Anybody with Reverse Mortgage experience?

Roberta_z5June 16, 2006

I want to pay off huge credit card debt that I can no longer afford. I own my house and farm free and clear and wonder how the Reverse Mortgage works.

I would have a hard time getting a home equity loan as I have very little income that is verifiable. I have a very good credit score. Is this the way to go? (I am over 65 yrs. and am living on a small SS check.)

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celticmoon

I don't have personal experience, but from what I have read, a reverse mortgage may be ideal for you. If you can get your hands on the current (Fall 2006) issue of Kiplinger's Retirement Planning magazine, there is an article on pages 125-126. According to that article:

You need to be aged 62 or older, the older you are the more you may borrow. Income is not a factor at all. If there is a mortgage existing, it must be paid off and replaced with the reverse mortgage. You essentially agree to borrow against the equity in your home. Most people arrange to receive a monthly payment and also establish an additional line of credit for emergencies, but you can take a lump sum as well. Interest rates adjust either yearly or monthly depending on the loan, and this affects the accruing debt. That debt then is paid out of the proceeds from the sale of the home when you leave it and sell it. "The debt will never exceed the value of the home, and you cannot be forced out to repay the debt." The insurance componant pays the gap should the house sell for less than the debt way down the road.

There are two basic types, and 90% choose the HEMC (Home Equity Conversion Mortgage) wherein your available line of credit can increase as your home equity increases. HEMC uses FHA loan limits for the debt upper limit.

Last, the article notes that upfront fees are significant, up to 5% of what you qualify to borrow and usually are rolled into the debt. And there are annual fees in addition to the interest. So there are significant costs. The loan requires you have financial counseling to insure you fully understand the loan. That counseling, plus the surge of interest in these loans, has created a bottleneck, so expect a wait before you see cash.

For more info, see the link below. Another useful info site is:

www.hud.gov/buying/reverse.cfm

And an AARP site again explaining everything is:

www.aarp.org/money/revmort

Hope this info helps and that you hear from people who actually have done this. Good luck to you.

Here is a link that might be useful: reverse mortgage info

    Bookmark   June 17, 2006 at 11:25AM
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quiltglo

Don't rule out a home equity loan. Check first since your home is paid for, it will be the perfect collateral depending upon how much you want to borrow.

Reverse mortgages are certainly worthwhile, but I believe they will be more expensive in this situation. Check on the other and let us know if you really can't get a loan.

Gloria

    Bookmark   June 19, 2006 at 12:14AM
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Chemocurl zn5b/6a Indiana

An elderly friend of mine, had one. I believe you are not allowed to be away from your home for over a year, or it MUST be sold.

She had surgery and extensive nursing home rehabilatation, and then found she actually liked living in a small assisted living apartment (big room) at the nursing home. She finally had to decide if she wanted to go back to her home, or stay at the nursing home, forcing her to have to sell. She sold, and so far has no regrets.

I don't know what will happen on down the line, when she can no longer afford the assisted living. She may be forced into a small room with a room mate, which she might not care for.

Only time will tell.

Sue

    Bookmark   June 19, 2006 at 1:01AM
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jannie

A few months ago, I read about a woman who got a reverse mortgage some 30 years ago,when her husband was living. She recalls getting checks for about $300 a month for a while, then they stopped. Her husband died and she remained in the home. She later moved into either assisted living or a nursing home, and the bank sent her a bill for something like half a million! They wanted back the money advanced to her, plus interest. What a horror story!!!

    Bookmark   June 19, 2006 at 4:56PM
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pamghatten

I have to chime in on this one, I'm a mortgage banker and have been involved in Reverse Mortgages for years.

The poster above mentioned a story where the Reverse Mortgage had a share appreciation clause, they no longer allow that type.

The FHA HECM is a great product, you should look into it. There is a ton of information on the AARP website, with some calculators that will show you how much money you could get.

Yes, it can be expensive if you want to leave the property to your heirs, but the heirs can eventually refinance the Reverse Mortgage to a regular mortgage if they want the property.

The original poster is over 65 and living on a small SSI check sounds like an ideal candidate. If her only income is a small SSI check, how could she repay a conventional Home Equity?

These products have evolved over the years .. there are a lot of banks offering these types of mortgages. The Reverse Mortgage market is growing in leaps and bounds as the Baby Boomers get older.

Do your research, there is a lot of information on the internet about Reverse Mortgages, and pick a reputable lender.

Good luck,
Pam

    Bookmark   June 26, 2006 at 1:54PM
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joyfulguy

Hi Roberta z5,

It's been almost 2 years since you made this post.

I'm wondering whether you found the information helpful, and what you decided to do, if you feel comfortable with sharing some of the information.

While reverse mortgages are useful for some, there are more expenses associated with setting them up, and a number of restrictions ... possibly higher ongoing costs, as well.

I have a bias, in that I like to run my own show.

Since you're on a farm, I suspect that you may well follow similar paths of thought.

I think that in a situation like yours, considering the amount of information that you have given, I would like to approach my financial agency to see whether I could set up a Home Equity Line of Credit with them.

I have never owned a home (as I've lived in about 22 locations in 79 years, the real estate people would have loved me, had I done so).

For several years I've had a Fully Secured Line of Credit, backed by mutual fund certificates, which the carriers issued to me at no extra charge, and stock certificates (which cost me $35. - 50.00 each to have registered).

There was no cost to set it up, but when using real estate as collateral, there usually are fees for inspection and evaluation, plus investigation regarding other liens and possibly lawyer's fees on such property when so used.

For most of the time I have let it lie unused, and they charge me no inactivity fees.

My credit limit varies depending on the current value of the underlying assets ... which is easily ascertained in the case of stocks and mutual funds, less so when one uses real estate as collateral. But long-term real estate values have risen in many areas: if I were to use a reverse mortgage, I'd want to know whether, had there been appreciation in value of the property in the intervening years prior to sale on my departure, whether that increased value would accrue to me (or at least partially so).

The interest rate varies depending on current rates ... for some time up until several months ago it was 6.25%, then was down to 5.75% for a while, then a few months ago went down to 4.75%.

When it was at 6.25%, I said that I could borrow to invest at almost nil cost ... 25% income tax deductibility reduces it to under 4.7% (20% reduces to 5.0%).

If I invest in a Canadian bank, pipeline, or other high quality stock, paying about 3% dividend that, being substantially tax-advantaged, leaves me with about 2.5% after-tax income, that reduces my net cost of the interest expense to under 2.5%.

If my deal with the bank is that I pay interest-only monthly on the loan, which I don't ordinarily recommend, as I like to see debt reduced, let's say that I leave a $10,000. loan run for 15 years.

When I go into the bank to pay off the loan, how much will I have to pay them? Exactly $10,000.00 ...which is precisely the amount that I borrowed, 15 years ago. Which would have bought a decent car, 15 years ago ... but not now.

I gained from inflation ... and the guy who got a Guaranteed Investment Certificate at the bank for that $10,000.00 over those years ... gets his interest (rent on the money) over the years between ... and when he collects the funds ... gets precisely $10,000.00, the same amount that he gave the bank, those years ago.

That will buy a lot less now.

I gained from inflation - he lost.

And inflation has been running at about 2% (higher for some of the basics that poor people must have).

Now that the interest rate that I must pay is 4.75%, deduct 20% income tax deductibility reduces it to 3.8% (25% income tax takes it lower), deduct 2.5% after-tax dividend income on the shares reduces my cost to 1.3% ... and inflation is a lot higher than that!

However ...

... since U.S. gov't. (and individual) debt is so high (and going higher, year by year), I fully expect that soon they'll have to offer higher rates of interest in order to seduce foreign lenders to buy more of their debts ... adding to that mountain.

Before you sign on for a Reverse Mortgage ... make sure that you are entirely familiar with every one of the provisions ... and run them by your lawyer to make sure that you're aware of all of the parameters.

Don't want you being subject to unpleasant surprises later ... when it's too late to alter the provisions of the contract.

Good wishes for making wise decisions regarding efficient use of your income and assets.

ole joyful

    Bookmark   June 4, 2008 at 5:50PM
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emma

I was told that reverse mortgage was a good thing when it first started but not now. I always thought that would be good for seniors who could no longer live on their income, but not anymore. I think I would just sell my home and buy a less expensive one. At this age I would hate being tied to anything like a mortgage.

    Bookmark   July 16, 2013 at 1:47PM
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joyfulguy

In the story that I wrote above, I referred to being able to deduct the interest cost, but that is available only in certain situations. In our country that is mostly on loans used for investment or productive purposes, intending to produce income later, which is not the situation in most cases of paying off a credit card loan.

I have a certain bias against using reverse mortgages, if one can obtain a regular line of credit.

One needs to check all of the provisions carefully and be sure that one can live within them before signing.

ole joyful

    Bookmark   July 20, 2013 at 1:01PM
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