What You Need to Know About Reverse Mortgages

Abstract

On Joe Greene's 84th birthday, he had only US$22,000 remaining in his retirement savings. He was happy to still be living in his own home and taking care of himself, but he worried about how he would cover his ongoing expenses. His house needed a new roof and a paint job. His wife of many years had passed on 5 years before. He wanted to stay in his home as long as possible. A friend suggested he might benefit from a mortgage. He was able to arrange one. He contacted two lenders through the mortgage site www.nrmlaonline.org. This is the National Reverse Mortgage Lenders Association. Click on the Locate A Lender box on the top right. Joe met with a counselor to complete the required counseling. Counselors are found on the Department of Housing and Urban Development (HUD) site, www.hud.gov. Put reverse mortgages into the search box on the site. The lender agreed to a mortgage of US$200,000. Joe spent US$40,000 on home repairs. The remaining $160,000 he leftuntouched to provide for his future needs. He thought he might live another 10 years as both his parents had lived into their 90s. The remaining money would allow him to draw US$16,000 a year to supplement his social security and small pension. The original mortgage that Joe and his wife had used to buy their home had been paid offlong ago. If it had not, proceeds of the mortgage would be used to pay offin full any existing mortgage and any outstanding home equity line. The mortgage must have the first claim on the house. During the life of the mortgage, Joe continues to own and hold title to his home. He pays the property taxes and makes home repairs. The terms of the mortgage require him to stay current on his property tax payments. There are no interest or principal payments on the mortgage. Interest accrues until the home owner moves, sells, or passes on. Joe would make payments to the federal insurance agency that guarantees that the bank will be repaid. There are up-front closing costs and fees. These might total 3% of the house value. These fees may make a mortgage unattractive, depending on how much one wants to borrow against a house. Borrowing a small amount relative to the house value may make the mortgage unattractive. In this case, a home equity line would be more attractive. Joe had no heirs. At his death, he planned to give his remaining estate to his local senior center and town library. At his death, his home would be sold. The bank would be repaid the principal and accrued interest on the loan. If the selling price of the house was less than what they owed the bank, the Federal Housing Administration (FHA) would pay the bank the shortfall. The insurance premium that Joe had paid went to provide insurance to cover any shortfall. Joe cannot be forced to sell his home to pay offthe mortgage, even if the mortgage balance grows to exceed the value of the property. An FHA-insured mortgage need not be repaid until the borrower moves, sells, or dies. When the loan is due and payable, even if the loan exceeds the value of the property, the borrower (or the heirs) will owe no more than the value of the property gained from a sale. If the sale of the home produces more than the loan amount, the excess goes to Joe's estate. A SECOND CASE In another case, Stephanie and John Hanlon were able to use a mortgage to improve their quality of life. They had both been widowed in their 50s and married each other in their 60s. They wanted to start their marriage in a fresh home without any memories. They bought a home together using a 7% fixed rate, 15-year mortgage. All was good until their investment portfolio declined in the 2008 market correction. John had some margin debt on his portfolio. He was forced to sell some bond holdings to pay offthe margin debt, which came due when his stocks declined. …