My current condition: late 60’s, married, no children, no heirs either of us particularly cares about. Current income (pension, SS, IRA disbursements) is enough to continue to stay in our home plus a little travel every year. IRA should last for the 20-25 years I expect to live. We live in San Francisco, so home value has kept rising since the '08 bubble burst, and is now at its highest ever.
Suppose, for the sake of argument, that our home is worth $750K and that the mortgage amount remaining is right now at just under 50%. Mortgage payment is $3000 per month, property taxes are $6500/year, and insurance $1500/year.
I understand that we would still be responsible for property taxes and insurance, and for maintenance. Some of the extra money coming in would go towards those expenses and possibly towards some home improvements.
I understand that there will be fees up front, and possibly loan insurance required. If I understand correctly (and please correct me if I’m wrong) our mortgage payment would go away, and we would get some additional money from the reverse loan on the equity. I believe that the amount of this additional money, if taken as monthly payments, may change over time as most of these loans are at variable rates.
With these conditions, this still seems like a good idea to me. We would like to use the money mostly for more travel, as I haven’t been in very many parts of the world at all, and would like to do this travel while I’m young enough to enjoy it. And we would like to be able to do this without spending down the IRA unduly.
So what am I missing? Are there real pitfalls, on the understanding that we don’t care if the house goes to the bank when we’re dead?
One thing I’ve read about is that you generally must occupy the house continuously. Said another way, the reverse mortgage “matures” if you have to move out, e.g. to an assisted living facility. So just as your cashflow needs take a bump, your cashflow takes a hit.
Given the other challenges you’ve told us about with your spouse, this might be a big deal.
I am not a banker, but I’m afraid reverse mortgages are, in practice, most likely written so as to scam you. I don’t think you should risk it.
This is where “widow foreclosures” come from. The reverse mortgage is put in one spouse’s name. When that spouse dies, the other is evicted immediately.
A former co-worker and her family were living in a house that had a reverse mortgage on it. The owner of the house needed money, and so her son decided to act as landlord and rented it to the co-worker while the mother lived with her son, the landlord.
Well, the landlord was strapped for cash and when the air conditioner broke (in mid-May), he kept making excuses to the tenant as to why he hadn’t fixed or replaced it yet. This went on well through to August, and this was one of our hotter summers, where we had near-record-breaking streaks of high temperatures.
Finally, the co-worker and her family moved out, but I remember her telling me that towards the end (when she’d had enough of the landlord’s excuses), there was a bank officer (or agent) outside, and she asked who lived in the house. The co-worker gladly told her, as well as the fact that they’d been living in the house for a long time.
Last I heard, the bank went after the mother (which is really the sad part of the story) for breach of contract, and other damages. I’m hoping it trickled down to the landlord somehow, but I don’t see how it could have, outside of chipping away at any inheritance he might’ve received.
Reverse mortgage companies aren’t looking for profit. They are looking for PROFIT.
It’s a very one sided deal. They have a lot of options that work to their advantage.
Their goal is to foreclose. When that happens a lot of your share of the remaining equity ends up in their hands. This is a lose-lose situation.
Note that if you merely refinance your mortgage, you can get a lot of cash out. Some of that you put aside to pay your mortgage for a while. The rest is for travel, etc… (But be aware of limits on taking an interest deduction on your taxes.)
The rules of foreclosure are the same as you have now. The mortgage holder does not want to foreclose if they can avoid it. (Note!) Some aspects work to your advantage.
When it’s time to sell, it’s just like a normal home sale. No extra headaches or fees.
Some facts about Reverse mortgages. To be eligible, you have too:
Be 62 years of age or older,
Own the property outright or paid-down a considerable amount,
Occupy the property as your principal residence,
Not be delinquent on any federal debt,
Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
Participate in a consumer information session given by a HUD- approved HECM counselor
3 rules re: when Loan becomes due;
You leave without intending to return for more than 1 year.
You die.
You sell the house.
You do not have to sell your house, ever, unless one of those 3 thing happens or you otherwise default.
I’m over 62. My home is paid for. It’s worth maybe 400k total +/- . Sounds like you have about that much in equity. A reverse mortgage offered me a cash advance, then another one in a year. My credit score was 822 though this may or may not matter with the process.
The first advance is about 33% of the value of your home (equity)
The second about half that amount a year later. You can take less if you like. You’ll (your estate?) will pay about~ 4.5% on this money. Again, nothing is due until one of the 3 examples above trigger the sale, or you default on your obligations. (see below)
How much money you get, how you take it, whether it’s a ARM or conventional mtg all determine your payment options and amounts. Ask the broker about all that.
You’re required to take out insurance with the FHA, this is about $1600 for the loan. This covers the lender if your house ends up being worth less than you’ve been paid. Insurance so to speak that you’ll never owe more than the house is worth.
Now. Before you spend the money… seriously, go straight to your broker/banker and buy a 10 year annuity. You’ll have an additional $1200 +/- a month for 120 months (assuming you have about 400k equity) Take the second amount, (a year later), and buy another annuity that begins when the other ends, for another 10 years.
In the event you’re still alive and have your facilities about you, you can do a second reverse mortgage at any time your home appreciates significantly, as it probably would over a 20 year period.
Other costs.
up to $5000 loan origination fee. I forget the formula.
HUD counseling certification ($125-150) (a one and a half hour phone counseling - HUD required)
Appraisal - 400 to 600 depending where you live. More of a home inspection really, buy with a value at the end. If the home needs repairs, repairs are made from the proceeds before you get a penny. Repairs like falling walls, broken windows, leaking roofs, etc.
FHA insurance (mentioned above) 1600 +/-. One time payment.
Except for the counseling, these are paid from the loan proceeds, when the loan closes. You pay for the counseling when it happens. It’s a waste too. IHMO
Time involved - 30 - 45 days. There are mandatory cool off periods built into in the process. Depends on state I’m told.
IS it a good deal?
The funds are not taxable, (their claim) but I haven’t run anything by my tax lady yet. I’m sure the annuity will be as it’s paying interest.
You’ll get money you’ll never pay back, and you are free to do with it what you please. I have an additional thousand + dollar/month income for the next 20 years that I will never pay back.
Be aware of what constitutes default though with respect to your obligations.
If both spouses are on the RM, the surviving spouse can remain in the house until she dies, leaves or sells.
If she was not on the RM, (and she had to sign out of it if she’s a spouse) then she can still live in the house. She has one year to sell the house, refinance the RM and make payments OR if she’s NOW the owner and otherwise qualified, she can take out a RM on it and pay off the first one. She really has many options and is never evicted immediately.
BTY, this is a program backed by the Feds. I doubt they are seeking to scam people.
it might make more sense to capture the equity in the house via sale and have (say) 350000 in your pocket and move to a much lower cost area and buy a nice house for 250000 or so. This would allow you to travel reasonably and still have a house you own (and no mortgage).
Hanging on in the SF area as non wealthy retired people will drain pensions and IRAs quickly just in lifestyle costs.
Will the existing mortgagee agree to you giving the reverse mortgagee security over your house? If you only have 50% equity to offer, how much will the reverse mortgagee be willing to pay you anyhow.
Using your example figures - you have $375,000 equity now. Your Outgoings are $3,667 a month. So the reverse mortgage could cover all these for around 8 and a half years if the reverse mortgagee is willing to pay out on all of your equity (which I doubt will be the case).
Personally I think you’d be far better off selling the current house, and buying a more modest one for cash.
The RM would be no different than a 2nd mortgage. They stand in line behind the holder of the 1st TD if it comes time to settle up. FHA has insured the RM (2nd) so any depreciation in the property value beyond the worth of the property is paid by FHA. No RM lender loses.
Thanks, Morgenstern, for your information. One thing I’m not clear on - am I then incorrect that the current mortgage payment goes away? What if I used the RM money to pay down the current mortgage and/or re-finance it to a much lower payment? How much total % of equity am I liable to be able to get in order to do that? I was hoping for a net monthly increase of more than $1k in income to make it all worthwhile.
For the rest: thanks for sharing your opinions - I am able to figure out that we can live in Peoria much cheaper than we can live here but neither of us wants to do that; I don’t believe my spouse is in any danger of needing a nursing home any sooner than I am; there may well be tricksy RM vendors out there, I believe I can find an honest one if I decide to go that route.
A lot of misinformation here. I have a reverse mortgage. I love it. Best thing I ever did. It’s a very expensive loan. But it’s a good loan. But you have to know what you’re getting. You don’t get to borrow your full equity, if you have any. Sometimes the RM is used only to save your home. You can NEVER be foreclosed upon unless you have not lived there for more than a year. It is possible to go into negative equity, but if you live there, that will only be worked out after you’ve sold the palce or are dead. Or in a nursing home.
BUT! If you spend all your windfall on travel or old debts, you’re fucked. Tax bill comes due, you’re out of there. Almost all of the money I have coming in from my RV is in a dedicated account to pay for all the house related shit that might reign down on me. You don’t get, actually all that much. But you get to live in your house until you can’t any more.
In fact we currently already have enough to pay for the current mortgage, taxes and insurance. If major repairs are needed I may have to dip further into my IRA that I would want, but I could do it. I have no expectation of losing the house under any likely scenario. So the entire question for me is, how much I would actually get. Unfortunately, I don’t seem to be able to generate a number without actually talking to a vendor.
LSLGuy, thanks for the reference. I had already read one set of government links, but there is some new stuff here.
I am going to say that you can cash out 1/4 to 1/3 of your equity in a reverse mortgage. The amount of your equity may affect that number. This is from my experience with a solid broker. The nature of the loan which can never be called in by the lender limits their liability.
If you’re going into a reverse mortgage because you think it’s a good financial deal, it’s not. It’s not a way to save money or get extra money or anything like that, and from where I sit, a lot of the issues folks have with them is because they’re approaching them as some sort of smart money advice. That’s not what they are.
What they ARE is a way for older folks to 1) stay in the house they own and presumably have a fair bit of equity in and 2) spend some of that equity. They are GREAT at that.
My grandmother had one for the last years of her life, and now my parents have one. The terms vary; my parents don’t get a monthly payment but they do not pay a mortgage. They are able to live comfortably in their house with extra money to travel, live it up a little, etc. Without the reverse mortgage, they’d still be OK, but only just OK… with the RM, they enjoy their retirement.
My understanding is the same as what others have posted in this thread. The RM is guaranteed for the time whoever’s name is on the mortgage lives in the house. The terms of the mortgage are such that they will never reach a place where the equity is used up and the bank swoops in and does something horrible like sell the house out from under them.
About the only bad thing I can say about the RM is that my parents are spending my inheritance. (I wouldn’t have it any other way!)
(I wouldn’t have it any other way!)