Blue Elevator Blog

The Reverse Mortgage

So, why is a business blog talking about a reverse mortgage?

When things are tough personally, it can affect your business.  And, vice versa.

So, if things are getting financially tough with you or your parents, we want to inform you about the possible benefits of an often-overlooked financial product: A reverse mortgage.

Today, there are some great reverse mortgage products.  When used properly, these products have a lot of benefits for homeowners and their families.

Before we show an example on a reverse mortgage, let’s cover some basics.

Reverse Mortgage Basics

Basically, here is how a reverse mortgage works:

• Traditionally, a reverse mortgage is often thought of as a refinancing option.  If you have significant equity in your real estate (e.g., primary residence), you can take “cash out” of your home.  The FHA reverse mortgage is called a Home Equity Conversion Mortgage (e.g., HECM).
• When you get a HECM, this mortgage will replace your existing conventional mortgage.  This means that you will have to use the new HECM loan to payoff any debts owed on the property.
• With a traditional or conventional mortgage, you make a monthly payment and, gradually, pay down what you owe.  When you make a payment, your loan amortizes down.
• With a reverse mortgage, you DON’T have to make a monthly payment.  Payments are optional.  There is no prepayment penalty.  If you don’t make a monthly payment, or you pay less than what is owed for interest, the amount you owe will increase.  Thus, it is the “reverse” of a regular mortgage.  Each month, when you don’t make a payment or pay less than the interest charge, your loan amortizes up.  As with a traditional mortgage, you will receive a monthly statement reflecting the amount paid, if any, and the new amount owed.

The “Old” Reverse Mortgage

The reverse mortgage earned some bad press several decades ago.  Today, this reputation can still cloud consumer perception of this potential benefit.  And, here’s why it earned some bad press.

Legally and contractually, recipients of a reverse mortgage DON’T have to make a monthly payment.  But, as its name suggests, the loan amortizes in reverse.

Some of these earlier products failed to protect homeowners and their heirs.  Because these loans amortize up, some people found that they owed more than what the home was worth.  They were upside-down.

Then, they were forced to make up the difference between the value of the home and the amount owed under the reverse mortgage.

The “New” Reverse Mortgage

The new reverse mortgage is a government insured loan. It has safeguards to protect against the challenges with predecessor products.

As with anything, we recommend you check with your CPA, tax advisor, and attorney for specific advice.  And, we also recommend speaking with a skilled and trustworthy Reverse Mortgage Specialist.  We are happy to refer you to one.  The reason we recommend this is because program specifics change.  And, everyone’s personal situation is different.

There are two basic types of reverse mortgages:

• A HECM (Home Equity Conversion Mortgage).  This is what you would use to “refinance” or take out a reverse mortgage on your existing primary residence.
• And, there is an often-overlooked option called a HECM to Purchase.  For the balance of this article, for simplicity, we’ll call it a Reverse Mortgage Purchase.  This means you can actually purchase a home using a reverse mortgage.

FHA or HUD Reverse Mortgage Particulars

Presently, here are some program basics for an FHA reverse mortgage.  However, program particulars are subject to change at any time.  So, please be advised to check with your Reverse Mortgage Specialist for details.

• One borrower must be at least age 62.  Note: Presently, HUD allows a younger, non-borrowing spouse to remain on title.
• The older the borrower, the more money you can borrow.  Which means, the lender will advance you more money.
• As mentioned, you can borrow up to a certain amount.  This amount is based upon an actuarially determined Loan to Value (LTV) factor.  The LTV factor is based on the age of the youngest borrower or spouse.  Typically, LTV factors will average from about 50% to 60%.
• The Maximum Claim Amount (MCA) in 2017 is $636,150.  This is the maximum amount of “value” that an FHA-approved lender will lend against.
• The amount of your loan will be a function of the LTV factor and the home’s value.  The LTV factor will be applied to the lesser of a) the MCA, b) the appraised value, or c) the purchase price.

Now, there are loads of additional information to consider: Interest rates, Mortgage Insurance Premiums (MIP), third-party charges, loan origination fees, and so-on.  There are also limitations on loan advances for the HECM.

Also, there are different options on “funding.”  You might want a lump sum payout.  In lieu of a lump sum payout, you might want a monthly check to supplement your monthly income.  Or, you might want to just have funds available under a credit line.  And, you might have the ability to enjoy a combination of all of the above options.

Either way, you can ask your Reverse Mortgage Specialist for details and options.

A Reverse Mortgage Purchase – Example

Now, we’ll show you an example of how a Reverse Mortgage Purchase might work.

Let’s say Mom and Dad are in their mid-70s.  They live in the family home.  It is a single family home with a pool.  And, let’s say the home is worth about $750,000.  And, let’s say they have an existing mortgage.  Currently, they owe about $115,000 and their monthly payment is $1,700 per month.

Additionally, let’s say they receive combined social security of around $4,000 per month.  Because of their generosity, medical expenses, and life, they have about $15,000 in the bank.

Plus, Mom and Dad will need to replace the roof soon.  They will need to redo the pool within the next year.  And, they will need to repaint the home.  And, to save money, Dad started doing the yards and pool maintenance a couple years back.

Your situation may be different.  A lot of times, senior homeowners appreciate the benefits of a single-level home.  This way, they avoid the risks and physical challenges involved in scaling stairs.

Recap

So, here’s where they’re at:

• They have $15,000 in cash left.
• Net, they are trying to live on $2,300 per month (e.g., $4,000 – $1,700).
• They have a ton of deferred maintenance.  A new roof at $7,000.  Pool refinishing at $8,000.  And, painting at about $5,000.  Plus, a whole host of other little items.
• Plus, Dad is worn out from doing the yards and pool.  It takes him most of the week.

Result

Now, it is clear to see that Mom and Dad are going to need some financial assistance pretty quickly – especially if they stay in the family home.  And, these funds will need to come from the kids (maybe you).

Reverse Mortgage

Now, let’s see what this situation would look like with a reverse mortgage.  And, if you recall, there are two types.  There is a HECM (where you stay in the same home).  Or, you can purchase a new home using a Reverse Mortgage Purchase.

In our example, you can see that the home has a lot of deferred maintenance.  And, it is wearing Mom and Dad out.  So, everyone decides that selling the family home and getting a smaller home would be best.

A Possible Solution

So, you and Mom and Dad find a skilled and trusted Realtor®.  And, you also find a skilled and trusted Reverse Mortgage Specialist.  At Blue Elevator™, we would be happy to refer you a skilled and trusted Realtor® and a skilled and trusted Reverse Mortgage Specialist.  Just ask us.  Now, on with the example.

• You sell and list the family home.  It sells for $750,000.  After selling costs of $60,000, Mom and Dad net $690,000.  After paying off the mortgage of $115,000, they have $575,000 left in their pocket.
• You and the Realtor® find a great, single-story, ground-level condo.  It has a community center.  A pool.  A spa.  And, of course, the yards, roof, and painting are taken care of by the HOA (Home Owner Association).  This will free up Mom and Dad to enjoy life.  And, they don’t have to pay for these costs!  Remember, they (you) were staring down the barrel at $20,000 of deferred maintenance on the old home.
• The condo is listed at $500,000.  So, you decide to buy the awesome condo.  It’s move-in ready.  And, you and your Reverse Mortgage Specialist decide to purchase it with a reverse mortgage.  Additionally, because of Mom and Dad’s age, they would qualify for a 60% LTV on a purchase.  This means they can purchase this condo with a 40% down payment.
• Presently, borrowers are required to take a reverse mortgage counseling course.  This course is another consumer safe-guard.  After taking the course, you can then obtain a reverse mortgage if you otherwise qualify.
• So, having taken the reverse mortgage counseling course, Mom and Dad decide to move forward and make the offer.  They decide to put $200,000 down on the $500,000 condo.  They will use the FHA reverse mortgage to finance the remaining $300,000.

The End Result

Old Situation

If you recall, Mom and Dad were in a tight spot, which means that you were in a tight spot.

• There was approximately $20,000 in deferred maintenance on the home (e.g., roof, pool, and paint).
• They were living on $2,300 net per month.
• And, they had $15,000 in the bank.  Remember, with the deferred maintenance, this $15,000 would be wiped out leaving a negative ($5,000) – financed by you.

New Situation

Now, Mom and Dad can sail off into the sunset.  This means you can enjoy your immediate and extended family and focus on building your business.

• You saved $20,000 in deferred maintenance (which would have wiped out their remaining savings of $15,000).
• Now, they are living on the full $4,000 of Social Security.
• There is a $375 monthly HOA dues payment.  So, they are technically living on $3,625.  But, this is a lot higher than the $2,300.   And, they (you) would’ve needed to hire someone to do the yards and pool maintenance if they had stayed in the family home.
• Remember, they NO LONGER have to make a mortgage payment – for the rest of their lives.
• Dad no longer has to spend all week trying to conquer the yards and do the pool maintenance.
• They had $15,000 in the bank, which they didn’t have to spend.  Now, they have added an additional $375,000 to it.  Note: $575,000 net proceeds from sale.  Less, $200,000 down payment.  This leaves $375,000.  So, when you add that to the $15,000, they now have a cash position of $390,000.
• The additional $390,000 could be conservatively invested.  And/or, they could use some of it to supplement their monthly income.

Additionally, thank God, you and Mom and Dad can now rest easy.  Mom and Dad can stay in their home because the reverse mortgage is insured and protected.  Note: They still have to pay property taxes.  But, they can live in the condo until they finish their years.  And, no one has to worry.  When you inherit the condo, you will never owe more than it’s worth.

Summary

For some, a Reverse Mortgage Purchase can be a great tool.  You can help out your loved ones and allow them the independence they desire.  Plus, God willing, for some, it can greatly improve their cash position.  In our example, it was a $375,000 turn-around.  This means you can preserve your own cash flow, too.

Contact us if you would like to learn more.  Also, you can read on if you want to see the results of using a HECM (e.g., Home Equity Conversion Mortgage) using our example.

HECM

Instead of selling the family home and purchasing a new home, Mom and Dad could have also stayed in the family home.  This is what it would look like if they had stayed in the family home:

• Maximum LTV of 60%.
• Since the value of the home is $750,000, the HECM would be based upon the MCA of $636,150 – because it is the lesser amount.
• Therefore, the HECM amount would be $381,690 (e.g., $636,150 x 60%).
• Out of this, the lender would require a pay-off of the 1st mortgage of $115,000.
• This means they could get cash out of $266,690 (e.g., $381,690 less $115,000).
• Technically, due to program constraints, they could not get all of this money up-front in Year 1.  Presently, you can get 60% in Year 1.  And, you get the balance in Year 2.  Ask your Reverse Mortgage Specialist for details.
• Plus, as in the case of the Reverse Mortgage Purchase, they no longer have a monthly mortgage payment.

Note:  Every situation is different.  And, program specifics change.  But, as you will see in this example, the Reverse Mortgage Purchase (after selling the family home) provided more net cash.  The Reverse Mortgage Purchase yielded $375,000.  The HECM yielded $266,690.

Again, please consult with your Realtor®, Reverse Mortgage Specialist, tax advisor, and/or attorney for your best option.