Reverse Mortgages. Persons 62 and older are eligible to take out a Reverse Mortgage on their residence. Read on to learn more about this strange animal called a Reverse Mortgage.
A Reverse Mortgage is a first lien on a residence that has no monthly payments. In many cases, the borrower withdraws all or part of the loan in monthly installments, thus the term "Reverse Mortgage". The lender pays the borrower monthly rather than vise versa.
The idea is to permit seniors to tap the equity in their residence, or pay off an existing home equity loan or mortgage, avoiding a monthly payment, and augmenting retirement income. The borrower has a choice of benefits, lump sum, monthly payment or a combination.
Example. Take the hypothetical case of a 76 year old widow with an $300,000 condo subject to a $80,000 home equity loan on which the monthly interest at 6% is $400 per month. The widow's retirement income (social security and pension) is $1,600 per month. She can hardly afford the monthly payment on the home equity loan and might not qualify for a regular mortgage because of her low income. Solution: A Reverse Mortgage which pays off the home equity loan and provides a monthly income of $350 per month for the widow's lifetime. Her monthly available cash, therefore, has improved by $750 per month, the $400 interest payment she saves, plus the monthly cash disbursement by the lender. The widow makes no monthly payments on the loan but still has to pay for insurance and taxes, which are expenses she had anyway.
How Does The Loan Work? Reverse Mortgages are guaranteed by the federal government so there is generally a saving in the interest rate. The lender's interest accrues, adding to the outstanding loan balance each month. Included in the interest accrual is an insurance premium. Also, included in the loan balance are the initial expenses for the lump sum payment to the government, the lender's origination fee, appraisal and closing costs. In my experience, these fees and costs generally run $9,000-$20,000, depending on the amount of the loan. Fees have often been cited as a strong negative to Reverse Mortgages, as they may reduce the amount of the equity in the property that is available to the borrower's heirs. However, the benefits outweigh the negatives for many seniors.
Ultimate Payoff. The lender has to get paid its principal and interest somewhere along the line. There is no free lunch. The typical Reverse Mortgage terms provide that the loan becomes due at the death of the borrower or if the borrower moves out, for example to go to a nursing home. The borrower, or the borrower's representative, has six months in which to sell the property and pay off the loan. Generally, an additional six months is granted to reflect market conditions. If the property is not sold, the lender takes over the property and has to sell it. Since the loan is guaranteed by the federal government, the lender can't lose on the deal. The lender has no claim against the borrower's estate.
Whether there is any equity in the property left for the borrower's heirs, will depend on how much money the borrower has drawn and how long the borrower lives or stays in the house. For this reason, an older borrower, with a shorter life expectancy, is permitted to withdraw more money from the Reverse Mortgage loan than a younger borrower with a longer life expectancy. The insurance premiums paid to the federal government are supposed to cover variations in market values and life expectancies.
The program is relatively new, but is gaining in popularity because of bad market conditions, outstanding loans, and the squeeze felt by many retirees in their pension and social security income. In some ways, the program can be looked upon as a government incentive to seniors for staying in their own homes.
Down Sizing. Another use for a Reverse Mortgage is in financing a new, smaller home. For example, a married couple want to down size and realize $400,000 from the sale of their primary residence. They want to buy a smaller condo in Florida for $200,000. Based on their ages, they may be able to borrow $100,000 on a Reverse Mortgage on the new Condo This reduces their out of pocket purchase costs to $100,000, and leaves investable funds of $300,000. They have no mortgage payments on the new house and have substantial liquid funds for investment, living costs, or assisting family members.
New Competition. As pointed out by a recent Wall Street Journal Article, competition is heating up the Reverse Mortgage market. Active lenders are Genworth Financial, Bank of America, Wells Fargo and Financial Freedom. Also, the Article points out that Met Life is also dropping its Reverse Mortgage origination fees and servicing charges. Because the Reverse Mortgage scene is constantly changing, clients are advised to do comparative shopping, which has potential to save thousands of dollars in origination fees and servicing charges.
Conclusion. Reverse Mortgages can be a useful tool for financial planners, seniors and estate planning advisors. We have had several clients tap their home equity with a Reverse Mortgage, enabling them to stay in their homes, augment their income and improve their standard of living. We suggest that an interested borrower get quotes from several lenders. A Reverse Mortgage generally involves modifications of a client's Will or Trust, as well. If you, friends or relatives want to consider a Reverse Mortgage and discuss its impact on overall estate planning, please call James R. Modrall III or Thomas A. Pezzetti, Jr. or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe and Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.
