Reverse Mortgages
Content
What exactly is a Reverse Mortgage?
What does it cost?
What are the advantages?
What are the drawbacks?
We decided that there are a lot of questions unanswered about Reverse Mortgages. To us in the Real Estate and lending businesses, it seemed almost as though there was too much mystery surrounding this seemingly simple concept. Once we began the research process, we found it challenging to get a complete answer. For Michael and I, we saw this as a challenge to find out what the mystery was and get some straight answers on this mysterious notion of Reverse Mortgages. Especially challenging was determining what the loan costs actually are.
What is a Reverse Mortgage?
In the simplest of terms, a conventional mortgage is a ‘forward' mortgage. You borrow money from a lender (the mortgagor) to buy your home. When this is done, you typically own little of your home and have borrowed most of its value from the lender. The lender owns most of the home (if not all).
In a Reverse Mortgage, you own the home and you use the home as the asset to borrow money against. You are effectively saying I will reverse or “convert” the equity of my home back to the lender by taking the money (or value of the home) back in one big payment, or monthly payments, or when I want it, until my equity is gone. You are slowly going in reverse (as it relates to your homes equity) converting your equity back to the lender. Reverse mortgages in the industry are called HECM loans (Home Equity Conversion Mortgages).
What does it cost?
We are finding that the cost of obtaining a Reverse Mortgage is realized in two categories. There are the initial costs paid at the closing table when you get the loan, and then there are the ongoing costs during the term of the loan (such as fees and interest in each payment).
Category |
Reverse Mortgage |
Conventional Mortgages |
Loan origination fee |
2% of your homes value |
1% of loan amount (loan amount is almost always less than homes value) |
Age and availability of loan product |
Must be 62 or older |
Any age (based on financial qualification) |
Home asset lent against |
Must have home paid off or pay off balance with Reverse Mortgage at closing. Must owe nothing on the home (Reverse mortgages cannot be 2 nd lien holders) |
Loan based on equity position of owner, credit score and income mainly. |
Mortgage insurance |
2% of homes value PLUS .5% is added to your loans interest rate. |
Cost varies as a monthly payment and only if LTV is above 80%. |
Interest rates |
Variable only (to date, have not seen fixed rate Reverse Mortgage products available) |
Fixed or Variable |
Servicing Fee |
$35 per month maximum if adjusts monthly, $30 per month if payment adjusts in less frequent timeframes. |
None charged in payment. |
Amount you can borrow |
Depends on your age above 62 and tables go to age 95. You can borrow from about 52% of your homes value @ age 65 and up to about 75% of your homes value at age 90. The amounts vary slightly as the interest rate of the loan moves up or down. |
Based on homes total value and can typically borrow up to 90% and more depending on lender. |
Example:
If you or your spouse are age 62 to 65 years old (loan amount determined by the youngest person in the home) and live in your house, and your homes appraised value is $250,000, you could borrow approximately $126,630 in a lump sum, or take the money as you wish in monthly payments or borrow the money as a line of credit when you want it. Out of this comes the ‘up front' costs charged when you take the loan and sign the documents at your closing. For our example, these include 2% of the homes value ($250,000 in example) as a loan origination fee (this is $5,000.00) and another 2% (another $5,000.00) for mortgage insurance. Yes, this is a total of $10,000.00 before you get a dime. In addition to these costs, other initial costs born at closing include the 3 rd party closing costs such as: appraisal, title search, title insurance, surveys, inspections, recording fees, mortgage taxes, credit checks, and others. In your monthly payment, you will pay up to $35.00 additional in each payment for loan servicing fees, and you will pay an additional .5% interest in the calculation of your loan payment. For example; if you get a loan at 6.5%, your payment will be based on 7% because of the HUD requirement of .5% for mortgage insurance.
Note that most of the costs of a Reverse Mortgage (or HECM loan) are born at the beginning of the loan, or at the closing of the loan (signature of documents to begin the loan). What is also potentially troubling is that the borrower does not necessarily know that they have paid these costs or realize the extent of these costs. They are obtaining a check for $X each month and may not realize that their equity is being eaten up at a burn rate which includes initial closing fees in many categories, government fees, insurance, and more. It seems to us that older persons could find themselves “cashed out” when they thought they had years of income left in their home.
What are the advantages?
Although we are not totally clear on this answer, we do believe that if a person was over age 62, had no family left, was terminally ill, and the income would sustain them for the remaining few years of life, that a Reverse Mortgage could help them to bridge the gap.
What are the drawbacks?
The cost of obtaining a HECM, or Reverse mortgage is high. If you are concerned about passing assets to family or friends, and your home is a large portion of your assets, this type of loan could challenge your intent. If you are healthy and live many more years, this type of loan could “cash you out” of your home equity assets before you realize what has happened.