Should I get a reverse mortgage? Is a reverse mortgage a solution that’s right for you?
It seems as if every article on the web about reverse mortgages responds to that question with the non-committal response of, “It depends.”
Personally, I’m tired of that answer.
And I know when I see that prelude to the answer it tells me that the author doesn’t have a clue. They’re simply covering their backsides and writing an article about something they haven’t bothered to really research.
How would you like someone to finally answer the question?
From 2005 and 2008, I personally originated reverse mortgages, so I have intimate knowledge of the program. In 2008, I decided to exit the origination business because it had become overly burdensome and costly due to changes the federal government imposed on the program.
But, I took what I learned with me, and now, I share it with seniors who are looking for innovative ways to liberate the equity they’ve accumulated in their homes.
One thing my experience has taught me is that every one of us has unique challenges and considerations when it comes to our retirement incomes and our personal financial situations.
There is no one-size-fits-all answer. And anyone who tries to tell you otherwise does not have your best interest in mind.
That’s why I want to share with you 5 important questions you should to ask before you consider moving forward with a reverse mortgage.
5 Considerations To Determine if Reverse Mortgages are a Scam Or A Solution:
- Are Reverse Mortgages a loan from the US Government?
The U.S. Government does not make any mortgage loans.
HECM loans (commonly known as reverse mortgages) are mortgages that are insured by the government to be repaid by the borrower to the lender.
If the loan is not repaid in full, the government (through its FHA branch) is on the hook for the balance. That’s why reverse mortgages have such a huge number of restrictions and regulations.
Note: Most loans are paid in full, so they cost the government nothing. In fact Uncle Sam typically makes a profit via the insurance premium.
- Is the Reverse Mortgage program a scam?
Few consumer-based programs are as heavily regulated, scrutinized, or policed, or have more borrower protection than an HECM loan.
Over 30 years ago, the senior advocate association AARP realized that the majority of seniors had the majority of their net worth tied up in the “illiquid equity” in their homes.
So, AARP lobbied Congress to find a way to help seniors liberate some of that equity without the need to sell their homes.
The result was the reverse mortgage, i.e., a loan against your home with no monthly payments and no repayment until you no longer live in your home.
To make that possible the loan is insured and administered by HUD.
Because of this connection, the loan falls under government regulation. This means that the originators authorized to provide the loan are under constant scrutiny by the government.
Most of these originators are good, honest people who would not think of doing anything that might jeopardize their license to do business. Unfortunately, less than scrupulous people try to game the system, and they’re the ones who make headlines in the 24-hour news cycle. Should I get a reverse mortgage…
- Are reverse mortgages expensive?
Yes, but the truth is they’re no more expensive than any other government-backed loan.
In addition to loan origination fees and other closing costs such as title, escrow, stamp tax, etc., insurance must be paid to the FHA (both at origination and as a monthly fee).
On the closing statement, the FHA adds these fees together, and the resulting high figure can be a real turn off for some.
But here’s the real story:
A reverse mortgage has an artificially low-interest rate because of the FHA insurance.
Because the lender has literally no risk, a “risk premium” is not added to the loan’s interest rate. This is why some lenders do not even ask the question Should I get a reverse mortgage. If not for the FHA involvement, the risk premium would typically add between 3 to 5 percent to the base interest rate. Trust me when I tell you: That will have a huge impact on reducing the equity left in the home.
- The balance on the loan grows every month, so will the loan eventually eat up any equity left in the home?
Here’s an example based on my personal past experience: Before I tell you my “real” experience with my Mother’s home, let me say that the government designed the program to ensure the appreciation of the house would equal the increasing loan amount.
In other words, if the loan is growing by $6,000 per year, the value of the home should also be appreciating by at least that same amount (if not more), so the remaining equity stays constant throughout the life of the loan.
Now, let me tell you about my mother’s house.
In 2008, my mom had suffered large losses in the two recent stock market crashes. She worried that the economic events related to the subprime debacle would reduce her liquidity and might wipe out a large amount of equity in her home.
As a hedge against these calamities, I encouraged her to obtain a reverse mortgage.
Her house appraised at about $450,000 and at her age she was able to get $225,000 in cash out.
After closing costs the loan started at about $235,000. This meant that there was still $215,000 in equity left in the house before the loan started to grow.
Six years later, my Mother moved into a senior-care facility and my siblings and I sold the house for $650,000.
After all expenses, including paying off the reverse mortgage, my Mother received net proceeds of $325,000. The loan maintained its original equity, and gained about $100,000.
- Is a reverse mortgage right for me?
It’s really simple. If you don’t need the cash or want to take the money to invest in something else, the answer is absolutely not.
Nothing that you could invest in with “low risk” would offset the cost of interest on the loan. Using a reverse mortgage to fund an investment would be a terrible decision for you.
In fact, a reputable reverse mortgage originator would refuse to write the loan under this circumstance. Should I get a reverse mortgage
On the other hand, if you:
- Plan to stay in your home for longer than two years;
- Need access to supplemental cash to enhance your living standards;
- Need to pay for necessities, such as in-home assistance
Then my answer to should I get a reverse mortgage is a resounding YES! A reverse mortgage is the right decision for you.
Nothing else (other selling your house) allows you to take the equity out of your home with less risk.
More importantly, this loan is the ultimate “pick a payment” program.
Did you know that you can make payments on the reverse mortgage?
If the additional monthly payment to the loan balance concerns you, and you have the capability to make a payment, go ahead and do that.
If you want to pay interest only, do that.
The choice is yours. Reverse mortgages offer features that they give you choices at a time when you might think that your options are limited.
If this article as piqued your interest about the question Should I get a reverse mortgage, you’re in luck. I can help you by get in touch with an originator in your area. Simply click here to schedule a call with me. We’ll talk about your unique situations and how a reverse mortgage might be the answer you’ve been looking for.
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