Reverse mortgage reform
Special to the Tribune
Reverse mortgages have always been a beneficial product and, in some cases, critical. The Federal Housing Administration recently put out a number of new rules governing how they work and how the consumer understands them.
The three biggest concerns have been the costs, understanding how reverse mortgages work, and the kids.
The first new change is a new product called the Home Equity Conversion Mortgage Saver. The saver plan will cost about 35 percent less then the HECM Standard. The up-front costs, which are included in any new loan, are traditional closing costs for escrow, title insurance, FHA mortgage insurance premium, loan origination points and bank servicing fee. Fees traditionally have been running in the $17,000 range and the new saver plan reduces them to about $11,000. There is a trade-off where the saver plan allows for less total loan proceeds, but in the end may be a better financial plan for seniors.
Secondly is the counseling process. It has always been required that the applicants speak with an independent third party counseling service to assure they understand how the mortgage works. This has been enhanced to where the counseling agency is responsible for assuring the applicant has a loan comparison chart comparing at least three loan options, a guide book to assure that the right questions get asked and answered, an explanation of what the counseling is to accomplish and another guide published by National Council on Aging. This guarantees that the sometimes scant information provided by a loan officer is gone over in detail by a party with no interest in the transaction.
In the end, a reverse mortgage is simply not for everyone. There may be a better financial plan for some seniors. But for those for whom it does work, it can be a life-altering benefit.
Eliminating a current mortgage adds to a senior’s income stream. It works the same as a conventional mortgage, except the senior makes no payment. The payment is added to the mortgage balance and paid when the house is sold or transferred through an estate (refinanced by the heirs). The elimination of the payment adds to their monthly cash flow.
For those without a current mortgage, the funds are used for additional monthly income, medical expense, investing, long term care or various other reasons.
Owning a home free and clear has been this country’s mantra for over a hundred years. Reverse mortgages in today’s age of high cost of living and extended families living farther from parents have given countless seniors the luxury of maintaining a suitable life style after retirement, being able to travel to see the grandkids, and just being able to pay the bills.
Yes, the kids. That was another concern back in the second paragraph. Remember that the banks do not want to own the senior’s home – only to make a reasonable profit in the end. The home remains in the senior’s name at all times. The senior can break all the average life spans and live to 125 if they are so blessed and the loan is guaranteed not to interrupt their ownership. If they are receiving monthly checks from the loan they will continue. The bank only loans up to certain amounts depending on the senior’s age, thereby leaving plenty of equity in the house. So there is always something left for the kids.
Some families have a choice of using their own (the kids’) money to assure long-term care for elderly parents or to use their home. It may give great relief to a senior to be able to take care of themselves and to see the home they worked so hard for taking care of them now. Being able to have care at home and not leave the home also may give great comfort.
Lastly we have recently seen an upswing in the use of a reverse mortgage to purchase homes. For example, a senior retires, sells the existing home, puts cash in the bank and uses the balance to downsize into a new home. The purchasing power doubles for those who want to pay cash and have no mortgage. If the senior has $200,000 to buy a home they can now buy a $400,000 home with reverse mortgage having no payment.
– Norm Hansen at RPM Mortgage-Lake Tahoe can be reached at 775-586-1130.
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After a period of dry, warm weather, winter returns this week to Lake Tahoe.