I
was contacted recently by a freelance writer who wanted to get some
dirt on reverse mortgages. He said he could find people all over
the place who could sing the praises of the reverse mortgage, but he
wanted to find someone who could give him the pitfalls and things to
watch out for. This got me thinking…there are a number of
times I do not recommend the usage of a reverse mortgage and there are
several things to watch for but I would not necessarily call them
“pitfalls”.
A reverse mortgage is a complex financial transaction
and it is not an inexpensive loan, but when used correctly and under
the right circumstances, it can greatly enhance the lives of the senior
borrowers who obtain one. So my advice to senior borrowers revolves
around education and not the ominous “beware” tone that it
appeared this writer was prepared to take.
Firstly,
I say to borrowers Choose the correct option to meet your needs.
Borrowers can choose a fixed rate or an adjustable rate and fixed rates
sound great, but they are what is called a “closed end
instrument” and require the borrower to take the entire loan at
the very beginning of the transaction. For borrowers who are paying off
an existing mortgage and need all their funds to pay off the current
loan, this is no problem.
For a borrower who has no current lien
on their property or a very small one, this would mean that they would
be forced to take the entire eligible mortgage amount on the day the
loan funds. This might give a borrower
$200,000, $300,000 or more in cash from the very first day that they do
not need at the time and on which they are accruing interest. This can
also have an adverse affect on some seniors with needs-based programs.
Seniors on Medicaid
and some other needs-based programs would impact their eligibility by
having the sudden addition of the liquid assets and the senior would
wind up funding their own Medicaid with the equity in their home. For
these seniors, a careful consultation with family members and a
financial counselor is advised to be certain that they chose an option
such as the line of credit where funds can be made available to them
during times of need, but they never have excess funds sitting in
accounts to affect their eligibility.
A
borrower who is planning on using only a portion of their funds monthly
need not pay interest on the entire amount from the very start, eroding
the equity unnecessarily fast. An adjustable rate will accrue
interest at a much lower rate at today’s rates, but has a 10% cap
and can go much higher if rates rise in the future. However, the adjust
rate program allows for more options for borrowers to receive their
money. They can choose a lump sum; a line of
credit against which they can draw at any time and which cannot be
frozen like many of the bank Home Equity Lines of Credit
(HELOC’s) are going through now and which grows on the unused
portion annually; a monthly payment for a set term or for life; or a
combination of all of the options.
The adjustable rates are currently
much more flexible to meet borrowers’ needs. One
of the things that can determine the amount for which borrowers will
ultimately qualify is the rate at which the loan accrues
interest. When the margins on the adjustable rates were lower and
the fixed rate was higher, the adjustable rates gave borrowers more
money in their pockets in the form of eligibility. Now, most borrowers we run through the reverse mortgage calculator
receives more money on the fixed rate program.
This is extremely
important to know if you are trying to get as much as possible to pay
off an existing lien. It also means that the higher the margin, the
less money the borrower will receive and the faster interest on the
loan will accrue. So the thing to look for in a reverse mortgage here
is definitely the rate on a fixed rate or the margin on an adjustable
rate that is being quoted.
Another
thing seniors need to look out for in their reverse mortgages is the
fees being charged. The fees are highly regulated by HUD and therefore,
the lenders cannot charge fees like processing fees, administration
fees and things like that, but there are some things borrowers can
watch to help themselves! Firstly is the servicing fee. The amount of
the servicing fee will determine the servicing set aside, which
ultimately determines how much money goes to the borrower.
The
servicing fee set aside is not a fee at the time you close your loan,
it is money that is not made available to you and is left in the equity
of your property that is meant to go toward the payment of the monthly
servicing fee. On a regular or forward mortgage, you don’t
see this fee, you simply pay anywhere from .25% to .50% higher rate
which goes to the servicing company and is built into the rate you pay. Reverse mortgages use a flat dollar amount
instead and the set-aside is determined up-front due to the fact that
the balance of the loan is increasing, not being paid down by the
borrower.
The maximum origination fee is set by HUD, but they do not
require every lender to charge only the maximum! Check around and see
if you might be able to get a better origination fee. Finally,
one of the biggest things for seniors to watch out for with their
reverse mortgage has nothing to do with the actual mortgage at
all…it’s becoming aware that there are those who are going
to try to get you to part with your money!
Do not consider investment strategies which include long term annuities which will not allow you access to your funds for long periods of time without penalty.
Be
wary of reverse mortgage originators who seem overly-anxious to help
you invest your loan proceeds. Always remember that this is your
home equity and with some careful stewardship, it should take care of
you but if not guarded, can be taken away, leaving you with a loan on
your home and nothing to show for it. It
seems most of the time I see a “reverse mortgage horror
story” it is usually due to what happened to the money and not
the reverse mortgage itself.
With some careful planning by the senior
borrowers, getting the family and/or a trusted financial advisor
involved and knowing what to watch for, a reverse mortgage can be a
viable retirement tool for many borrowers.It’s
just a matter of making sure you put the seniors’ best interest
first and knowing what to look out for when doing reverse mortgages for
senior homeowners that keep those horror stories from happening in the
first place.
Reverse Mortgages for Seniors by: Michael Branson (CEO -ARMC)
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