By: Christel Silver Special to the Boca and Delray newspapers
A reverse mortgage is a type of home equity loan for a senior homeowner, who is at least 62 years old. It is also called a home equity conversion mortgage (HECM). The loan is repaid when the last surviving borrower moves out of the property, passes away, or the house is sold.
First, you need to ask yourself some questions: Do you want to stay in the house? Can you afford to pay taxes, insurance, any HOA/Condo fees, and repairs? Do you want to use the equity in your home for supplementing your social security payments or pay off debts or health bills? Is this your primary residence? If your answers are yes, you can consider a reverse mortgage. There is no income or credit requirement – a big difference to a conventional equity loan. And there are no future mortgage payments.
The money you receive can be used to supplement your income, pay for health care expenses, pay off debt, finance home improvement, or re-invest. Money from a reverse mortgage is not considered income and is not taxable. (Consult a tax advisor for more information.)
You personally can never owe more than the value of your home with a reverse mortgage and if the balance is less, your heirs can sell the house and keep the difference. The bank cannot ask you to pay more than 95 percent of the value of the house, even if the mortgage balance is higher.
Here is a scenario I personally experienced:
My friend owned her house without a mortgage. She was 66 years old and had no heirs. This was a perfect basis for a reverse mortgage. She took out a lump sum and 10 years later she owed more than the house was worth. When she died the house was worth $190,000 and she owed $245,000 because every month the interest is added to the loan amount. The bank sued all her beneficiaries for the full $245,000. I told them not to do anything, and after we sold the house in a short sale, the bank released everyone from liability. Since the estate is not personally liable if the home sells for less than the balance of the reverse mortgage, there were no grounds for going after the beneficiaries.
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 (Federal Housing Administration) insurance. 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.
The amount you can borrow is determined by an FHA formula that considers age, the current interest rate, and the appraised value of the home. You must own the house outright or have substantial equity in your home. It is very simple: the older you are, the more valuable the house is, and the lower your current mortgage is, the more money you can get with the reverse mortgage.
Here are some issues for you to consider:
The mortgage fees and closing costs, including the mortgage insurance can be high. You must maintain the house, pay property taxes, homeowner insurance and condo/HOA fees.
It can complicate your wish to keep the house in the family. Again the mortgage comes due when you move out (senior facility) or die.
A reverse mortgage wouldn’t be the best option if you can’t maintain the costs associated with the home, even without a monthly mortgage payment.
Spending the equity in your home, of course, also diminishes the value of your estate — leaving you less to pass along to your heirs down the road.
If you have a younger spouse who is not a co-borrower (maybe you removed the spouse to get a higher amount of the reverse mortgage), the surviving spouse may have to move out of the house. You might need to consult an attorney.
You should let your children know when you get a reverse mortgage. They need to be aware that if you have to move into a retirement home, the reverse mortgage becomes due and the house cannot be rented!
Because the requirements are so complex, the government requires homeowners interested in taking out a reverse mortgage to receive mandatory (free) counseling by an independent third party. These organizations have to be approved by HUD (Housing and Urban Development) and can help homeowners review alternative options. My advice is to have your children or a good friend attend the counseling session.
If you decide to proceed with the loan, you can expect to pay higher-than-average closing costs based on the value of your home, including origination fees, upfront mortgage insurance and appraisal fees. The interest rate you pay is also generally higher than that for a traditional mortgage. You are also required to pay an initial Mortgage Insurance Premium (MIP), as well as an annual MIP of 1.25 percent. The origination fee is what the reverse mortgage lender earns on the loan, but it is determined by FHA what the lender can charge (for example: 2 % for the first $200,000 of the property value). These expenses can be rolled into the loan.
You can also use this reverse mortgage program to purchase a property and never have a mortgage payment, but you need cash for the difference between the reverse mortgage amount and the sales price of the property. It all depends on your situation whether a reverse mortgage is a good fit for you.
About Christel Silver
Christel Silver is a full time Broker/Owner of Silver International Realty servicing the East Coast of South Florida. In 1985 she was licensed in Maryland and Washington DC as a Realtor and later as a Certified Residential Appraiser and Associate Broker and has been in Florida since 2001. The National Association of Realtor’s (NAR) President appointed her (2010-2014) as the President’s Liaison to Germany, where she grew up and worked at the Justice Department for 17 years prior to coming to this country. The Germany Real Estate Organization (IVD) has an agreement with the NAR and she is an International member of this organization. Christel is a Certified International Property Specialist (CIPS), and a certified speaker teaching CIPS classes. Having been President for the Florida Certified Residential Specialist (CRS) Chapter, she is now serving as a Regional Vice President helping Chapters to grow, currently for Virginia, Central Virginia and Maryland. Fifty percent of her business is in the International arena. For more information visit www.silverhouses.com.
By: Christel Silver Special to the Boca and Delray newspapers