Reverse Mortgages
The Choices for Reverse Mortgages are NOT Obvious
It might be obvious that a reverse mortgage operates exactly the opposite of a traditional mortgage. What is not so obvious, but should be, is that the best features of a reverse mortgage are also the opposite of traditional mortgages. What does this mean?: It means that the particulars one is looking for in a reverse mortgage are not the same things they look for in a traditional mortgage. This article will show why reverse mortgages have to be interpreted completely different than traditional mortgages. Unfortunately, most loan professionals have not recognized this and are selling these products, to the detriments of their clients, incorrectly. The program a senior takes is determined primarily by 3 things:
- Is the reverse mortgage temporary (less than 5 years) or lifelong?
- What are their immediate cash needs and monthly income needs?
- Which program maximizes my benefits?
Who Is A Candidate For a Reverse Mortgage?
- A reverse mortgage candidate is one, primarily, who wants to stay in their home but can’t afford to live there without using credit cards or creating more debt to make ends meet.
- One who needs a large some of money for some capital improvements on their home or for some other reason but can’t pay back a normal loan to borrow it.
- One who is seriously depleting their reserves to pay their bills and will use up all of their reserves paying their bills before they die.
- One who has a lot of debt, but even if they consolidated all of their bills, they still would not be able to make their normal mortgage payment.
- One who is selling their home but does not have the buying power to get the home they want. In these cases, the senior can put only 50% down on the new home and make no payments on the mortgage for the rest of their lives and/or bank the rest of their sale proceeds for reserves. Reverse mortgage purchases ALWAYS involve closing costs, unlike refinances.
Misconceptions Loan Agents are Selling to Seniors
- There Are Always Closing Costs Associated with ALL Reverse Mortgage—WRONG!
- This is not true. There are a couple of ways to avoid all the closing costs, except for the up front mortgage insurance premium, and all prepaid expenses under the right program discussed and displayed later.
- A Fixed Rate Is Always the Most Important Priority in a Reverse Mortgage—WRONG!
The priorities of reverse mortgage are not the same as traditional mortgages. Contrary to popular belief, taking a fixed rate is not necessarily the best choice and should only be considered in rare situations. Only in cases where the reverse mortgage is less than a life time choice or temporary, should a fixed rate even be considered in this writer’s opinion, for reasons which will become obvious later. In most other cases, taking a fixed rate mortgage can hurt you in 3 big ways:
- You will have access to much less equity (Trapped Equity) in your home.
- You will not be able to have access to a line of credit, a huge benefit because the line pays a return in appreciation every year. I will prove this to you later.
- There will always be much higher closing costs.
Well, won’t you pay more interest if the rate rises over time than if you settle on a fixed rate? Isn’t that more costly and risky? Yes this it is true, but it is less of a priority than not having access to your equity. The benefit of a fixed rate traps equity in your home and taking a fixed rate forces the borrower to take out all their money at once. A variable allows for a line of credit that does not have to be accessed immediately and used. Additionally, the line of credit amount pays a 4% return on your money, or probably more exact, gains 4% more in appreciation every year. So if one has a $100,000 line of credit attached to their reverse mortgage, they will gain $4,000 a year in more usable equity unless they use the line of course.
Having more equity access is more important, and in the long run, will most likely accrue less interest than choosing a fixed rate. Why? Because you will have to accrue interest on more principle because you have to max your loan amount to get your equity out on fixed rates, something you don’t have to do on variables, you can have a credit line instead.
Okay, so why can’t I just take a $50,000 fixed rate loan then? Because it is not worth the costs to do that. The loan is too expensive. You also lose all access to the rest of your equity FOR THE LIFE OF THE LOAN.
Getting the Least Amount of Cash Out is Most Prudent—Wrong!
Achieving no closing costs reverse mortgage loans are almost impossible to do if you don’t take out high loan amounts of $150,000 or more. Again, you have to look at this totally different than you do on traditional loans. After you take these large sums you can pay big portions back over the next couple of months. Unfortunately, if you pay all of it back, your loan agent who helped you do this will, will have the whole rebate he received to pay your closing costs charged back to him, but still, there is no penalty to you. Always go for maximum line of credit you can to get the 4% return and also to achieve the most important goal for long term reverse mortgages: UNTRAPPED ACCESS TO THE MAXIMUM EQUITY IN YOUR HOME. Not having access to all your equity during this lifetime choice, is the same as losing the equity since you can’t access it. The only exception is if the loan you need is temporary, then none of this applies. Also, most lenders are willing to pay all your closing costs and not charge the maximum $6,000 origination fee and pay all your other closing costs if your funded balance is $130,000 or more.
Reverse Mortgage Are Good Short Term Fixes—Wrong!
Reverse mortgages are terrible short term vehicles especially if one is talking about small loan amounts. Short term needs almost always involve small loans. Reverse mortgages are expensive and were not created to be short term vehicles. In only this situation should a senior consider a fixed rate if equity preservation in the property is important after 5 or 10 years, but even so, the variable may still be more viable in some situations.
