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The Pros and Cons of Reverse Mortgages

Now, we're gonna go over the basics of a reverse mortgage. The reason why we need to discuss this is I've done hundreds, if not thousands of reverse mortgages throughout the years. And every situation is different.

The questions that come up on everyone are basically the same. So what I wanted to talk about today is basically the basics of what a reverse mortgage is, and maybe what it isn't.

Let's google it!

So that being said, we're getting more and more calls in regards to reverse mortgages. So the first thing I thought we would go over is when you look at a reverse mortgage or when you Google it, you can see me down at the bottom right here, the rate update powered by Dan Frio. I'm at the top, one of the markets, which is awesome.

But if you go through, you're gonna read questions like, do you have to pay back a reverse mortgage? How much money do I get from a reverse mortgage? What is the reverse mortgage in its simplest items? Or what is a reverse mortgage in its simplest terms is basically what it's asking. Then, what are the rules of a reverse mortgage? So what I thought I would use is because a lot of people, say that you're only grabbing the data that helps your argument.

I'll put it that way. This is from the FTC, right? So let's use their background and their website's information to really explain what a reverse mortgage is. And the one main question that I want to explain to everybody is what a reverse mortgage is.

Who qualifies?

So let's first start out by who qualifies and what would prompt you to look into a reverse mortgage. Let's read it through. If you're 62 or older and want money to pay off your mortgage, supplement your income or pay for healthcare expenses, you may consider a reverse mortgage. It allows you to convert part of the equity in your home, into cash. Without selling your home or paying additional monthly bills. All right. So let's go down through it and see what it explains here.

How does the reverse mortgage work?

When you get a regular mortgage, you pay the lender every month to buy your house over time. In a reverse mortgage, you get a loan in which the lender pays you. The reverse mortgage takes part of the equity in your home and converts it into payments to you.

Why get a reverse mortgage?!

The one thing I want to explain to everybody, and I even have attorneys questioning this. Sometimes I used to have a radio show in Chicago and I had an attorney on there and he's why would my client wanna do a reverse mortgage. When do they have to deed the house to the bank? I got some great news for you.

If you get a reverse mortgage of any kind, you get a loan, which you borrow against the equity in yours. You keep the title to your home. The money you get usually is not taxable and it generally won't affect your Social Security or Medicare benefits. When the last surviving borrower dies, sells the house, or no longer lives in the house is the principal residency. The loan must be repaid.

So let's break all this down

How this is working so far? So what is a reverse mortgage? You're 62 years or older. And then when we go down a little further, I'm gonna give, I'm gonna show you the biggest pieces of this puzzle on how much money you're gonna end up getting.

But in most cases, people are applying for reverse mortgages because they're deficient in money or cash flow. We'll put it that way. So you have a house that you've been in forever, and God bless you. You've spent some, a long time there, and now you have a ton of equity in the house, but you just have no means of paying your bills anymore.

Then, it gets to be really difficult trying to apply for a loan and you can't live off of credit cards. So what's the alternative? It was the creation of a reverse mortgage, basically for those that have their house paid off or almost paid off.

What you do is you put up the house collateral, just like any mortgage. You continue to be the title owner or invested in the title. What that means is you own the property. You don't have to give the property over to the bank. That, that came in part. Let me explain that piece of the puzzle, where a lot of people think that you have to give the house back to the bank.

Here's what can happen

In a reverse mortgage, let's say, you're 62 years old and you got a reverse mortgage and it was based on the value of the house at that time when got the loan. Let's say, you had great genes and you live to 110. What the end of this, you owed $500,000 on your reverse mortgage, but the house is only worth 200. Now, what happens?

Options you can take

You have a couple of options. Your heirs can get the property and put it up for sale and sell it. If you sell it, you're gonna sell it for 200 and remember we owe 500,000 while you're gonna be short. In a reverse mortgage, you can't be short.

Hand in the key, no need to pay

So what happens in this case, you can take that and pay the deficiency balance back, but you don't have to, you're not obligated to. So in that situation, you would most likely hand the keys over to the bank and say we had 40, 60, 50, 60 years living in the house. We enjoyed it. Never had to make a mortgage payment. The house is yours. That's the only time that it would happen if you were in that loan so long that the interest that you owe on that loan or the amount of money you owe on the loan exceeds the value of the property at that time. You have the ability to hand the bank house over to the bank with no repercussions. You don't owe anything else. There's no recourse on the loan.

So that's the reasoning behind what you hear a lot of times as well. You have to give the house over to the bank. The bank doesn't want your house. The bank basically wants you to stay there as long as you're still alive. If you deem that property as your primary home, you can stay there without making mortgage payments.

Reverse Mortgage as your bolt to freedom

So let's look at it this way. You have, let's say your house is worth four or 500,000 and you own it free and clear. And you're just like, I can't afford my monthly expenses with gas prices, the way they are medicines, the way it is inflation. Food and everything else, you just don't have enough money each month to survive. It's probably not a prudent idea to charge it on credit cards. Cuz most credit card rates are 18,20, and 25%. And again, where are you going to, where are you going to get the money to pay that loan? So which was the creation of the reverse mortgage.

CFPB: You have to pay other costs related to your home

Now, let's get into the nitty gritty of whatever reverse mortgage is at this point. So let's continue down the page of the CFPB and see what else they have to say about reverse mortgages. You have to pay other costs related to your home in a reverse mortgage. You keep the title to your home. That means you're responsible for the taxes, insurance, fuel maintenance, and other expenses. If you don't pay the property taxes, keep the homeowners current and maintain the house. The lender might require that you pay back the loan.

So basically you have to keep your utilities up. Your taxes are paid current, your homeowner's insurance is current and the house is in livable condition. You do not have to make a mortgage payment. I'm gonna explain to you though, that there are options where you can make payments to this if you want.

HECM

The most customary or standard program or reverse mortgage product in the country right now is called a HECM. They're fairly insured, reverse mortgages, and are backed by the US Department of Housing and Urban Development also known as HUD, and they can be used for any purpose.

How much and how to borrow

How much can you borrow? Basically, it breaks it down to this. What is your age? What type of reverse mortgage you're selecting we're not gonna go over all those options. I just want to explain to you the basics of what a reverse mortgage is, and if you're intrigued and want to learn more, please give us a call at (844)775-5626.

In the type of reverse mortgage, you select the appraisal of the home for an interest rate and the financial assessments of your willingness and ability to pay the taxes and the homeowners insurance on the property. In general, the older you are, the more equity you have in your home and the less you owe on it, which means more money to you.

How to apply HECM

Before applying for a HECM, you must meet with a counselor for an independent government-approved counseling session.

Some lenders that offer proprietary mortgages also require counseling and the counselors are required to explain the loan costs and financial implications. The counselor also must explain the possible alternatives to the HECM like government or non-profit programs or single purpose or proprietary reverse mortgages.

Scenario

Now, I will go over the specifics just to break it down, like a scenario. So for example, let's say like I was stating before you're running short each month. So you have multiple options that you can do. You can take a lump sum distribution. You can take monthly payments. So you put up your house's collateral and let's say you're getting 2000 a month in social security and pension, and it just doesn't work. And you're about a thousand or 1500 short each month. You can set up this program to send you a monthly distribution of 1500, or you can just set it up that it's a line of credit to use when you need it.

House rich, but money poor

The best time to apply for this or a good time to apply for this is in many cases. One, let's just say your house is rich, but money poor. Means you have your house virtually paid off and you got a half million dollars sitting there, but you have bills coming in that you can't pay. And you're like, okay, I'm cash or house rich. But I don't have enough money to pay my bills.

So instead of selling the house, you can do it this way. So let me explain how this works and let me explain the payment options that you have when you're making payments or proposed payments.

So how do you pay this back?

What I'm basically saying is you get the money in any denomination you want the lump sum, the monthly distribution, or whatever. Now, what can you do? How does the balance grow? What's happening behind all this? So think of it this way. You have a free and clear house, but I need a hundred thousand dollars to pay off all my bills and then I'm set. So I initially take a hundred thousand dollars and the rate is on out there, whatever. So now you close on the loan. You're good. And now what happens? You start getting statements.

So those statements are given to give you options to pay if you want to pay. So you don't have to make a mortgage payment. That's the whole gist of a reverse mortgage. So what happens if you don't make a mortgage payment? The interest that accrues on the money that you were lent, just compiles. So you might like, you might not care or you might like, I don't like that. You can then maybe make an interest-only payment if you want.

So let's say you took out a lump sum and each month that, that lump sum, the amount of interest accrued on that lump sum is $500. You can send in $500 a month and it'll stay at the current balance that you have, but you'll continue to pay the interest. So in this case, we borrowed a hundred thousand. We're paying the interest every month. Cause that's all we can afford right now, but we continue to owe a hundred thousand dollars. So that's how that works.

Paying it full

Or you can make payments for the whole thing. So let's say for example you just don't qualify for a loan. You have enough cash coming in, but it's just cash. It's unrecorded, it's untaxed. It's all these variations of things. But you can't get a mortgage. You can actually use a reverse mortgage to get a mortgage. Again, that's what it's for, but what I'm getting at is you can make payments.

Benefits of Reverse Mortgage

So let's say for example I don't qualify because of my income on how I get a lot of cash and everything else. So I'm like, I just have no way of getting money. In this case, I can get money, and because I'm getting cash in, I can actually make payments to turn that into just a normal mortgage. Cause basically what this is, a reverse mortgage is technically an FHA mortgage with an optional payment. You don't have to make any payments. You can make interest only. You can make a full payment. You can send in a dollar, you can send in as much as you want. That's the benefit of all this.

So hopefully with this little information that I give you, you were able to understand the basics behind a reverse mortgage when it's used, when it's most commonly used, and who qualifies.


* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.