in the future they could not meet their monthly obligation. This left them uneasy, and although they lived quite frugally, they were beginning to do fewer of the things they enjoyed.

We discussed how a government insured reverse mortgage could be used to pay off their current loan. No payments are required on a reverse mortgage as long as one of the borrowers lives in the home, but they could opt to make monthly payments with no pre-payment penalties. The amount of equity in their home would be then always be under their control.

As with their existing mortgage, they would be obligated to keep their taxes and their insurance current, and to not let the property fall into disrepair. Another benefit for this couple was that they could use their reverse mortgage funds to pay their property taxes, which had begun to be a financial strain.

Mr. Kenney asked me about the bank owning his home if they got a reverse mortgage, and I told him that the lender never owns his home; it only has a lien on the property for the amount they borrow, just as the lender that holds his current mortgage does. When neither of the Kenneys is living in the home anymore, the lender is repaid only the amount they used, plus accrued interest and any closing costs that were originally rolled into the loan. The remaining equity in the house is theirs to keep or pass on to their heirs. Additionally, they could sell their home at any time, the same as with their current mortgage.

From here I was able to tell them the basic overview of the Federal Housing Authority (FHA) reverse mortgage. Strictly regulated by the FHA and incorporating many consumer safeguards, the loan would not become due until both of the Kenneys move out of the home permanently, and they would never owe more than the fair market value of the house. If their reverse mortgage lender should experience financial difficulty, the FHA would step in and ensure the continuity of their loan without skipping a beat.

This is a government insured loan, and the insurance, called MIP, is the largest portion of the closing costs (making them more expensive than conventional mortgages). Other closing costs are comprised of an origination fee (this was just lowered with the passage of the Housing Recovery Act of 2008), and standard third party fees such as title insurance, appraisal fee, credit report, attorneys fees. All charges, fees, etc., were explained and itemized for the couple on a piece of paper called a Good Faith Estimate. With this type of loan, there can be no hidden charges due to the strict oversight of the federal government.

Mr. and Mrs. Kenney asked me about the next step in the process. I explained that before we could move forward, they must complete the government required counseling session where they would hear again, from an unbiased third party, the details of the reverse mortgage. This would be their second time hearing the information, and would be a great time for them to ask questions they may think of after I left. I gave them a list of counselors and told them to pick whichever one they wanted and set up either a face-to-face or telephone interview with a government appointed Housing and Urban Development (HUD) counselor. Recently, the original federal grant money set aside to pay for the counseling was paid out and there is a now a charge of $125 for the counseling session. Lenders are not allowed to pay this, as the counseling would then be potentially biased in the lender's favor. This is a consumer safeguard put in place by the FHA to make sure that we originators are doing our job of explaining reverse mortgages well, and also to make sure that the client isn’t being taken advantage of by an individual or organization.

Since Mrs. Kenney was the younger borrower, the amount they qualify for is based on her age, and also by the appraised value of the home (or the lending limit set by the FHA in their county, whichever is less) and the current interest rate. They could opt for a fixed-rate or a variable-rate reverse mortgage, though the fixed-rate option is often at a higher interest rate than the variable option. Their house was appraised at $355,000. The FHA national limit was just raised to $417,000, so in this case they will use the appraised value and the current interest rate. The Kenneys qualify for a reverse mortgage net to them of $209,000. We will use $100,000 to pay off the existing mortgage, freeing up $700/month, and $109,000 will be left in a credit line to use when and if they need it. They are only charged interest, currently at a rate of 3.42%, on the money they actually withdraw and the money left in the credit line will actually increase every month by the same interest rate. This increase in the credit line equals about $310/month. Their bottom line? They will increase their disposable income by $1000 per month and will also have $100,000+ in their credit line for unforeseen emergencies. The money from a reverse mortgage is tax-free and does not affect Social Security or Medicare benefits.

They will be able to draw upon the money any time they want, for whatever they want. They can use it to help out their children financially, do something special with their grandchildren or to set up a college fund, travel, buy a new car, make home repairs, pay for rising health care costs or give to charity. Many people find that simply being relieved of a monthly mortgage payment is enough, and they rarely draw upon their credit line at all.

For myself, the best part of my job is spending an afternoon with two people that I would not have had a chance to meet otherwise, being welcomed into their home and sharing stories of how they met and hearing about their children and grandchildren. I was able to show Mr. and Mrs. Kenney how they can take control of the equity they have built up over the years in what is their largest asset and turn it into a liquid asset without having to give up ownership or control. The Kenneys had spent most of their adult lives caring for others and never being quite “comfortable” financially - now, finally, that was going to change.

Return to Local Resources