Approximately one-third of all Americans own their homes free and clear. Nevertheless, many seniors can end up losing their homes because they don't have the money to pay their property taxes, or they get hit with high medical bills or encounter a situation in which they need the equity from their home but can't qualify for a loan.
For many, a reverse mortgage may be a great way to avoid losing their home.
the last few years, reverse mortgages have gained a somewhat negative
reputation in the real estate community. In some circumstances,
however, these can be a tremendous blessing to seniors who may be at
risk of losing their homes.
How reverse mortgages work
reverse mortgage is a special type of home loan that lets you convert a
portion of the equity in your home into cash. The equity that you
built up over years of making mortgage payments can be paid to you.
However, unlike a traditional home equity loan or second mortgage, HECM
(home equity conversion mortgage) borrowers do not have to repay the
HECM loan until the borrowers no longer use the home as their principal
residence or fail to meet the obligations of the mortgage.
can also use a HECM to purchase a primary residence if you are able to
use cash on hand to pay the difference between the HECM proceeds and
the sales price plus closing costs for the property you are purchasing.
be eligible for a FHA HECM, the FHA requires that you be a homeowner
62 years of age or older, own your home outright, or have a low
mortgage balance that can be paid off at closing with proceeds from the
reverse loan, and you must live in the home."
choose to receive your payout as a lump sum, a lifetime monthly
payment, a monthly payment for a limited term, a line of credit, or a
combination. You would never owe more than the value of the home,
regardless of the amount paid out.
Reverse mortgages require
points and fees, which often run about 5 percent of the property value.
On a $400,000 property, that's $20,000. The homeowner must
occupy the property as his or her primary residence. If the homeowner
becomes ill and is away from the home for more than 365 days, the
reverse mortgage becomes due and/or the property must be sold.
the homeowner dies, the property goes to the lender upon the death of
the borrower. In some cases, the property may be sold, provided that
both the interest and principal paid by the lender can be reimbursed.
If this is the case, then the balance could go to the deceased's
estate. As a rule of thumb, the younger the borrower is
(minimum age is 62), the smaller any monthly payment would be. For more
information on reverse mortgages, visit the Federal Trade Commission website.
A reverse mortgage retirement plan: reality or pipe dream?
recently had a conversation with one of my former colleagues from
Southern California who is eagerly awaiting his 62nd birthday so he
can get a reverse mortgage. He is a sophisticated investor who has owned
(and lost) multiple properties over the years. His game plan for
retirement is to do what most investors love to do: work with someone
else's money. Here's what his plan is:
1. When he turns 62, he
will purchase a four-unit building where he will put 40 percent down,
owner-occupy one unit, and rent out the other three units.
2. He will then obtain a reverse mortgage, which he will use to pay down the principal as rapidly as possible.
result: The reverse mortgage refunds his down payment each month while
he collects the cash flow from the building. If he lives long enough,
he has paid zero for the property since the rents and reverse mortgage
will cover the cost of the property plus covering all his living
expenses. Since he has no heirs, he's not concerned about what happens
after he dies. While all of this sounds great, there are a host of
issues that this individual is not taking into consideration that could
1. Is the mortgage lender reputable?
HUD/FHA is one of the legitimate reverse mortgage lenders. It's
important to verify that any reverse mortgage lender the borrower uses
2. Lump sum payments can be dangerous.
A report by the Consumer Financial Protection Bureau found
that about 70 percent of all borrowers elect a lump sum payment,
oftentimes to handle bills or other emergencies. The challenge is that
once the money is gone, the reverse mortgage continues to deplete the
borrower's remaining equity. The result is that if the owners are
unable to keep up with property tax increases or their insurance, they
can still lose their home.
In fact, the report says that about
10 percent of all homeowners with a reverse mortgage are now facing
foreclosure, largely due to the fact that they took lump sum payments.
Part of the reason so many people take this option is that the lump sum
payment (at least for the HUD/FHA product) is at a fixed rate, while
the monthly payment option is at an adjustable rate.
3. A little-known dirty secret.
In many cases where people have remarried, the house may be in one
person's name. In that case, if the person who is on the mortgage dies,
the surviving spouse could be evicted from the property.
bottom line is that reverse mortgages can be a tool to help an owner
stay in his property, but they should be considered more as a last
resort when all other options have been exhausted.
Source: Bernice Ross, CEO of RealEstateCoach.com, and author of the National Association
of REALTORS®' No. 1 best-seller, "Real Estate Dough: Your Recipe for
Real Estate Success."