Reverse Mortgage Insider Has Some Advice for Senior
Citizens on Using These Loans
‘A reverse mortgage is complex transaction and not an
inexpensive loan, but when used correctly, it can greatly enhance the
lives of senior borrowers’
by Michael Branson, All Reverse Mortgage Company
July
31, 2009 - I was contacted recently by a freelance writer who wanted to
get some dirt on reverse mortgages. He said he could find people all
over the place who could sing the praises of the reverse mortgage, but
he wanted to find someone who could give him the pitfalls and things to
watch out for. This got me thinking…there are a number of times I do not
recommend the usage of a reverse mortgage and there are several things
to watch for, but I would not necessarily call them “pitfalls.”
A reverse mortgage is a complex financial
transaction and it is not an inexpensive loan, but when used correctly
and under the right circumstances, it can greatly enhance the lives of
the senior borrowers who obtain one.
So my advice to senior borrowers revolves around
education and not the ominous “beware” tone that it appeared this writer
was prepared to take.
Purchase Reverse Mortgage Program allows seniors to
purchase a new home, never make a mortgage payment for as long as they
live in the home, may require sizable down payment
First, I say to borrowers, "Choose the correct
option to meet your needs."
Borrowers can choose a fixed rate or an adjustable
rate and fixed rates sound great, but they are what is called a “closed
end instrument” and require the borrower to take the entire loan at the
very beginning of the transaction.
For borrowers who are paying off an existing
mortgage and need all their funds to pay off the current loan, this is
no problem. For a borrower who has no current lien on their property or
a very small one, this would mean that they would be forced to take the
entire eligible mortgage amount on the day the loan funds.
This might give a borrower $200,000, $300,000 or
more in cash from the very first day that they do not need at the time
and on which they are accruing interest. This can also have an adverse
affect on some seniors with needs-based programs.
Seniors on Medicaid and some other needs-based
programs would impact their eligibility by having the sudden addition of
the liquid assets and the senior would wind up funding their own
Medicaid with the equity in their home.
For these seniors, a careful consultation with
family members and a financial counselor is advised to be certain that
they chose an option such as the line of credit where funds can be made
available to them during times of need, but they never have excess funds
sitting in accounts to affect their eligibility.
A borrower who is planning on using only a portion
of their funds monthly need not pay interest on the entire amount from
the very start, eroding the equity unnecessarily fast. An adjustable
rate will accrue interest at a much lower rate at today’s rates, but has
a 10% cap and can go much higher if rates rise in the future. However,
the adjust rate program allows for more options for borrowers to receive
their money.
They can choose a lump sum; a line of credit
against which they can draw at any time and which cannot be frozen like
many of the bank Home Equity Lines of Credit (HELOC’s) are going through
now and which grows on the unused portion annually; a monthly payment
for a set term or for life; or a combination of all of the options. The
adjustable rates are currently much more flexible to meet borrowers’
needs.
One of the things that can determine the amount for
which borrowers will ultimately qualify is the rate at which the loan
accrues interest. When the margins on the adjustable rates were lower
and the fixed rate was higher, the adjustable rates gave borrowers more
money in their pockets in the form of eligibility.
Now, most borrowers we run through the
reverse mortgage calculator receive more money on the fixed rate
program. This is extremely important to know if you are trying to get as
much as possible to pay off an existing lien. It also means that the
higher the margin, the less money the borrower will receive and the
faster interest on the loan will accrue.
So the thing to look for in a reverse mortgage here
is definitely the rate on a fixed rate or the margin on an adjustable
rate that is being quoted.
Watch for Fees Being Charged
Another thing seniors need to look out for in their
reverse mortgages is the fees being charged. The fees are highly
regulated by HUD and therefore, the lenders cannot charge fees like
processing fees, administration fees and things like that, but there are
some things borrowers can watch to help themselves!
First is the servicing fee. The amount of the
servicing fee will determine the servicing set aside, which ultimately
determines how much money goes to the borrower.
The servicing fee set aside is not a fee at the
time you close your loan, it is money that is not made available to you
and is left in the equity of your property that is meant to go toward
the payment of the monthly servicing fee.
On a regular or forward mortgage, you don’t see
this fee, you simply pay anywhere from .25% to .50% higher rate which
goes to the servicing company and is built into the rate you pay.
Reverse mortgages use a flat dollar amount instead,
and the set-aside is determined up-front due to the fact that the
balance of the loan is increasing, not being paid down by the borrower.
The maximum origination fee is set by HUD, but they
do not require every lender to charge only the maximum! Check around and
see if you might be able to get a better origination fee.
Watch for Long-Term Annuity Pitches
Finally, one of the biggest things for seniors to
watch out for with their reverse mortgage has nothing to do with the
actual mortgage at all…it’s becoming aware that there are those who are
going to try to get you to part with your money!
Do not consider investment strategies which include
long term annuities which will not allow you access to your funds for
long periods of time without penalty.
Be wary of reverse mortgage originators who seem
overly-anxious to help you invest your loan proceeds. Always remember
that this is your home equity and with some careful stewardship, it
should take care of you but if not guarded, can be taken away, leaving
you with a loan on your home and nothing to show for it.
It seems most of the time I see a “reverse mortgage
horror story” it is usually due to what happened to the money and not
the reverse mortgage itself. With some careful planning by the senior
borrowers, getting the family and/or a trusted financial advisor
involved and knowing what to watch for, a reverse mortgage can be a
viable retirement tool for many borrowers.
It’s just a matter of making sure you put the
seniors’ best interest first and knowing what to look out for when doing
reverse mortgages for senior homeowners that keep those horror stories
from happening in the first place.
Guest opinion is by Michael Branson, CEO of All
Reverse Mortgage Company
All Reverse Mortgage Company is a
HUD Approved Lender offering all available Government Insured
Reverse Mortgage Products. ARMC is a member of
NRMLA (National Reverse Mortgage Lenders Association) and
NCPC (National Care Planning Council). Home page:
http://allrmc.com/index.php
Keep up with the latest news for senior citizens, baby
boomers
July
31, 2009 - I was contacted recently by a freelance writer who wanted to
get some dirt on reverse mortgages. He said he could find people all
over the place who could sing the praises of the reverse mortgage, but
he wanted to find someone who could give him the pitfalls and things to
watch out for. This got me thinking…there are a number of times I do not
recommend the usage of a reverse mortgage and there are several things
to watch for, but I would not necessarily call them “pitfalls.”
