Reverse mortgages explained

Posted by Mark Chapman on March 10th, 2010 at 2:15 am

(Engle­wood Edge invites read­ers to join this ongo­ing real estate dis­cus­sion, ques­tions and answers on the ever-changing world of real estate. You ask the ques­tions, and Dane will answer them.)

Dane Hahn

By Dane Hahn

Ques­tion: What is a reverse mortgage?

Answer: Years ago, a reverse mort­gage was a much dif­fer­ent pro­gram than it is today, so if you remem­ber the “old days” and how the bank some­how held the own­er­ship and the term was fixed — well, it’s all dif­fer­ent now.

Today a reverse mort­gage can pro­vide a cush­ion for an older homeowner—a way to take the money out of your home with­out ever hav­ing to make any monthly pay­ments back dur­ing your res­i­dence in the house for your lifetime.

And here’s my good news for Snow­birds: A reverse mort­gage can facil­i­tate the pur­chase of a Florida retire­ment home with­out you sell­ing the fam­ily farm up in Michi­gan (or wher­ever). More on that nearer the end of this column.

First of all, to get a reverse mort­gage, the youngest home­owner on the deed has to be 62 or older, and, of course, you have to own a home (although you don’t have to own it free and clear; there can still be a mort­gage in place). Our Con­gress has decided it would be great if seniors could con­tinue to live in their own homes and have the money to spend that they have accu­mu­lated over the years in equity –  a sort of have-your-cake-and-eat-it-too concept.

A reverse mort­gage is a low-interest loan for senior home­own­ers that uses a home’s equity as col­lat­eral. The loan amount you will receive is a per­cent­age of the home’s value (and is deter­mined by the age of the youngest homeowner).

The loan does not have to be repaid until the last sur­viv­ing home­owner per­ma­nently moves out of the prop­erty or passes away. At that time, your estate has approx­i­mately 12 months to repay the bal­ance of the reverse mort­gage or sell the home to pay off the bal­ance. The estate is not liable if the home sells for less than the bal­ance of the reverse mort­gage. If the home sells for more than the out­stand­ing loan amount, the dif­fer­ence is returned to your fam­ily (the estate).

To be eli­gi­ble for a HUD reverse mort­gage, the Fed­eral Hous­ing Admin­is­tra­tion requires that all home­own­ers be at least age 62. The home must be owned free and clear or have a mort­gage bal­ance that is no more than approx­i­mately 65 per­cent of the home’s value. If there is a mort­gage bal­ance, it can be paid off com­pletely with the pro­ceeds of the reverse mort­gage loan at the clos­ing. There are no income or credit require­ments for a reverse mortgage.

Almost all home types are eli­gi­ble. How­ever, mobile homes must be built in the last 30 years, the land must be owned, it must be on a per­ma­nent foun­da­tion, and it must meet an FHA inspec­tion. Other types of homes not eli­gi­ble as of this writ­ing are co-operatives (but con­dos are fine) and also com­bi­na­tion homes and busi­nesses; ask your lender if you have a doubt.

Gen­er­ally, a home equity loan, a sec­ond mort­gage, or a home equity line of credit has strict require­ments for income and cred­it­wor­thi­ness. Also, with other tra­di­tional loans, the home­owner must still make monthly pay­ments to repay the loans. A reverse mort­gage has no income or credit require­ments, and, instead of mak­ing monthly pay­ments, the home­owner receives payments.

With a reverse mort­gage, the amount that can be bor­rowed is deter­mined by an FHA for­mula that con­sid­ers age, the cur­rent inter­est rate and the appraised value of the home. The older the home­owner, the lower the inter­est rate. The more valu­able the home (up to a cer­tain point), the higher the loan amount will be.

As stated pre­vi­ously, with tra­di­tional loans, the home­owner is still required to make monthly pay­ments, but, with a reverse mort­gage, the loan is not due as long as the home­owner lives in the home. Also, with a reverse mort­gage, one can­not be forced into fore­close or forced to vacate the home because of a missed mort­gage pay­ment. How­ever, the home­owner is still respon­si­ble for real estate taxes, util­i­ties, and maintenance.

A reverse mort­gage can­not be out­lived. As long as at least one home­owner lives in the home (keep­ing taxes and insur­ance cur­rent), the loan does not need to be repaid. Fur­ther­more, one will never owe more than the home’s value (a reverse mort­gage can­not become “upside down”) because of the FHA insurance.

Many peo­ple are apply­ing for reverse mort­gages, using the cash equity to pay off any present mort­gage, and then using the newly acquired funds as a sig­nif­i­cant down pay­ment to pur­chase a Florida home. It’s all per­fectly legal so long as the home with the reverse mort­gage con­tin­ues to be the “pri­mary res­i­dence,” mean­ing six months or more of res­i­dence each year.

In the event of death or in the event that the home ceases to be the pri­mary res­i­dence, the homeowner’s estate can choose to con­vert the reverse mort­gage into a tra­di­tional mort­gage to keep the house or sell the home to pay the bal­ance (the cash bor­rowed, inter­est, and fees).

If the equity in the home is worth more than the bal­ance of the loan, the remain­ing equity belongs to the heirs. No other assets are affected by a reverse mort­gage. For exam­ple, invest­ments, sec­ond homes, cars, and other valu­able pos­ses­sions can­not be taken from the estate to pay off the reverse mortgage.

If the sale of the home is not enough to pay off the reverse mort­gage, the lender must take a loss and request reim­burse­ment from the FHA.

The amount that is avail­able for the loan depends on three fac­tors: age (older is bet­ter), cur­rent inter­est rate, and appraised value of the home (more is better).

Use this cal­cu­la­tor to deter­mine exactly how much could be drawn.

Imag­ine that you have been try­ing to sell your home “up North” for a year, with no tak­ers. The low cost of Florida homes makes you wish you could buy before the prices go back up — and these homes are par­tic­u­larly appeal­ing right now — but with­out sell­ing the fam­ily farm, there is not enough cash to make the trans­ac­tion hap­pen. If you were to ini­ti­ate a reverse mort­gage, you’d be able to con­tinue liv­ing in the home up north dur­ing the warm months, and have the cash to buy a home in Florida.

Then, if you ulti­mately sell the house in the North, you get the rest of the equity cash from that sale and can put that in your sav­ings or toward the mort­gage here in Florida. Once you have estab­lished your new pri­mary res­i­dence here, you can open a new reverse mort­gage on this new pri­mary location.

There are sev­eral ways to receive the pro­ceeds of a reverse mort­gage and you can mix and match as needed.

• Lump sum: a lump sum of cash at closing.
• Tenure: equal monthly pay­ments as long as the home­owner lives in the home.
• Term: equal monthly pay­ments for a fixed num­ber of years.
• Line of Credit:- draw any amount at any time until the line of credit is exhausted.

If you have a real estate ques­tion you would like answered, address it to Dane Hahn. Please include a phone num­ber so if I have addi­tional ques­tions I can call you. Send your ques­tions to: dane.hahn@gmail.com

Dane Hahn is affil­i­ated with Tar­pon Coast Realty, which has offices in Engle­wood, Boca Grande and Sara­sota. To reach him by phone, call 603−566−5460.

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