Dear Friend:
Being a senior myself I am constantly looking for ways to improve my quality of life, have more liquid assets, reduce my cost of living and looking for ways to have passive income. My wife and I are still part of the working class considering I am 63 years old and have a 13 year old (only) child. Yes I am an older Dad, however it is a wonderful feeling to have a child and see how they grow and mature. I have been working in the reverse mortgage arena since 2003 and been enrolling people into the reverse mortgage since 2004. Since I have been working with seniors for the past 12 years, I decided to share some of my feelings; thoughts and opinions about the current government sponsored Reverse Mortgage Program. My thought was to bring this newsletter into print so I can explain the truth about the reverse mortgage program and why I feel it has many benefits for the average person. Nowadays you need to comb through a lot of information and misinformation just to find the truth about the reverse mortgage program. I hope this will make your job easier.
What does a Reverse Mortgage do?
"Reverse Mortgages are a powerful tool to help eligible homeowners obtain Tax-free cash flow." Fannie Mae.
Well is this true? Can a homeowner really pull out tax free money from their home? The answer is a resounding YES!! Is this the right thing to do? Well this Informational letter is to answer and explain all the concerns, questions and studies you have heard over the years.
Let’s first define the Reverse Mortgage:
"Reverse Mortgages enable eligible homeowners to access the money they have built up as equity in their homes. They are primarily designed to strengthen seniors' personal and financial independence by providing funds without a monthly payment burden during their lifetime in the home." Fannie Mae.
This seems to make sense. The equity, or the part of the value in your home that you own, can be turned into tax free cash. Secondly, you do not have to pay this money back until you either sell the property, permanently change your address or the property passes into your estate.
"Like most Americans, you probably want to stay in your home as you grow older. However, as it gets harder to do things on your own, you may need a helping hand with everyday tasks. It can be costly to pay for help at home, along with home modifications and other health needs. For many people, these extra costs are a real burden.
Older Americans often hold onto their home as a nest egg in case they need extra money. But when that “rainy day” arrives, how do you tap the equity in your home? Some people may tell you to sell the house and move to assisted living or a nursing home. There is another option. If you’ve owned your house for many years, it could be worth a lot more than you paid to buy it. Home equity is the difference between the appraised value of your home and what you owe on any mortgages. A reverse mortgage can help you convert some of your home equity into cash and continue to live at home for as long as you want." National Council on Aging.
Does this sound familiar?"
"I do not want you to consider this unless you are extremely sure this program is right for you." How many times have you heard that? Yes, there is truth in that statement, but does the person you speak to really understand the program and have your best interest at heart. Let’s face it, this world is made up of individuals that would rather make a pay check than have a clear conscious.
The Reverse Mortgage Program is a wonderful program and since I have been enrolling families into the program I have not had one unhappy client. My training began in 2003 when I became a certified FHA processor specifically doing reverse mortgage processing. The processing of the reverse mortgage was an education on the inner workings of the mortgage. In 2004 I became licensed with the California Department of Real Estate and started enrolling individuals and families in the Reverse Mortgage Program.
Why do I tell you this information?
I want you to know that I do understand the program. I do know that it is not right for everyone. I will share my personal feeling about the benefits with you. I am a consumer like all of you. I go to the grocery stores and see the price of groceries going sky high. I remember when you could go to the store and fill a bag of groceries for $5.00. Now that same bag costs at least $20.00. I shop for new flooring, windows, painters etc. and want to make sure I am getting a fair deal. The truth of the matter is there has been A LOT of BAD press on the reverse mortgage. Over the years I have read many articles about the program and found at least 60% to be quoting errors concerning the program. I know it is not a perfect world, but the people in the press should do their homework before they print and disperse it. Enclosed is an article from Woman's Day, May 2014 discussing the pro and cons of doing a reverse mortgage:
Generally this is a good article. But at one point the author says "Reverse mortgages have a bad
reputation because of their high fees" then later she says the "new rules took effect last year ... to make loans safer and less expensive" Then she goes on to say "But as easy as reverse mortgages may sound on TV commercials, there are high cost". Which is it, high costs or less expensive?
The reverse mortgage has costs to the program. This is an FHA loan and all FHA loans have an initial upfront MIP (Mortgage Insurance Premium) of between 1.75% to 2% of the appraised value. What has happened is the upfront premium has been reduced to .25% depending on which program you select. This of course reduces the cost dramatically. All of this cost is paid out of the "benefit"* or loan, NOT out of your pocket. As a matter of fact, the only out of pocket expense for a reverse mortgage is the appraisal and the HUD approved counseling, which I will go over later.
My point is that many of these authors have not studied the program enough to make these points. They are knowledgeable authors but not specifically in this industry. You have to work in this industry and have calculated the clients benefit, before you will understand how it works.
The other area that the article failed to mention was when their mortgage is paid off by the reverse mortgage; their monthly payment they were making to bank now stays in their pocket as additional cash flow.
Bottom line is the program has many benefits that need to be explained by a qualified reverse mortgage specialist and these articles really confuse people. If you really want the truth about the program and its benefits you need to sit down face to face and have someone explain it to you. I would be happy to come to your home or you to my office for this explanation as a courtesy.
* I use the term "benefit" as this amount you get is determined by the age of the youngest borrower and the current value of the home.
MY Mottos
I have two mottos’ that personally work for me when making life decisions: "Cash is King"
I do not care what economy you live in, if you have more money than the next person you will be in a better situation.
"Knowledge is Power"
The more knowledge you have, the better your life will be.
This is why understanding the reverse mortgage is crucial for all adults, seniors and their adult children. We will all be faced with situations and decisions in our lifetime that we will have to make. As I mentioned earlier, the cost are rising and unfortunately will continue to rise. My Dad passed away last October, 2013
and my Mom, then 89 years old could not take care of him before he passed. It cost $250 per day for 24 hour care. Unless you have long term insurance, this cost is not paid by insurance. The Department of Labor and Statistics says that on the average it will cost $250,000 in medical care for each senior. That is an astounding number. Are you ready?
This program gives you options, either you have cash to pay or buy long term insurance. To me it is better to be knowledgeable about your options than ignore them. Too many people hear the term "reverse mortgage" and think it is a scam, dangerous, scandalous, and taking advantage of seniors. Well it is my job to tell you that none of the above is true with today's HECM reverse mortgage program.
As I mentioned earlier, it is not for everyone, but it is for many people.
Equity - Winner or Loser?
Most people know what equity is and feel as the author of the article mentioned, the borrowers had plenty of equity in their home. However, what does that really mean?
I have had many seniors attend my workshops stating that they have their house paid off and all of the equity is theirs. This is a true statement, but there are some strings attached.
Firstly, what is equity really? The equity in your home is based on the difference between the current value of your home and the amount of mortgage you have on your home. Is the equity a secure "safe" commodity? The answer is a sad "NO". Take the mortgage decline of 2006 - 2010. Equity is my opinion is what I call "monopoly money", it is not real money. It can go up or down on a monthly basis depending on different factors. For instance the housing market is like all other businesses. It is based on supply and demand. When supply goes up, demand goes down and prices fall; when supply goes down, demand goes up and prices rise. Can you control this? Of course not! Nor can you control that your neighbor who moved in last year lost his job and had his home foreclosed upon. Is this your fault, NO. But in both of these situations your equity dropped at no fault of your own.
A reverse mortgage is a product that will lock a portion of your equity and it will not go down. It literally takes a portion of your equity (your benefit) and turns it into cash if you choose. That portion can even grow before you access the money but it will not lose value as equity can. The balance of the equity in your home will still be subject to the ups and down of the housing market. Yes, I said up! You never lose any equity, if your home goes up in value that is your equity. It is a win-win situation! However, if the equity declines you are protected through the FHA Insurance.
Secondly, how can you get your equity out of your home? There are only three ways to get the equity:
1. Selling your home.
"Like most American, you probably want to stay in your home as you grow Old"
National Council on Aging
Most seniors want to stay in the home they have enjoyed to raise their family and not uproot themselves. 2. Refinancing your home.
The senior that has a home paid off, wants to stay in the home and wants some of their equity can only secure it by paying money in costs to get a loan. You can only access the money by paying an interest rate and servicing the loan with a monthly payment.
Or
3. A Reverse Mortgage
How does a reverse mortgage work?
"With a reverse mortgage, you are charged interest only on the proceeds you receive. It is compounded over the life of the loan until repayment occurs. Nothing is paid out of the loan proceeds."
National Reverse Mortgage Lenders Association
Let’s break this down to understand. If you have a mortgage and your benefit exceeds the mortgage, the difference will be available to you when you choose. The interest rate on the portion of the benefit used will grow in the loan balance. However the money you have been paying to the bank stops. When you normally send in your payment to the bank, part went to interest and part went to principal. The part that went to principal would theoretically increase your equity. Right? Well what happens if the housing market is declining as it did from 2006 to 2010. You were putting money into your home to increase your equity but instead the market was driving the value down and you would be going backwards. Now, if you did a reverse mortgage, stopped making payments to the lender and you start putting the money into your bank account then what you are doing is "controlling your equity". You can do whatever you want with this money.
As a sideline, the current interest rates for a reverse mortgage are as low as 2.5% to 4.5%.
Did you know the industry calls the Reverse Mortgage the safest mortgage you can get?
What does that mean, a safe mortgage?
Firstly, when you take out a traditional mortgage it is called a "recourse" loan meaning the bank has recourse on you to service the loan and hold you responsible if you do not make your payments. This could lead to FORECLOSURE!!!
A reverse mortgage is a "non-recourse" loan meaning it not a loan on you; it is a loan on your home. Not only do you not make house payments, but you live in the home for the rest of your life, you are SAFE and SECURE and can never be FORECLOSURED upon. You must continue living in the property as your primary residence and keep paying your county property taxes and your homeowners insurance.
Secondly, you as a borrower are required to go through government sponsored HUD counseling. This counseling will confirm you have a "general understanding of the HECM loans" (The government has titled their reverse mortgage product, Home Equity Conversion Mortgage or HECM). This is just another way to confirm that this type of mortgage is safe for the borrower.
A common question is "Could I lose my home" or "Does the government take my home?"
The answer for both of these questions is NO! You keep title to your home and you can keep the home in a Living Trust. When the property passes to the estate, it will go to whomever you have already
determined and the government will not take your property. It is your property and will stay that way. At the time your the property moves to the estate the beneficiaries have a full year to decide what they want to do with the property and the loan balance. Most beneficiaries sell the property and as mentioned earlier, if the property went up in value they would sell the property, pay off the reverse mortgage loan balance and keep the difference. However, if the loan balance is greater than the property value, then they sell it for whatever is fair market value and that is considered the payoff to the lender no matter what the loan balance.
There are no pre-payment penalties, you can actually refinance a reverse mortgage and there is a program whereby you can purchase a home with a reverse mortgage.
Really if you have a mortgage, nothing changes when you do a reverse mortgage. The main difference that you will notice that when you currently send your payment monthly to you lender, now you can send that same payment to your savings account of your choice.
Are there credit score or income qualifications?
Again the answer is NO! It does not matter whether your credit score is 200 or 800, nor does it matter what income you have. Even if you declared bankruptcy, you qualify.
This program is entirely equity based.
If you are like some of my clients their credit cards got away from them. The interest rates are extremely high and they can barely make the minimum payments. They are strapped with this balance for years to come. There is a solution to rid yourself of this problem. As long as you have equity in your home you can do a reverse mortgage.
