How Do Reverse Mortgages Work?

Today we have an article about reverse mortgages written by mortgage expert Buck Gieseke. Reverse mortgages are one of the most misunderstood home financing tools available today. As a mortgage originator for over two decades, I was adamantly opposed to writing this type of loan until mid-2006. That’s when I got the facts that changed my thinking. First and foremost let’s put some of the Reverse Mortgage myths to bed:

What if I outlive the benefit? You can not outlive a reverse mortgage. If you live to be 120, you still will not have to make a mortgage payment. Can I get upside down in value? Because the loan is insured by the FHA, you will never be obligated for more than the sale of the home (even if it depreciates).

Could you lose the title or lose control of the property with reverse mortgages? Title always remains in the homeowner’s name. Could the burden or responsibility be passed on to my heirs? Your reverse mortgage is secured by the equity in your home so your heirs are never personally liable. Upon my death, is there a possibility that my heirs would not inherit my home? Your heirs do inherit your home according to your own estate planning, and your heirs have the option to sell the home or refinance it.

Reverse Mortgages Qualifications

The majority of reverse mortgages originated today are FHA or HUD Home Equity Conversion Mortgages (HECM). These are insured by the FHA and have been growing in popularity over the recent years.

To qualify for reverse mortgages, you must be at least 62 years of age, have an equity position in your home and undergo nominally priced (approximately $100) counseling from a HUD approved agency. In contrast to past guidelines, you can have a co-borrower that is less than 62 years of age. The surviving spouse (borrower) can still remain in the home without repayment of the loan but does not have the ability to continue making draws on the loan.

Also contrary to previous guidelines, income is now taken into consideration for qualification but works similar to hoe the VA calculates monthly residual income…or what is left over after obligations are met. The monthly draws that the homeowner receives, however, can be considered into this calculation to offset shortfall of income to obligation ratio. There are no medical tests or histories required for reverse mortgages. It almost sounds too good to be true, and that is why it took me so long to offer this valuable tool to those that could benefit. Dollar amount available is determined by borrower age and equity position.

The cost of FHA/HUD reverse mortgages (HECM) is similar to that of a refinance. Interest rates are typically lower than the most competitive rates offered by traditional mortgages. Also, similar to most refinances, all of the costs are packaged into the loan to eliminate out of pocket expenses. You are still responsible for paying your property taxes and home owner’s insurance and for making property repairs but will not have a mortgage payment as long as you live in the home.

Reverse Mortgages and Using the Money

Upon closing, the proceeds from reverse Mortgage will first pay off any existing mortgage (if there is one). The (remaining) proceeds are tax-free and can be spent at the homeowner’s discretion, and with no impact to other benefits such as Social Security or Medicare.

The funds can be accessed or used in a combination of ways. Some will take a lump sum, pay off debt (if needed) and keep the remainder as a reserve for living expenses. Others choose to receive a monthly amount similar to receiving a paycheck–remember this is from home equity so it’s tax free. Many like the security of knowing they can readily draw on the equity in their home. It may be to cover increasing healthcare and day-to-day living expenses, to do the traveling that they have always dreamed of doing, or helping grandchildren fund their college education. More and more people are using the proceeds to purchase a vacation or second home. The Reverse Mortgage allows the borrowers to pay cash for the home, have no mortgage payments and actually have two properties appreciating in value.

Whatever the reason, properly planned reverse mortgages can, provide security, personal independence and an overall improved quality of life, allowing those who chose a Reverse Mortgage to live life on their terms.

Buck Gieseke
bgieseke@goloanstar.com
Loan Star Home Lending
10025 19th Ave SE, Suite 100
Everett, Washington 98208
(425) 366-8236

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