Reverse Mortgage Guide

Confusion reigns supreme when one talks about reverse mortgages. So much has been written about this program that myth melds into fact and fact conflates myth. Where does truth start and falsehood end? Why can’t the media get it right?

The answer to these two seminal questions has its genesis in humankind’s penchant to fear that which is new.

Throughout the annals of history, those things that were at first feared, or at least misunderstood, have often turned out to be mans’ best friend. The germ theory of disease is one such obvious example. In the mid-1800s a Hungarian physician demonstrated that disease could be drastically reduced by enforcing appropriate hand-washing behavior by medical care-givers. The germ theory of disease had not yet been developed. This doctor lectured publicly about his findings. Predictably he received a frigid reception from the medical community His observations went against the current scientific opinion of the time. It took another 17 years until scientific opinion changed.

When FHA introduced the long-term loan in 1935, this type of financing went against the way mortgages were then obtained. Accordingly, this new type of financing flew in the face of the 5-year renewable balloon note, the “term” financing common at the time. The financial community was against it. Only with the passage of some time did the opinion of those pundits change.

In the late 80’s the government once again created a new type of financing program. It was a program where one could obtain a loan that did not require monthly mortgage payments. In fact, the borrower could receive money each month. “Crazy”, other pundits would declare. “It is a trick, a scam”, people were told. “Beware”, the word went out. Fear permeated every corner of the land. But, truth be told, it is a fear based in ignorance.

Too many of us simply do not understand money/financing basics: Most of us do not know how to make it, spend it, grow it, save it or how to keep it. We learn nothing about credit or about its impact on our lives. So it can be said that, here in America, we are often quite ignorant about things relating to money.

Such things are not taught in the schools. Yet, once we become adults, society expects us to suddenly have wisdom about money, credit and the like.

Will Rogers once said that “all of us are ignorant……just on different subjects”. After reading this article the reader will no longer be ignorant about the hard-to-understand, difficult-to=digest, easy-to-get confused topic of reverse mortgages. I will cover the basics in capsule form. The goal is to overcome the fear.

A reverse mortgage is a special and different kind of loan that’s easy to get if you are at least 62 years of age and own your own home, condo (PUD) or co-op (only in New York). It converts a portion of the value of the home into cash. The pool of money that is thus created can be received by the senior homeowner(s) in a variety of ways. Also there is no requirement that monthly mortgage payments be made, nor is there any personal liability attached to the loan.

The most popular program is the government insured FHA/HECM (Home Equity Conversion Mortgage). It represents over 90% of all reverse mortgages obtained. The other non-government insured reverse mortgages are called “proprietary” programs. This article will focus primarily on the FHA program.

The amount of money that can be created from a reverse mortgage is usually dependent upon the following:

1. The age of the youngest borrower.

2. The value of the home (up to a certain limit for some programs).

3. The interest rate (for some programs).

The pool of money that’s created can be received in a variety of ways. The options that may be available include a lump sum, partial lump sum, monthly payment, line of credit or a combination of same.

As above noted, one of the key things that sets a reverse mortgage apart from any other kind of loan is that its a non-recourse loan. There is no personal liability to the borrower, their estate or to their heirs providing the property is sold in an arms-length transaction.

Here is how this concept works. Let us assume for a moment that the amount that ultimately becomes due is greater than the value of the home. When the house is sold by the estate, it nets — lets say — $300,000. Let us also assume that the amount due on the loan is $400,000. The difference of $100,000 does not become a liability. You will not find this feature with typical “forward” loans.

Another key thing that makes reverse mortgages special and different is that monthly mortgage payments are not required. Interest and servicing fees accrue over time. This means as with any negative amortization loan, that the amount that becomes due will be always increasing because mortgage payments are not required.

This kind of loan is changing the lives of older Americans because it is easy to get, no monthly mortgage payments are required to be made, there is no personal liability, and the funds can be obtained in a bunch of ways. It is totally different from the typical loan that we are used to talking about.

These differences are daunting because they are not familiar. Yet these differences are enabling an older generation to remain in the home that they love. Remove the fear, and the differences will no longer be disquieting.

Reverse mortgages work well for many qualified property owners but not for everyone. If you think a reverse mortgage might be appropriate in your situation, be certain to get independent advice before signing any paperwork. Speak with a knowledgeable source, such as an attorney who specializes in elder law.

Attorney Dennis Haber is the author of the just-published, ground-breaking book, Piggy Bank Your Home: Tap Into The Power Of A Reverse Mortgage.

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This entry was posted on Tuesday, April 1st, 2008 at 4:36 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.