Teacher Terry
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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- Jun 17, 2014
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They are a good deal for the lender. We are keeping our equity and if we ever want to downsize to a condo would use it to pay cash.
They are a good deal for the lender. We are keeping our equity and if we ever want to downsize to a condo would use it to pay cash.
I have read too many horror stories about people that forget to pay their yearly taxes once and the banks foreclose. If they both end up in a care facility for more than 3 months even if one person is expected to rehab and go home their house is sold.
I've heard the horror stories first hand. I'm also a default counselor on reverse mortgages. The lender (as any mortgage lender) will pay the taxes if the homeowner fails to pay them (and there is no money left available under the loan -otherwise the lender will take it from there). They will then ask homeowner to pay it back - they can set up a repayment plan over as long as 5 years - or they can have family help them pay the amount due. They *always* have the right to redeem. The reality is, if you have reached a point where you can't pay the taxes on the home - typically bc of the loss of a spouse and their income - the house should be sold.
At least one of the homeowner's must live in the home 6 months and 1 day during each year. Any homeowner - even the last remaining homeowner can go into hospital or nursing care - the loan does not come due until someone is in such care for 12 consecutive months.
JillPill, thanks for the clarification. How does the lender verify the occupants/occupancy of the home?
Murf
I guess things have changed since I last read the rules. Black owners in a poor neighborhood that was gentrifying forgot to pay their taxes one year and had the money to pay lost their homes. This happened to more people in this neighborhood because the bank wanted these homes. Maybe it was illegal but more than one person got ripped off. They were all in their 80’s so maybe the bank gambled that they wouldn’t get lawyers. In fact seniors in this neighborhood were pursued by the bank offering reverse mortgages because they knew they would get a big pay out down the road.
Why not just get a regular interest only mortgage, more money at a better interest rate? A Reverse mortgage seems like a more expensive option. JillPill you almost sound like a RM sales person..... Not that you are.
This is not true. I am a housing counselor - I've been certified in counseling on reverse mortgages and have done the federally mandated counseling for the last 10 years with approximately 1300 clients during that time.
A reverse mortgage allows you to access a portion of the equity in your home - roughly 50% (based on your age- younger borrowers can borrow a lower percentage than older borrowers). You still own your home - there is just a mortgage accruing interest on what you've borrowed. There are also no pre-payment penalties - you could pay the interest accruing if you are concerned about the your heirs getting less money on the sale of home at your death.
The federally insured loans (the vast majority on the marketplace) have an expensive feature - 2% of the value of home is paid out at closing to the Feds to maintain an insurance fund for the product. There is also an origination fee to the lender that is based on value of home - max is $6000 on homes worth 400K and above. This fee is negotiable with the lender and is often lowered or waived by the lender. There are also normal closings costs - recording fees, lenders title insurance etc. - but you pay those for any loan closing.
The clients I see typically are using them to pay off their current mortgage balances as they retire or accessing money to make up the loss in income after death of a spouse. Some very wealthy people also get them to set up a creditline that increases at the interest rate of the loan - the money accessed is tax free.
the loans are best for people who are pretty sure they don't want to sell before death and are not really concerned about whether heirs will get any money from sale of home on their death - childless couples in that position are ideal - but plenty of parents I counsel say they've done enough for kids and if there is money left over from the sale of home on death - great- but they're not going to lose sleep if there isn't.
There are also some new products coming on the market that don't have the fed insurance and no origination fee - they lend a smaller percentage of the home value though.
I wouldn't write them off until you've fully researched them.
So it seems the lender gets the house for half the house's value and collects interest to boot. That is my take from your description.
No that's not right. The only money the lender gets at the end of the loan is what the homeowner actually borrowed plus the interest that accrues. (less anything the homeowner may have prepaid)
The lender can only lend up to roughly half the home's value. For a 600K home they could lend up to 300K. So let's say the homeowner is 65 and ready to retire with a 100K left on his mortgage loan balance. Reverse mortgage lends money to pay that off (it must be first and only lien holder) - then there is roughly 200K that homeowner can borrow. They don't have to borrow any of that if they don't want to. Some homeowners simply have that as a creditline they can tap at any time that increases at the interest rate of the loan (IMHO making it more attractive than a HELOC as a "safety net -(200K today is not going to be worth as much when homeowner is 85 and wants to tap it).
Again - lender gets paid back what was borrowed plus interest.
JillPill, thanks again for answering questions on this seemingly unpopular option.
Are the interest rates adjustable, fixed or are both available? Does the credit limit increase annually? Finally, what are the ongoing expenses to the homeowners other than insurance & property taxes?
Thanks again!
Murf
you're welcome Murf.
The federally insured reverse mortgage (HECM) has a fixed rate option as well as an adjustable. There is less money available under the fixed and the single payout occurs at closing
The adjustable options are annual and monthly adjusting. The are tied to the annual LIBOR and monthly LIBOR respectively. The annual has a cap of 2 per year rate adjustment and 5 for the entirety of the loan, monthly is less attractive for people concerned about dramatic changes in interest rate as its cap is 10. (the interest rate therefore can also go down when the LIBOR is lower as during the Great Recession when the annual was hovering around .60 (it is around 2 today)
The creditline growth is same as the loan balance growth - they both increase at the interest rate of the loan daily compounding. Borrowers receive a monthly statement - so they'll be able to see balance growing on loan and credit line (if they choose that option).
The other property charges would be and HOA or condo fees. (because both are "super liens" above mortgages). As with any mortgage - a borrower can't "waste" the property so general upkeep is required.
Are there any ongoing fees annually or monthly?
If I were to setup a credit line of 100k & just let it set,how much would it cost me per year to keep it going?
Murf
The lenders are allowed to charge a fee of $35 per month but they generally waive this without the borrower even asking (I haven't seen one on a lender's rate sheet in quite a few years)
If you finance your closing costs you would have a loan balance of those that would grow at the interest rate . You could of course pay the closing costs instead of financing them and have no balance accruing.
What do closing costs run (rough estimate is fine)?
HELOC application from a CU...They want $974.25 closing fee and for me to pay for an appraisal. Any recommendations for HELOC source?
We also have several million in other assets, but I see no reason to NOT take out an RM, which would be repaid when the house is eventually sold. Although we don't really need the cash, at least in the foreseeable future, having it as tappable funds appeals greatly to me...but not to my recently-retired wife. Other than the up-front fees, I can't understand her rather blunt refusal to even consider an RM. No eligible family member wants to live in our piece of paradise, & we plan to stay in it until they bury us, so where is the downside?
Any advice?