17 Common Misconceptions

1. A reverse mortgage sells the home to the bank

It is not in the interest of lenders to own homes — they operate with the sole motivation to make loans and earn interest on those loans. The homeowner keeps the title to the home in their name. The lender simply adds a lien onto the title in order to guarantee that it will eventually get paid back the money it lends.

2. Heirs will not inherit the home

The estate inherits the home as usual, but there will be a lien on the title. The lien consists of whatever proceeds were received from the reverse mortgage plus accrued interest.

For example, if a homeowner takes out a reverse mortgage and owes $50,000 after 5 years; then the homeowner passes away and the estate sells the house for $250,000. The lender gets $50,000 and the estate inherits $200,000.

A reverse mortgage is a “non-recourse” loan which means that the borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home may be used to repay the debt.  Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.

3. The homeowner could get forced out of the home

The HECM reverse mortgage was created specifically to allow seniors to live in their home for the rest of their lives. Because the homeowner typically receives payments from a reverse mortgage instead of making payments to a lender, the homeowner can never be evicted or foreclosed on for non-payment. However, it is the homeowner’s responsibility to maintain the home in good condition, keep property insurance current, and pay the property taxes.

4. Someone can outlive a reverse mortgage

The reverse mortgage becomes due when all homeowners have moved out of the property for 12 consecutive months or passed away.

5. Social Security and Medicare will be affected

Government entitlement programs such as Social Security and Medicare are not affected by a reverse mortgage. However, need-based programs such as Medicaid may be affected. To remain eligible for Medicaid, the homeowner needs to manage how much is withdrawn from the reverse mortgage in one month to ensure they do not exceed the Medicaid limits. You should consult with a qualified financial advisor to learn how a reverse mortgage could impact eligibility of some government benefits.

6. The homeowner pays taxes on a reverse mortgage

The proceeds from a reverse mortgage are not considered income and therefore, are not taxable. Furthermore, the interest on the mortgage can be tax deductible when it is repaid. Consult a tax advisor for more information.

7. There are large out-of-pocket expenses

The majority of lender closing costs and fees can be financed into the reverse mortgage loan.  The usual exceptions to this are the appraisal and counseling fees.

8. A reverse mortgage is similar to a home equity loan

The only similarity between a reverse mortgage and a home equity loan is that both programs use the home’s equity as collateral.

·       Any homeowner can apply for a home equity loan, whereas a homeowner must be at least 62 years of age to be eligible for a reverse mortgage.

·       A home equity loan must be repaid in monthly payments over a period of 5 or 10 years. A reverse mortgage is typically not payable until the homeowner moves out of the property for 12 consecutive months or passes away.

·       A home equity loan that charges no closing costs often acquires a higher interest rate over the life of the loan. A reverse mortgage charges upfront closing costs but typically has lower interest over the course of the loan.

16 Distribution of Funds from a Reverse Mortgage

There are several ways to receive the proceeds from a reverse mortgage.

·       Lump sum – a lump sum of all available cash at closing.  No more funds will be available after the date of closing.  This is most often the used program when there are liens or other debts to be paid off thru the loan closing.

·       Tenure – a pre-determined schedule of equal monthly payments as long as the homeowner lives in the home.

·       Term – a pre-determined equal monthly payment for a fixed number of years.

·       Line of Credit – an LOC from which the homeowner may draw any amount at any time until the line of credit is exhausted.

·       Any combination of those distribution options listed above

·       Start here to calculate the possible proceeds you may be eligible to receive: 

Reverse Mortgage Calculator

·       Reverse mortgage calculators have two parts. In Step 1, basic information like property value will be used to evaluate whether or not you are eligible for a reverse mortgage.

·       In Step 2, you can enter additional property information to determine how much you may be eligible for.

Of course, resources such as the Reverse Mortgage Calculator are designed to give the potential consumer a rough idea of what he or she may expect to gain from a HECM mortgage.  It is always advisable to follow up the use of this calculator with a face-to-face meeting with a HECM mortgage professional of your choice.  They will be in a better position to consider all of your personal and financial factors that may influence the final proceeds.

15 Can I Lose My Home?

You remain the owner of your home and can stay as long as you wish. Since you are still the homeowner, you must continue to pay hazard insurance, property taxes and continue with basic home maintenance during the loan period – but no other payments or conditions are required. If and when the home is sold, the loan is repaid (including accrued interest and any fees) and any remaining equity goes to you or your heirs.

In the case of death of the homeowner, the heirs inherit the home and keep any remaining equity after the outstanding balance is paid off.  In short, the origination of any type of HECM Reverse Mortgage does NOT transfer ownership of the real property to the bank or lending institution.  Only in the case of the death of the homeowner(s) without any heirs to the property will the bank take possession of the home.  Otherwise, the loan is repaid once the last remaining borrower moves out of the home. In most instances, the home is sold, the loan (including interest and any fees) is repaid, and any remaining equity goes to you or your heirs. If your heirs choose to keep the home, they can pay the HECM loan back by using such financial tools as refinancing the reverse mortgage. If they choose to sell the home, they are provided up to 12 months to complete the sale.

In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage loan or put the home up for sale.

If the equity in the home is higher than the balance of the loan when the home is sold to repay the loan, the remaining equity belongs to the estate.  If the sale of the home is insufficient to pay off the HECM, the lender takes a loss and requests reimbursement from the FHA. No other personal assets are affected by a reverse mortgage in any way. For example, investment and retirement accounts, second homes, automobiles, and other possessions cannot be extracted from the estate to pay off the reverse mortgage.

14 Types & Options

A Reverse Mortgage is used for one of two different types of transactions.

1) Financing your current home.  This usage is the typical type of Reverse Mortgage transaction and is most often what is generally considered and thought to be a Reverse Mortgage.

2) Reverse for Purchase. A lesser known usage is financing the purchase of a new home the senior clients intend to move into.  Few home buyers (or their real estate agents) realize that this is even an option.  For Realtors and home buyers, we have dedicated a page to this specialized use of financing.

Regardless of Refinance or Purchase, there are three Reverse Mortgage Options to choose from.

Once we meet and have a clear understanding of what your goals are, you will receive guidance as to which option we feel is most appropriate. Of course you are the decision maker, but we want to feel comfortable that you are making an educated and well thought out decision as to which option best suits your needs. Each option has its own unique characteristics and is summarized below.

Reverse Mortgage Option # 1 – HECM Adjustable

The Adjustable Rate Mortgage (ARM) has been around since FHA took control of the Reverse Mortgage program in 1988.  It is currently tied to the LIBOR index and is updated monthly.  A “margin” is added to the LIBOR index and that creates the annual interest rate that is charged on the outstanding balance.  The ARM option offers clients the most flexibility.

1.     The senior can receive monthly income,

2.     The senior can take a disbursement at the time of closing,

3.     The senior can have the funds available in the form of a Line of Credit (LOC) to use on an as needed basis, or

4.     The senior can have a combination of any of the above!

Additionally, should a client’s needs change in the future, the set-up of the loan can be changed at any time for a nominal fee (currently the charge is about $30 to make a change).  Few people actually realize how flexible your Reverse Mortgage options really are after closing.  No other mortgage financing is as flexible as the HECM Reverse program.

Finally, you should know that any unused portion of funds (the money that is available but hasn’t been taken yet) actually appreciates at 1.25% HIGHER than the rate that is being charged on the used portion.  Under certain circumstances, this can be used as an excellent estate planning tool and could leave a bigger estate to your heirs than just the value of the home.  Essentially, over time it is likely that the Line of Credit is worth more than the value of the home itself!

This concept is worth repeating.  When administered properly, the line of credit can be hundreds of thousands of dollars more valuable than the home.  Over time the bigger asset is not the house, but rather the LOC.  We have a page dedicated to Financial Planning Strategies that utilize the Reverse Mortgage product and encourage you to explore some advanced concepts. New Mexico Reverse Mortgage will work with you to discuss real numbers. If you have a trusted Financial Advisor or an Estate Planner, we’d like to meet with them to share some strategies they likely have not ever considered that can greatly enhance your financial health and security.  Remember, the mortgage is insured by the government and the LOC has a guaranteed growth rate.

Reverse Mortgage Option # 2 – HECM Fixed

The Fixed Rate program was created in 2008 and is not as flexible at the ARM, but it does offer an interest rate that will never change.  With the Fixed program, the only option for disbursement of funds is “Lump Sum”. This means that at closing, the entire lump of money is disbursed with no option for future disbursements.  The Fixed Rate is often used when the purpose of the money is already known.  As a simple example: If the Principle Limit (or Loan Size) is $200,000  and the senior has a $150,000 mortgage lien that gets paid off thru the closing, then the senior would have $50,000 left over to save or spend however they like.

Reverse Mortgage Option # 3 – HECM Hybrid

This is a relatively new option that was first available in 2014.  It has both a Fixed Rate feature and the Adjustable Rate feature.  Using the above example, the portion that was immediately used at closing to pay off the $150,000 lien would be fixed.  The remaining $50,000 would not be disbursed to the borrower at time of closing, but would remain available to the senior in the form of a Line of Credit.  This is an excellent choice of products and we are expecting it to gain in popularity as it becomes more widely known to consumers.

Summary

Each program and terms are modified for your specific needs.  Your New Mexico Reverse Mortgage expert will walk you through every step of the process in order to qualify, answer all of your questions, and help you select the option that best suits your needs.

*What option that makes sense for one senior does not mean that it is the best option for another senior. Every client and scenario is unique, and needs to be treated as such.  So, we listen and will create an individual report for you.