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How the Reverse Mortgage Line of Credit Works

Making the right decision regarding a reverse mortgage includes deciding on the type of HECM reverse mortgage. The reverse mortgage line of credit is a very powerful option in the suite of reverse mortgage choices. Often overlooked due to borrowers reluctance to tie themselves to an adjustable rate loan, the LOC option can be flexible and provide long-term security that many of the other HECM options do not.

What is a HECM?

At the risk of boring some of my readers, let me at least summarize what a reverse mortgage is (in case you happened on this page before viewing a description of reverse mortgages).

A Home Equity Conversion Mortgage (HECM for short) is a federally insured reverse mortgage. Reverse mortgages use the equity in your home to pay you and/or allow you to live in the property mortgage free. It’s a very simple concept, the money you have built up in your home is gradually released back to you!

How do I get paid?

The HECM reverse mortgage has four options for paying you. They are:

Lump Sum – Much as it says in the title, the loan disburses a one-time lump sum payment to you. Any remaining funds are used to maintain the loan payments and allow you to live in the home mortgage payment free. The Lump Sum option can be, and is often, paired with the line of credit (LOC) option we will discuss momentarily.

Term Payments – Term payments are simply taking the lump sum you would have received and dividing it out over a number of months and having those payments sent to you. For example:

Lump Sum Distribution: $100,000
Term Months 20
Term Payment = $100,000/20 = $5000 per month

Often, term payments provide a system of secure payments while also allowing for a modicum of control for those of us that are likely to let a lump sum payment burn a hole in your pocket!

Tenure Payments – Tenure payments are like term payments but are guaranteed for life. You will receive your payment as long as you are alive and own the home and are living there. Certainly some great security, but generally substantially smaller payment amounts.

Line of Credit (LOC) – The reverse mortgage line of credit works by providing you with a reserve of funds available at your convenience. The funds are essentially stored for your use and you can access them at your leisure. The bonus is that they actually grow with time! In fact, many seniors use the lineup credit with a reverse purchase mortgage and line of credit. (Try the link if you’d like more information on the reverse purchase loan)

The HECM Line of Credit

One of the greatest benefits of how the reverse mortgage line of credit works is that the unused portion of the line of credit grows at the loans interest rate. So if the loans interest rate is 4.5% then the line of credit will grow by 4.5% per year. Assuming a $200,00 line of credit untouched for 10 years, here is an illustrated example:

So as you can see, in 10 years your line of credit would have grown by over $100,000! That’ some pretty sweet purchasing power!

Only pay for what you use!

Another benefit to how the reverse mortgage line of credit works is that you’re essentially only charged for what you use! What I mean by that is that you only pay interest on the portion of the LOC that you’ve accessed. So if you have a $200,000 line of credit and you’ve only drawn $30,000 of that line, you will only be paying interest on the $30,000. You have access to the other $170,000 but aren’t charged interest for it until you use it.

Additionally, you are always allowed to pay down the mortgage balance or line of credit at any time. So say you hit the lotto and you want to pay the loan off, you are more than welcome to. Without penalty of any kind!

Options

This all feeds into the overall flexibility the line of credit provides the reverse mortgage. You will have complete control of not only the funds but when and how you access those funds. This means that you won’t be offsetting the interest you earn on the money you would receive a lump sum by paying interest on them in the mortgage.

We also all know that the rates that banks lend money are FAR higher than the rates they pay on deposits, well this is your opportunity to turn the tables. The rate of interest on your line of credit will be the same as the rate of interest you would borrow.

Finally, LOC interest rates generally outpace the rate at which homes increase in value, thus, for the portion of the value of your home that is represented by your LOC, your home value will grow faster than the 2% that homes generally grow. This is a huge advantage. During the financial crisis of 2008, had you had a HECM reverse mortgage line of credit your home could have essentially gained in value rather than sinking with the rest of the market!

Always consider….

I can’t think of anything in life that does not have a flip side and LOC’s are no different.

One turnoff for many people is that the HECM requires that the LOC be combined with the adjustable rate program. You are not able to get the LOC on the HECM fixed rate mortgage. This means that you will be subject to whims of the rate market.

Being subject to the rate market is difficult in these time as we are in a rising rate environment. The good thing is that while you are subject to rising rates, you also benefit from them through the growth of your credit line.

One last item on rates, because of the nature of how HECM reverse mortgage limits are calculated, should you want a reverse mortgage, please take advantage of the program sooner rather than later. Rising rates equal lower loan amounts. So the sooner you lock in your HECM loan, the better.

Summing up.

In summary, the HECM reverse mortgage line of credit is a strong tool for borrowers. If used properly it can provide tremendous peace of mind by adding a safe and secure reserve for seniors.

We here at truehecm.com are always listening. If you have a question or comment please reach out to us. You can comment below or you can contact us through our contact page. We would also love your feedback through a
review as well!

And, if you are in California, our HECM reverse mortgage specialists are always ready to help you determine if the program is right for you. Just drop us a line through the contact page and well get to you ASAP!

Also, check out our about page for a little more information about us!

For additional reading try:

Reverse Mortgages: A Risk Management Tool for Retirement Distributions

How Does The Line Of Credit For A Reverse Mortgage Work?

About the author: Sean Thomas is a businessman, brokerage owner, blogger, athlete, father, and husband. Not necessarily in that order! Having been in the mortgage and real estate industry since 2005 he has a deep knowledge of the real estate and mortgages their trends and quirks. Follow Sean on Twitter for more tips, information, and musings.

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Reverse Purchase Loan Explained – Buy a Home with a Reverse Mortgage!

If you’re looking to “right size” your life, the HECM reverse purchase mortgage program might be right for you! Many seniors and their family members are not aware that they can use a reverse mortgage to purchase a home and remove the burden of a mortgage payment. The reverse purchase program can be a great option for seniors looking to downsize their home, relocate to a more hospitable climate, move closer to children and grandchildren, or for any other reason deemed appropriate.

We will endeavor to cover the following:

1. A quick primer on what a HECM reverse mortgage is.

2. General qualification standards for reverse mortgages as well as standards specific to the HECM reverse purchase mortgage.

3. The specifics of how a HECM reverse purchase mortgage works.

4. Benefits and drawback of the HECM reverse purchase mortgage.

HECM Basics

The HECM reverse purchase mortgage program is a powerful tool for seniors interested in taking control of their retirement. Let’s take a look at the details of how it works.

Thank goodness it’s not the theory of relativity!

First, for those not acquainted with the HECM reverse mortgage, let’s get a quick understanding of what a reverse mortgage is. Reverse mortgages are a mortgage that unlocks the equity in a home to allow the home to pay for its self. Essentially, you will draw from the equity in the home to pay the mortgage payment. This means that instead of you paying the mortgage on a monthly basis and reducing your loan balance, you will add that payment to your mortgage balance each month.

You are guaranteed no more mortgage payment and should you choose to, you will own the home and be able to live in it for the rest of your life. The homeowner only needs to guarantee that the property will be owner-occupied and that they will maintain the home, and that taxes and insurance will be paid. Again, to be clear, as long as you take care of the three items previously mentioned you will be able to live in the home, even if the loan balance became greater then the home value! That is security!

Reverse purchase mortgages can provide security. Photo by James Sutton on Unsplash

For those who might be skeptical, the reason that you are able to do this is due to the fact that the FHA (Federal Housing Administration) guarantees the loan. This means that should the loan balance exceed the home value the FHA will step in and make sure that the lender is made whole. Wah-la! You AND the bank are protected!

HECM for Purchase

Now let’s discuss the reverse mortgage for purchase! The reverse mortgage for purchase uses the equity in your home to pay for the mortgage on your new home. Often, a homeowner sells their current residence and use the proceeds to purchase a new home. For example, let assume that an owner sells their current residence for $250,000. The home had a small mortgage balance of $15,000. The seller cleared $250,000 after all closing costs and the mortgage was paid.

The seller uses $228,000 as a down payment on their new home which they are purchasing for $425,000. The reverse mortgage would require that the buyer bring $228,000 to close and the remainder of the purchase price and closing costs would be covered by the reverse mortgage.

HUD’s New Rule

In September of 2017, the reverse purchase rules were changed to allow sellers to contribute to pay certain fees associated with the transaction. Sellers are allowed to pay for home warranty fees, fees required to be paid by the seller by state law and fees that are typically paid by the seller in the subject market.

If the purchaser wanted to make a larger down payment, say $300,000, the added down payment would have appeared as a reverse mortgage line of credit. This line of credit would be accessible to be used as the owner sees fit. Even better it grows at the interest rate of the reverse mortgage. If you would like more information on the HECM reverse mortgage line of credit, just click one of the hyperlinks in the text above!

 

Putting the reverse purchase pieces together!

The client would have a mortgage-free property that only requires they pay taxes, insurance and continue to maintain the property. This is a long-term solution for many seniors. As a retirement strategy, it allows seniors to maintain or upgrade a lifestyle without having to access retirement savings accounts.

Pro & Con

Reverse purchase transactions are a very powerful tool for retirement planning. A reverse purchase offers seniors the option to upgrade, downsize, or relocate as they see fit without the added burden of a new mortgage payment. For fixed-income retirees, this can often crucial.

The other side of the coin is that the HECM reverse mortgage for purchase program uses the equity in the home to satisfy the mortgage’s obligations. This means that each month the equity in your home will decrease by the amount of these mortgage obligations. If you are planning on leaving this equity to your heirs be aware that it will be decreasing on a monthly basis. You will need to either pay off the reverse mortgage or transition and the asset passes on to your heirs to stop the loss of equity. This can offer a substantial benefit as well. A reverse mortgage allows the loan balance to be greater than the value of the home! So, should you outlive the equity in your home, you know you will not be forced to relocate! You will need to maintain the taxes, insurance, and property!

Summing Up

In summary, the HECM reverse mortgage for purchase program is a tremendous tool for managing retirement and retirement assets. It can provide the option to upgrade, downsize, or relocate to seniors who may be limited by a fixed income as well as those just looking for ways to manage their home equity. Often, a home is the most important and lucrative investment a person will make. The HECM reverse mortgage and reverse mortgage for purchase program can allow for a way to access those funds.  It also allows for the retention of your residence. Retention of a home is often a paramount concerned for seniors as they enjoy their golden years.

Truehecm.com

We here at truehecm.com are always listening. If you have a question or comment please reach out to us. You can comment below or you can contact us through our contact page. We would also love your feedback through a review!

If you are in California, our HECM reverse mortgage specialists are always ready to help. Just drop us a line through the contact page and well get to you ASAP!

Also, check out our about page for a little more information about us!

For additional reading try:

FHA Reverse Mortgages (HECMs) for Seniors

Is it smart to use a reverse mortgage to buy a home?

About the Author

About the author: Sean Thomas is a businessman, brokerage owner, blogger, athlete, father, and husband. Not necessarily in that order! Having been in the mortgage and real estate industry since 2005 he has a deep knowledge of the real estate and mortgages their trends and quirks. Follow Sean on Twitter for more tips, information, and musings.

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California Reverse Mortgage Law

California Reverse Mortgage Law provides extra protections to seniors considering obtaining a reverse mortgage. Many have accused the Golden State of being regulation heavy, but in this case, the minor inconvenience goes a long way toward protecting what can often be a vulnerable population.

This short blog will cover the following:

1. Basic Reverse Mortgage Requirements

2. Additional Requirement for California Residents

Reverse Mortgage Basics

To qualify for a reverse mortgage a borrower needs to fulfill the following requirements.

Age – Potential applicants must be 62 years old or older. There is no upper age limit for an applicant. Also, federal laws prohibit discrimination in mortgage lending based on age. Thus, no matter how old an applicant is they are eligible to apply for a reverse mortgage.

Home Equity – The borrowers home must have sufficient equity to borrow against. The younger the borrower the greater the equity need be. With the changes made to the HECM reverse mortgage program in October of 2017, need greater equity than at any time since the financial collapse,

Counseling – To avoid confusion and misinformation, a potential borrower must attend a HECM reverse mortgage counseling session. These sessions are offered in-person and over-the-phone. The counseling will cover most of the major questions regarding reverse mortgages and will allow for questions to be answered.

California

Prior to taking the counseling session, and prior to the senior providing the loan officer with a completed reverse mortgage loan application, California reverse mortgage law provides 2 additional disclosures and a cooling off period.

The Important Notice to Reverse Mortgage Loan Applicant form is required by state law and must be signed before the borrower begins the application process. The form advises prospective borrowers that they are considering entering into a binding legal agreement, that they are required to attend counseling and that while allowed senior groups advise against using the proceeds from a reverse mortgage to purchase an annuity.

California Reverse Mortgage Worksheet Guide

Also, Californians are required to sign the form “Reverse Mortgage Worksheet Guide – Is a Reverse Mortgage Right for Me?”. This form contains five of the more commonly asked questions with regard to a reverse mortgage. They are:

1. What happens to others in your home after you die or move out? Answer – Once the borrower dies, moves or is absent from the property for 12 months, the loan becomes due.

2. Do you know that you can default on a reverse mortgage? – Importantly, there are obligations to a reverse mortgage and if they are not maintained the loan can be placed in default and lead to foreclosure. You are required to pay your property taxes, insurance, and maintenance.

3. Have you fully explored other options?

4. Are you intending to use the reverse mortgage to purchase another financial product?

5. Do you know that a reverse mortgage may impact your eligibility for government assistance programs? – Income received from investments will count against individuals seeking government assistance.

The reverse mortgage worksheet guide will direct the potential borrower to ask their HECM reverse mortgage counselor about any of these questions they are unclear on.

HUD Counseling

Finally, a potential borrower should receive a list of approved HECM reverse mortgage counselors. The list will provide the name, phone number, and address of counselors in their area.

California Cooling

The last line of California reverse mortgage law safeguards is the 7 day cooling off period. Once an individual has completed the required reverse mortgage counseling, a 7 day “cooling off period” is required to give the potential borrower the opportunity to rethink the decision. After completion of this period, the application can be taken and submitted to the lender and the reverse mortgage underwriting process begun.

Federal Right of Recision

Although not part of California reverse mortgage law, the true final line of defense is the federally mandated 3 day right of rescission. This is the 3 day period (not to include federal holidays or Sundays) immediately following the signing of the loan documents. During this time, should the borrower change their mind, the transaction can be canceled.

In summary, California reverse mortgage law has done it’s best to protect vulnerable seniors from potentially predatory transactions with multiple layers of protection. Ample disclosures and multiple cooling off periods provide seniors with the time they need to be sure that a HECM reverse mortgage is the right transaction for them. An HCEM reverse mortgage can be a powerful tool for seniors, but it isn’t the right tool for all seniors. California has done its part to try and make sure that all seniors get to make this determination!

There are many other features to the HECM reverse mortgage including the reverse mortgage line of credit, the HECM reverse mortgage for purchase program, and many others. If you have questions about these or any other reverse mortgage or lending-related item please click a link or contact us through our contact page.

Truehecm.com

We here at truehecm.com are always listening. If you have a question or comment please reach out to us. You can comment below or you can contact us through our contact page. We would also love your feedback through a
review!

And, if you are in California, our HECM reverse mortgage specialists are always ready to help you determine if the program is right for you. Just drop us a line through the contact page and well get to you ASAP!

Also, check out our about page for a little more information about us!

For additional reading try:

FHA Reverse Mortgages (HECMs) For Seniors

California Law: What to know about reverse mortgages

About the author: Sean Thomas is a businessman, brokerage owner, blogger, athlete, father, and husband. Not necessarily in that order! Having been in the mortgage and real estate industry since 2005 he has a deep knowledge of the real estate and mortgages their trends and quirks. Follow Sean on Twitter for more tips, information, and musings.

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Reverse Mortgage with Bad Credit?

Reverse mortgage with bad credit? We get this question all the time. Reverse mortgages have become a very valuable option for the ever-growing senior population. As is often the case, when you need a loan, sometimes, it’s hard to get one. While in the past, credit was typically not an impediment to a reverse mortgage, now there are credit standards associated with the program.

In March of 2017, Housing and Urban Development (HUD) instituted the financial assessment for HECM reverse mortgage transactions in an effort to reduce reverse mortgage delinquencies. This was an earthshaking change to the reverse mortgage market. It was feared that it would have the effect of locking reverse mortgage applicants with bad credit out to the market.

A little about what a reverse mortgage is.

As always here at truehecm.com, let’s start a the beginning by explaining what a HECM reverse mortgage is. A reverse mortgage is essentially just what it says, a mortgage in reverse. That means that rather than slowly paying your home off over time and building equity, you will use the equity you’ve already built in your home to pay you.

It may be the only way available to unlock the equity in your home as a cash benefit to you while retaining ownership of the property AND not incurring a mortgage payment! This means that the equity in the home will decrease month by month as the equity is used to pay the mortgage payments.

Reverse mortgage myths!

Lets dispelled a few myths here. You are not selling your home to the bank. You retain ownership of the property and have the right to pay off the reverse mortgage at any point you see fit. Should you transition while in the mortgage, your family members or designated beneficiary will have the right to dispose of the property in the manner they see fit for a period of up to 12 months. This means they can refinance or pay the loan off and keep the property or they can sell the home to satisfy the loan and the remaining equity will be theirs.

Don’t let the hype fool you! Reverse mortgages are not BAD! They are not right for everyone, but for lots of individuals, couples, and families reverse mortgages are a tremendous financial tool to allow seniors the financial freedom and security owning a home WITHOUT a mortgage payment provides

What are the requirements?

There are a few standard requirements that you must meet in order to obtain a HECM reverse mortgage or HECM reverse purchase loan.

Age – All financially obligated homeowners must be 62 years of age or older. This means that anyone on the title and any existing mortgages must be 62 years old or older.

Equity – The home must have equity. In most cases, equity must be greater than 50% of the value of the home. The actual equity requirement is dependent upon the age of the youngest title holder. (i.e. husband is 72 and wife is 68 then equity requirement is based on the wife’s age of 68)

Primary residence – The property that is the subject of the transaction must be your owner-occupied primary residence. This means it must be the home you live in.

Federal debt cannot have defaulted. Government Debt Defaults – You can not have any currently defaulted government debt obligations. This means student loans, FHA mortgages, unpaid federal taxes, etc. These obligations will have to be paid off if you want to qualify for a reverse mortgage with bad credit.

What’s changed?

These general requirements for the HECM reverse mortgage loan and the HECM reverse purchase loan have been in place for some time. Unfortunately, as of March of 2017, HUD implemented their financial assessment guidelines for HECM transactions moving forward. This raised the bar for reverse mortgage transactions substantially and may have locked many borrowers out of the reverse mortgage market.

The new guidelines look at income, credit and derogatory title items when assessing a reverse mortgage applicant’s file.

The brass tacks – Income!

HUD has implemented a residual requirement when assessing an applicant’s income. This means that after obligations (bills, mortgage, taxes, payments, etc.) the borrower must have a set amount of available money on a monthly basis. The number of people living in the household determines the total “residual income” required. For households of one person, the residual income requirement is $589 and increases to a maximum of $1160 for a household of 4 or more.

Let’s clear that up a bit by illustrating a couple of items.

A “household” per HUD is the number of people who reside at the residence. This could be just the homeowners or it could include children, grandchildren, borders, or anyone else making the home their residence.

“Residual income” per HUD is the amount of money left after subtracting any debts listed on the credit report as well as housing obligations (taxes & insurance). For example:

Credit Card Payment $53
Auto Payment $254
Home Insurance & Taxes $265
Total: $572

Single Household Income $1300

Residual Income: $728

In this example, the client is single and has a 1 person household, therefore, they would need residual income of $589. In the example, they have $1300/month in income and $572/month in obligations. This leaves them with residual income of $728/month. THEY PASS! HOORAY!

The key to passing the income requirement is the way a transaction is structured. A reverse mortgage line of credit can sometimes be the answer. If you have questions regarding income requirement please reach out to us through our contact page or comment and we will get back to you as soon as we can.  We are always here to help!

Credit!

The second hurdle added was credit qualification. This can be a challenge for many clients in need of a reverse mortgage. If you have, let’s say, dented credit, HUD may take a second look. In many cases, this may mean just writing a Letter of Explanation (LOE) for the underwriter outlining why the derogatory credit occurred. In more severe cases other remedies may be required.

Reverse Mortgage with Bad Credit? DO NOT LET DEROGATORY CREDIT DISCOURAGE YOU FROM APPLYING FOR A HECM REVERSE MORTGAGE. There are many ways to skin a cat, as they say, and derogatory credit is more often than not overcome.

Often the way the derogatory item is presented in the LOE is key to passing the credit requirement and getting a reverse mortgage with bad credit?. If you have questions regarding the credit requirement please reach out to us through our contact page or comment and we will get back to you as soon as we can.  We are always here to help!

The property!

Finally, in the loan process title events are scrutinized.  Any delinquency, judgment, or lien will be taken in to account by the underwriter.

This category can vary tremendously according to each client and thus describing the myriad options is difficult. If you have questions regarding the credit requirement please reach out to us through our contact page or comment and we will get back to you as soon as we can.  We are always here to help!

Summing up.

HUD’s financial assessment requirements have added a new layer of complication to the HECM Reverse mortgage process, therefore, obtaining a reverse mortgage with bad credit requires extra care. Ostensibly This was done to help protect HUD from rising reverse mortgage delinquencies, but it has had the effect of discouraging qualified applicants from applying. HUD may have created a solution for a problem that was already fixed. Many of the delinquencies in the reverse mortgage market are being caused by mortgages originated before new loan-to-value ratios implemented after the financial crisis.

Reverse Mortgage with Bad Credit? Don’t let the new hurdles trip you in your quest for financial freedom. The new regulations are easy for an experienced reverse mortgage consultant to deal with.

Truehecm.com

We here at truehecm.com are always listening. If you have a question or comment please reach out to us. You can comment below or you can contact us through our contact page. If you find the info helpful we would also love your feedback by giving as a 5-star review!

And, if you are in California, our HECM reverse mortgage specialists are always ready to help you determine if the program is right for you. Just drop us a line through the contact page and well get to you ASAP!

For additional reading try:

https://www.hud.gov/program_offices/housing/sfh/hecm/hecmabou
https://www.hud.gov/sites/documents/14-21ML.PDF
https://www.hud.gov/sites/documents/14-22ML.PDF
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Can Reverse Mortgages Help Solve Credit Card Debt?

Can reverse mortgages help solve credit card debt?

Seniors are often financially unprepared for retirement. Unfortunately, many retirees are saddled with excess debt and little in the way of retirement savings. With declining income prospects it is important for seniors to find a way to stop the debt bleeding as soon as possible. One question I’ve been asked is can reverse mortgages help solve credit card debt? And the short answer is yes, but let’s get a bit more extensive answer.

What is a reverse mortgage?

I always like to start with a general understanding of what the FHA home equity conversion mortgage is. If you are familiar with the loan please feel free to skip ahead.

Home Equity Conversion Mortgages (HECM for short) are a federally insured reverse mortgage. Reverse mortgages use the equity in your home to pay you and/or allow you to live in the property mortgage free. It’s a very simple concept, the money you have built up in your home is gradually released back to you! The HECM reverse mortgage has four options for paying you.

How can I get paid?

Lump Sum – The loan disburses a one-time lump sum payment to you.  Seniors use the remaining home equity funds to maintain the loan payments and live in the home mortgage payment free. The Lump Sum option can be, and is often, paired with the line of credit (LOC) option we will discuss momentarily.

Term Payments – Term payments are simply taking the lump sum you would have received and dividing it out over the numbers of months of your choosing. For example:

Lump Sum Distribution: $100,000
Term Months 20
Term Payment = $100,000/20 = $5000 per month

Tenure Payments – Tenure payments are like term payments but are guaranteed for life. You will receive your payment as long as you are alive and own the home and are living there. Certainly some great security, but generally substantially smaller payment amounts.

Line of Credit (LOC) – The reverse mortgage line of credit works by providing you with a reserve of funds available at your convenience. Lines of credit are stored funds that you can access when you need them.

Credit card corrosion!

Now that we have a handle on what a reverse mortgage is let’s get to the meat of the problem, controlling credit card debt with a reverse mortgage. Retirement is a game of making your resources last as long as possible while maintaining your lifestyle. This can often be a difficult balancing act!

Credit cards are one of the most corrosive forms of debt a senior can have when trying to find the financial balance needed to retire. Per Creditcard.com the average credit card APR is roughly 16%! As you can imagine that kind of interest rate is unsustainable.

Let’s say you were carrying $5000 in credit card debt. With an APR of 16%, your yearly interest on that debt would be roughly $800 per year. Now let’s be honest, many of us are carrying far more than $5000 in credit card debt and $800 or more per year adds up fast over a few years or retirement.

Add to that we are in a fast-rising interest rate environment, and for all intents and purposes, all credit cards are adjustable rate. This means that while you may be paying 16% today you could easily be paying a far higher rate next month, let alone the end of the year!

Can a reverse mortgage help solve credit card debt? Yes! For the right client.

First, paying the debt off is always the best option for dealing with credit card debt. This may not be an option for a senior on a tight budget.

The second best option for dealing with the debt is reducing the interest rate. What if you were able to reduce that interest from  16% to 5%?

That same $5000 in credit card debt at a 5% APR would incur interest of $240 per year. That would reduce the yearly interest by $560 which is a 70% reduction on the carrying cost for that debt. While not perfect it certainly makes maintaining the debt much more sustainable.

This is where a reverse mortgage comes in. A reverse mortgage with an interest rate of 5% would provide the relief we just discussed. Reducing the carrying cost of your debt allows the funds you’ve saved to go a lot further.

Also, unlike credit cards, a reverse mortgage does not have to be paid until the retiree moves or passes away. This can be the difference between making it in retirement and not.

Further, reverse mortgages come with the guarantee that the homeowner can stay in the home as long as they maintain the taxes, insurance, and home. A HECM reverse mortgage is one of the only ways that a retiree can unlock the equity in their home and remain secure that they will have their home through retirement.

Reverse mortgages also offer the added benefit of allowing for a line of credit that grows at the interest rate of the loan. A line of credit is excellent as an emergency fund rather than using high-interest rate credit cards. Again, keeping interest rates, and thus costs, down in retirement is a key to success.

Summing up!

So, in summary, can reverse mortgages help solve credit card debt? Yes! Paying high-interest credit cards with a HECM reverse mortgage is not the only solution, but it is an excellent option for a number of potential or actual retirees. Reducing costs and stretching your dollars is the name of the game in retirement and a HECM reverse mortgage is an excellent way to achieve this goal.

Truehecm.com

We here at truehecm.com are always listening. If you have a question or comment please reach out to us. You can comment below or you can contact us through our contact page. If you find the info helpful we would also love your feedback by giving as a 5-star review!

And, if you are in California, our HECM reverse mortgage specialists are always ready to help you determine if the program is right for you. Just drop us a line through the contact page and well get to you ASAP!

Also, check out our about page for a little more information about us!

Posted on

What is a reverse mortgage?

Welcome to RM 101!

What is a reverse mortgage? Well here is where you will find the answer. In this post, we are going to endeavor to cover the basics of what a reverse mortgage is and how it works. We will briefly describe the reverse mortgage, cover basic requirements, the reverse mortgage loan process and what happens after the loan closes.

Hopefully, after finishing with this you will be comfortable with what a reverse mortgage is and how it works, but as always, if you have additional questions you can always reach out via our contact page or if you are in California please sign up for one of our free no obligation Munch and Learn HECM reverse mortgage events!

The first is “Age” – All borrowers on the loan must be 62 years of age or older when the loan is closed. This means that if a husband and wife applied for the loan, each must be at least 62 or older. Further, anyone that is on the title to the property must be 62 or older.

Second is “Equity” – Generally, your home must have at least 50% or greater equity to be viable for a reverse mortgage. That number is very general as the actual amount of accessible equity is based on the age of the youngest borrower. The older the borrower the more equity you can access.

Third, the property must be your “Principal Residence” – The property must be your principal residence meaning that you live in the property at least nine months of the year as defined by Housing and Urban Development (HUD).

Credit – In 2017 HUD updated their financial assessment guidelines. This created true credit requirements. That said poor credit can almost always be overcome. You can find more details about credit with this linked post.

What is a reverse mortgage?

A reverse mortgage is essentially a mortgage that pays you the equity in your home. When you take on a reverse mortgage you essentially take the equity you have built up in your home and pay it back to yourself in a lump sum, term or tenure payments or you create a line of credit allowing you access to the equity at your convenience. A lender pays you this money and takes a lien on our property, with interest,  to secure this debt. You have the right, assuming you live up to a few minor obligations, to live in the property for as long as you like or until you and your spouse pass away. You may also “cure” (payoff) the debt at any time.

The monthly interest on the funds lent to you becomes the mortgage payment and is added to the loan balance each month. Here is a very simple mathematical example:

Reverse Mortgage Initial Loan Balance              $150,000
Yearly Interest Rate                                         5%
Monthly Interest Rate (5%/12)                          0.0042%
Monthly Interest ($150,000 x .0042%)               $630
New loan balance at end of month                  $150,630

The $150,000 lump sum payment would accrue $630 in interest at the end of one month. This would be your loan balance for the start of the next month and the loan balance would increase monthly for the life of the loan. Voila! Reverse mortgage magic!

Reverse mortgages myths!

Lets dispelled a few myths here. You are not selling your home to the bank. You retain ownership of the property and have the right to pay off the reverse mortgage at any point you see fit. Should you transition while in the mortgage, your family members or designated beneficiary will have the right to dispose of the property in the manner they see fit for a period of up to 12 months. This means they can refinance or pay the loan off and keep the property or they can sell the home to satisfy the loan and the remaining equity will be theirs.

Reverse mortgages may not be right for everyone, but for lots of individuals, couples, and families reverse mortgages are a tremendous financial tool to allow seniors the financial freedom and security owning a home WITHOUT a mortgage payment provides.

How can I get paid?

There are a number of ways to take funds with a reverse mortgage. They are a lump sum, term payments, tenure payments, line of credit or a combination of lump sum and line of credit.

Lump Sum – The loan disburses a one-time lump sum payment to you.  Seniors use the remaining home equity funds to maintain the loan payments and live in the home mortgage payment free. The Lump Sum option can be, and is often, paired with the line of credit (LOC) option we will discuss momentarily.

Term Payments – Term payments are simply taking the lump sum you would have received and dividing it out over the numbers of months of your choosing. For example:

Lump Sum Distribution: $100,000
Term Months 20
Term Payment = $100,000/20 = $5000 per month

Tenure Payments – Tenure payments are like term payments but are guaranteed for life. You will receive your payment as long as you are alive and own the home and are living there. Certainly some great security, but generally substantially smaller payment amounts.

Line of Credit (LOC) – The reverse mortgage line of credit works by providing you with a reserve of funds available at your convenience. Lines of credit are stored funds that you can access when you need them.

What are the requirements?

There are a few standard requirements that you must meet in order to obtain a HECM reverse mortgage or HECM reverse purchase loan.

Age – All financially obligated homeowners must be 62 years of age or older. This means that the primary homeowners must be 62 years old or older.

Equity – The home must have equity. In most cases, equity must be 50% or greater than the value of the home. The actual equity requirement is dependent upon the age of the youngest title holder. (i.e. husband is 72 and wife is 68 then equity requirement is based on the wife’s age of 68)

Primary residence – The property that is the subject of the transaction must be your owner-occupied primary residence.

Credit – In 2017 HUD updated their financial assessment guidelines. This created much stricter credit requirements. For more details take a look at the linked post.

Income – HUD also instituted a financial assessment with minimum residual income requirements. Residual income is defined as income left after accounting for current expenses. The requirements are based on family size and region. The chart below details the requirements:

Residual Income Requirements Chart

Family Size       Northeast       Midwest        South           West

1                          $540                $529               $529            $589

2                         $906                $886               $886            $998

3                         $946                $927                $927            $1,031

4 or More         $1,066             $1,041             $1,041         $1,106

Trust the Process!

The process for obtaining a reverse mortgage is much like that of any other mortgage. There is one added step of mortgage counseling which increases protection for seniors. Let’s explore.

Step One – reverse mortgage counseling

Reverse mortgages require that all occupants of the property attend a HUD-approved reverse mortgage counseling session. Counseling must be completed before the loan process can begin.

Step Two – initial loan disclosures and loan documentation

Your loan officer will provide you with loan proposal outlining the details of the loan. They will also provide a number of loan disclosures that will need to be signed. Please be sure to read your disclosures carefully and ask questions should you not understand them. That is what the loan officer is there for.

The loan officer will also request some supporting loan documentation at this time. Typically this will include income documentation such as Social Security Award Letters or paystubs, tax returns, homeowners insurance, identification (drivers license and social security card), and any other documents pertinent to the loan.

This information will be presented to underwriting and used to qualify you for the loan.

Step Three – approval and appraisal

Once the loan application and supporting documentation have been submitted and reviewed by the underwriter, you will receive a conditional approval. The conditional approval will list additional requirements the underwriter will need to approve the loan. As long as these requirements can be satisfied, an appraisal will be ordered.

While the appraisal is prepared, you will submit any final items required on the conditional approval. Once the conditional approval items have been submitted and approved and the appraisal has returned and is satisfactory you will be ready for the loan signing.

Step Four – final approval, loan signing, and recision

Once the appraisal and all outstanding conditions are approved by the lender, loan documents will be issued. Once you have executed your loan documents you will have 3 days (not counting Sundays and holidays) to rescind or cancel the loan.

Step Five – funding and loan closing

After the 3 recision days, your loan will close and you will be obligated to the terms of your reverse mortgage. Your funds will be disbursed according to the terms of the loan and you will begin to operate under those terms moving forward.

After closing

It is important to remember that while a HECM reverse mortgage is generally quite easy to maintain, there are a few very important items to consider:

  1. You must continue to pay your property taxes and homeowners insurance. Failure to pay property taxes and insurance is one of the few reasons that a reverse mortgage can be foreclosed on. Some homeowners will choose and in some cases be required to have a LESA (Life Expectancy Set Aside). This account is used to pay the expected property taxes and insurance much like an impound account on a forward mortgage.
  2. You must also maintain the property. HUD requires that the property is maintained in satisfactory living condition. I am not aware of HUD having inspected homes for this reason, but it is a requirement and can be grounds for foreclosure.

Summary

Reverse mortgages are a very powerful tool in a senior’s financial planning arsenal. They offer tremendous flexibility and allow seniors a plethora of options to free up income, reduce debt, and remain in their home. Used properly they can increase seniors expected quality of life tremendously.

Truehecm.com

We here at truehecm.com are always listening. If you have a question or comment please reach out to us. You can comment below or you can contact us through our contact page. If you find the info helpful we would also love your feedback by giving as a 5-star review!

And, if you are in California, our HECM reverse mortgage specialists are always ready to help you determine if the program is right for you. Just drop us a line through the contact page and well get back to you ASAP!

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How Does A Reverse Mortgage Work?

How does a reverse mortgage work? A reverse mortgage is a financial product specifically designed to allow homeowners 62 years of age or older to plan for retirement by accessing a portion of the equity locked in their home. As opposed to a forward mortgage, where the borrower pays a mortgage payment each month, thereby reducing their mortgage balance and increasing equity, with a reverse mortgage the mortgage payment is added to the loan balance each month and reduces the equity. Reverse mortgages are exactly as the name describes: a forward mortgage in reverse.

Highlights:

  • Eliminates monthly out-of-pocket mortgage payments
  • Can provide tax-free funds for retirement income, savings, repairs or almost any other use
  • Available equity is based on the age of the youngest borrower
  • You retain ownership of your home and you may repay or refinance the loan or sell the home at any time
  • The loan is repaid when you either no longer occupy your home as your primary residence or you pass away
  • Any remaining equity belongs to you or your heir

Loan Requirements:

The standard Home Equity Conversion Mortgage (HECM) or reverse mortgage has some basic requirements that all borrowers must meet: The first is “Age” – All borrowers on the loan must be 62 years of age or older when the loan is closed. This means that if a husband and wife applied for the loan, each must be at least 62 or older. Further, anyone that is on the title to the property must be 62 or older. Second is “Equity” – Generally, your home must have at least 50% or greater equity to be viable for a reverse mortgage. That number is very general as the actual amount of accessible equity is based on the age of the youngest borrower. The older the borrower the more equity you can access. Third, the property must be your “Principal Residence” – The property must be your principal residence meaning that you live in the property at least nine months of the year as defined by Housing and Urban Development (HUD). Credit – In 2017 HUD updated their financial assessment guidelines. This created true credit requirements. That said poor credit can almost always be overcome. You can find more details about credit with this linked post.

Reverse mortgage payment options:

Many seniors use reverse mortgages to eliminate a monthly mortgage payment, and unlike a forward mortgage, a HECM reverse mortgage can pay you! If the equity is available there are four ways in which you can collect funds from your reverse mortgage. They are a “Lump Sum” payment, a “Term” payment, a “Tenure” payment or a “Line of Credit”. Let’s take a brief look at each:

Lump Sum Payment:

Probably the most common payment option for a reverse mortgage transaction is the lump sum payment. Just as is sounds, you receive one lump sum payment upon closing the loan. Fixed rate HECM reverse mortgages require a lump sum payment option and can not be combined with the other payment options.

Term Payment:

A “Term Payment” is a fixed payment amount that is paid for a fixed period of time. For example, you would get a payment of $1000 per month for the next 10 years. After the term is up you would no longer receive a payment but you would still remain in your home with no monthly mortgage payment due to the bank.

Tenure Payment:

A “Tenure Payment”  is similar to a term payment in that it makes a fixed payment amount but for the life of the borrower rather than for a fixed period of time. For example, you would receive a payment of $500 for the rest of your life.

Line of Credit :

A HECM reverse mortgage “Line of Credit” operates just like a home equity line, meaning that you will have a sum of money that can be drawn upon at your discretion, but it has 2 major beneficial differences. One, the line doesn’t have to be paid back until a maturity event occurs and two, the line of credit grows at the loan’s interest rate for the life of the loan.

That second line of credit benefit is the one that excites retirees and their financial planners. The line of credit grows automatically and unaffected by the value of the home. Because it grows automatically it means that, theoretically, the line of credit could provide you with funds that would exceed the appraised value of your home. Further, each year your reserves will grow to provide you with additional layers to your safety net. That’s quite a useful tool!

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Who can benefit from a reverse mortgage?

“How does a reverse mortgage work” has been covered, but WHO can benefit from a reverse mortgage is an important consideration. Some examples of who would benefit from a reverse mortgage are:

  1. Someone looking for additional reserves that grow with time
  2. Seniors that do not plan to move from their home
  3. Retirees looking to supplement their retirement savings
  4. People who need extra help maintaining their home or paying taxes and insurance
  5. Seniors looking to relocate can benefit from a reverse mortgage purchase loan

A reverse mortgage loan is not for everyone, but it does provide a very solid option for many seniors. Historically maligned, financial professionals have come to realize the reverse mortgage is a very useful product that is one of the very few ways people can access the paid-up equity in their home without selling the home. It may be the only way to access that equity without selling the home and without creating a mortgage or alternative loan payment!

The Hiers

One of the most pernicious myths related to reverse mortgages is that when you take a reverse mortgage or HECM you are signing your home over to the bank. This myth often concerns adult children or other family members of the homeowners. Let me be clear:

YOU DO NOT SIGN YOUR HOME OVER TO THE BANK WHEN YOU TAKE A REVERSE MORTGAGE!!!!

As with standard forward mortgages, you sign a note and create a debt obligation on the title to your home when you open a reverse mortgage. You still own your home! A maturity event occurs when either you no longer occupy the home as your primary residence or if you were to pass on. This maturity event means that the loan comes due and must be paid off within the next 12 months. Title to your property either stays in your name or passes to your heirs per your estate plan. Any equity in the property remains with you or your heirs. The bank is only entitled to recoup the funds needed to pay off the debt owed against the home.

The Down Side

As was mentioned before, reverse mortgages are not for everyone. While a very solid tool for many seniors reverse mortgages do require consideration.

Taxes, Insurance & MantainenceTaxes, Insurance & Mantainence

While you will no longer have a monthly mortgage payment after obtaining a reverse mortgage you will still have obligations. The terms of a reverse mortgage require that you maintain the property and pay property taxes and homeowner’s insurance in a timely manner. It is very important that you keep up with property taxes and insurance as this is one of the main reasons homeowners run afoul of their reverse mortgage lender. There are ways to include your property taxes and insurance in the reverse mortgage loan and remove the responsibility of making those payments yourself. If you are concerned about tax and insurance payments, please ask your mortgage professional about a LESA, and we are always here to help at Ascent Lending/TrueHECM.com. Just drop us a line at our contact page or leave a comment and we will get back to you ASAP!

Costs:

Like all mortgage transactions, reverse mortgages have costs. These costs can include mortgage insurance, origination fees, third party fees, and servicing fees.

Mortgage Insurance – With the most common type of reverse mortgage, the FHA insured HECM reverse mortgage, you will have a mortgage insurance (MI) premium. The premium is two percent of the loan amount upfront and half a percent annually. This premium allows the Federal Housing Administration to guarantee reverse mortgage loans and lenders to offer them. Without them, the reverse mortgage may not exist.

Origination Fees – Lenders charge an origination fee generally from $2500 to a maximum of $6000. The FHA caps origination fees $6000.

Third Party Fees – Ther are a number of third-party fees associated with any loan and a reverse mortgage is no different. These fees may include (but are not limited too) appraisal fee, credit report fee, title fee, escrow fee, attorney’s fee, surveyor’s fee, flood certification. etc. Customary fees differ by location so consult with your loan representative.

Servicing Fees – Some lenders will charge a monthly servicing fee. FHA guidelines cap this fee at a maximum of $35 per month.

Summing Up.

How does a reverse mortgage work? A reverse mortgage works by allowing senior borrowers to access the cash equity in their home, without creating a new out-of-pocket mortgage payment. The homeowners have the right to remain in their home for the rest of their lives. There are obligations for this right, such as maintaining the upkeep on the home as well as keeping property taxes and insurance current, but all in all the program is a great option for a growing number of seniors.

Some of the benefits of the loan are:

  • It can help supplement your retirement income
  • It can help pay off an existing forward mortgage
  • You can eliminate high-interest credit card debt
  • Stretch your retirement savings
  • Stay in your home for as long as you like up to the rest of your lifetime

There are four ways for a homeowner to access cash from their home when using a reverse mortgage.

  1. A lump sum payment at closing
  2. A term payment over a number of years
  3. A tenure payment for the life of the homeowner
  4. A line of credit that can be accessed by the homeowner as they see fit

The lump sum payment and line of credit are often used together in many reverse mortgage products. These payment options provide substantial flexibility and a reliable means of obtaining funds for reverse mortgage clients. While many seniors may just want to eliminate a mortgage payment, the available cash provided by these payment options provides peace of mind.

Truehecm.com

We here at Ascent Lending-TrueHecm.com are always listening. If you have a question or comment please reach out to us. You can comment below or you can contact us through our contact page. If you find the info helpful we would also love your feedback by giving us a 5-star review!

And, if you are in California, our HECM reverse mortgage specialists are always ready to help you determine if the program is right for you. Just drop us a line through the contact page and well get to you ASAP!

Also, check out our about page for a little more information about us!