Buy a Single or Multi-Family Home with a Reverse Mortgage

Over the last few days I have added to my “Help” page at www.jkaravas.com some examples of how a senior can purchase a home using a reverse mortgage. One is a video and the other is a copy of an article that came to me about how a couple strengthened their retirement income by buying a multi-unit home with a reverse mortgage.

I think that both of these items are great views/reads for a senior looking to make a housing change, and all real estate agents looking to expand their sales resources.

It might be the forest and the trees thing

It has been my experience that some folks who can be helped by a reverse mortgage, get so caught up on the mortgage insurance premium attached to the financial guarantees within the FHA insured product that they lose sight of the festering costs that they are incurring because of their current financial circumstances.

For instance many people who can be helped by the reverse mortgage have lien attachments on their home. Each month the value of those liens grow with interest and penalty assessments.

Secondly many people who can be helped by way of an insured reverse mortgage have high priority home repairs that are being ignored. As each month passes the cost to do those repairs grows, eating away at the home’s existing equity value.

Individually, or combined, the negative costs generated by the growth of lien(s) and repair cost can far exceed any insurance guarantees expense accompanying a reverse mortgage.

I can not explain the rationale of allowing the growth of the lien values, or the condoning of a home falling into ill-repair, but that old saying “Can’t see the forest because of the trees” might be appropriate.

So if you are one of those people who fixates on the mortgage insurance premium costs, and you have turned your back on the circumstances that are actually eroding your equity value, I would strongly urge you to sit with someone, grab a pencil and paper, and compare the positive costs of the mortgage insurance premium to the cancerous cost of your eroding equity value.

"Reverse Mortgages Are Way Too Expensive"

Probably the most voiced complaint about the reverse mortgage is the cost.

Think about this. Most people have mini-buying habits. Maybe you need your lottery tickets most days. Or how about that morning Dunkin Donuts sandwich and the routine cup of coffee? Or the reoccurring meal special at McDonalds. For some there is that daily trip to the store to get that pack of cigarettes.

Most of these daily mini-purchases are quite affordable. Maybe $4 or $5. But let’s look at the long-term cost. An average of $4.50 per day, times most days, let’s say six, times 52 weeks per year, multiplied by ten years equals what? I’ll do the math. Can you believe fourteen thousand and forty dollars! That’s $14,040.

Now let’s examine the circumstances of one of the reverse mortgage candidates I am talking to right now. His house is worth on the market about $260,000. The roof is leaking every time it rains or the accumulated snow melts. It has been doing that for the last two years because he does not have enough money to fix the roof.

He has a small lien on his property because of some unpaid medical bills. He is 68 years old.

If I were to set him up for a reverse mortgage, at closing we could structure so that he would get $40,000 to pay off the lien and get his roof fixed. Plus let's say there is a provision (guaranteed) so he will receive a little over $650 per month for the rest of his life as long as he is living in his home.

His “Too Expensive Costs” would be:

• $5,200 for the mortgage insurance premium at closing
• $853 for his mortgage insurance premium monthly assessment as accrued over a ten year period.
  

That is a total of $6,053 over a ten year period, or less than half of what a few lottery tickets and a cup of coffee would cost. And there is no benefit comparison when one weighs the advantages of what the mortgage insurance guarantees vs. the cost of those daily mini-purchases of fast food or cigarettes. Too expensive?

For some, in my opinion, getting hung up on a sum total of cost of the mortgage insurance premium for guarantees, rather than putting those costs in their proper perspective can block the ideal reverse mortgage candidate from making the right decision that will, in the end, help them obtain a better life. Come on people – too expensive. Who are we kidding?

Reverse Mortgages Are Really Bad for Some Senior home Owners

Even as an advocate and originator of reverse mortgages, I have to agree that yes Reverse Mortgages (RM) are not right for some home owners.

If a home owner(s) is 62 and therefore seems to qualify for a (RM) that does not mean that they should jump at the opportunity to secure one.

1. There needs to be enough equity in the home to pay off any existing liens. The required equity percentage varies based on age. The older the home owner (HO) the larger the credit line when compared to a similarly valued home for a younger senior owner.

2. Secondly the HO should want to stay in their home for the foreseeable future. The entire purpose of the RM, originally and now, is to facilitate a financial means for senior homeowners to stay in their homes as long as possible. To do this there are FHA backed insurance guarantees and to fund those guarantees there are insurance charges in the loan. These charges are equal to 2% of the homes appraised value. So to incur those charges for a known short term stay in the home, is probably not the best financial alternative.

3. Having a financial goal is a key reason for getting involved in a RM. If a HO has no financial goal(s), then there is no need to secure a RM.

4. Having future cash flow that can meet the financial obligations of the RM is critical. One needs to make sure there is a cash resource, either through the remaining line-of-credit, or existing cash flow to be able to:

A. Maintain the home structurally.
B, Pay the real estate taxes
C. Maintain proper homeowner’s insurance.

The above list represents the root cause for the RM relationship to be disturbed after a closing. HUD, the managing agency for the insured RM product (Home Equity Conversion Mortgage) is currently taking a hard look at RM applicants with regard to financial qualifications to try and minimize the disruption in the HECM transactions when home owners can not afford to meet the three itemized obligations — physical maintenance of the home, paying real estate taxes and maintaining homeowner’s insurance.

The other action that has caused a “black eye” for the reverse mortgage product has been the practice of some mortgage originators convincing the senior home owner to use the money available within the line-of-credit for financial products inappropriate for the senior. These products in many instances have been financially beneficial to the mortgage originator.

Similarly there can also be pressure from family and friends when it becomes known that a senior HO has substantial cash readily available.

I personally recommend that each RM prospect and/or recipient align themselves with a confident with whom they can have present at all conversations regarding the possible transaction as well as any financial decisions they are entertaining after the loan closes.

The RM beneficiary needs to protect the funds realized my the RM loan so that it is a cash resource that can be available to them for the rest of their life. This of course includes keeping the funds in a place where the risk of losing those funds is minimal.

So now that we have discussed when someone should not get a RM, who should at least have the information as to how a RM would impact their life?

Simply stated I would say that anyone who owns a home with equity; is 62 years old, or older; who has a financial goal they can not meet under their current or anticipated future circumstances and has a desire to remain in their home for the foreseeable future.

What can the line-of-credit be used for?

Anything that the home owner wants. It could be for home repairs; purchase a car that is otherwise unaffordable; pay uninsured medical bills; retrofit a home for medical reasons; pay, back, current or future real estate taxes, help a grandchild pay for college. Simply stated the money can be used for any purpose.

If you have a lien on your house now, your line-of-credit, or part of it, will have to be used to pay that lien as the RM bank will want to be in the first position with regard to the securing of the loan.

After that you can leave the balance of the line-of-credit in place and request cash over the years as you need it. Or, you can arrange to get cash deposited in your account each month if you need additional income for day to day living expenses.

Your line of credit will grow each year at a rate that will be 1/2% more than what your loan interest rate is. so if your interest rate is 4%, your line of credit will grow by 4.5%.

Another question I get a lot is if I get a reverse mortgage, how will the cash I receive impact my reported income?

It is always wise to check with your financial tax advisor, but as a general statement, the money received from a RM, is a loan and not income.

I also see a lot of people hesitating to get RM information because they do not want the pressure of a salesperson pushing them to “sign the application.”

The truth of the matter is that you can not sign an application until you meet with your loan person after you have a counseling session with a FHA approved counselor. So if we were to meet with you and you decided you wanted to make application, you have to have a counseling session. This can be over the telephone or in person.

Once you complete the counseling, you can make application and go through the underwriting process. And here is what very few people will tell you. Even if you go through the entire procedure, including the signing of papers at a closing, you still have three days to change your mind and walk away from the entire process.

Getting information about a reverse mortgage and proceeding through the application process is safe and leaves plenty of room for the home owner(s) to maintain control.

So how does a senior home owner, or their advisor(s) get information about the overall process, or information about someone’s specific opportunity?

1. We can meet and review information on the product and I can answer your Questions. Call me at 203-687-1310 (New Haven area) or 243-6539 (Bridgeport area)
2. You can call me and request a brochure and CD to be sent to you.
3. Call me and ask to be notified when we will be holding a seminar in your area.

One of the myths about an insured reverse mortgage is that you lose your home equity value. Under certain circumstances that is true and normally those circumstances involve large cash withdrawals and living for a long time -- sometimes beyond what the life expectancy tables anticipate. Even that is OK since any excess money owed over the value of the property is paid to the bank by FHA once you are done living in the home and not by you or your family. That is an insurance guarantee you buy at the time of a closing.


For illustration purposes let's assumed that the home owner is 70 years old. The home that they currently own and live in is valued at $300,000. In addition assume that there is a $50,000 mortgage that needs to be paid in full.


The borrower wants to receive $700 per month for the next 10 years. For calculation purposes let's assume an interest rate that is expected over the life of the loan and not the current rate. The latter being lower.

Based on closing costs being rolled into the reverse mortgage obligation and after paying off the $50,000 existing mortgage the net home equity value at the beginning of the loan is $236,000, approximately -- loan balance less home value. At the end of the ten years, after paying off the mortgage and paying $700 a month to the home owner, the equity position is $213,000 approximately. Again loan balance subtracted from an estimated home value which is being calculated for this illustration at an appreciation rate of 4% per year over the next 10 years.


Since the terms of the payment to the home owner can always be changed at any time as long as there is equity value, one needs to remember that if the above scheme was set up and additional financial needs arose, the payout can be changed.


If you have questions about the above illustration, or would like an illustration based on your specific circumstances, call me at 203.687.1310. Or email me at john@ReverseMortgageByJohn.com.

Economic Stimulus Plan Gives Boost to Fairfield County Senior Homeowners In CT

Senior Homeowners in Connecticut got a huge boost in the Insured Reverse Mortgage assistance program within the 2009 Economic Stimulus package. The principal loan limit was increased from a recently established value of $417,000 to a NEW $625,500- Wow!

This huge bump will expire by the end of this year. So if you know of someone who was inadequately served by the old limit, let them know that things have changed and they have changed in a very big way.

One bit of advise. Don't hesitate to call. Since this is an accross the state, across the country adjustment I am confident that there will be a tsunami affect on the rising tide of applications submitted to RM providing banks and the impact will be that that the bank's own resourses will be stretched to their fullest. This can cause a "hold" on accepting new applications. So if you want the information, or if you come to decide that you want an insured reverse mortgage, call me at 203-687.1310 (New Haven area) or 203.243-6539 (Bridgeport area).

How Can a Reverse Mortage Help Those in Foreclosure?

There is a lot of talk about people in the process of being in foreclosure. I am also sure that if we could see over the horizon we would discover the numbers growing.

How can a reverse mortgage help those senior home owners who are worried about becoming part of this increasing population?

• First, the youngest home owner must be 62 years old, or older.
• If you have at least 45% equity in your home - you qualify.

That's it!

Income has no bearing.

Credit worthiness is not a factor.

So if you want to stay in your home for the foreseeable future and you qualify under the above criteria, than you owe it to yourself to discover how the FHA insured reverse mortgage can help you.

Knowledge is power so call me for your information. I can be reached by calling 800-290-3521, extension 504, or my cell phone at 203-680-1310. You can also send me an email at john@ReverseMortgageByJohn.com.

For those who contact me via my website, www.ReverseMortgageByJohn.com and fill out the contact form, there is a $250 reduction in your closing cost if we do a HECM loan (insured reverse mortgage loan) for you.