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What is a Reverse Mortgage and how does it work?

What is a Reverse Mortgage and how does it work?

A Reverse Mortgage is a mortgage specifically designed for those 62 years of age and older who want to have more control over their mortgage and their assets.  It is similar to an FHA mortgage but with lots of extra options and protections.   They are easier to qualify for than a traditional mortgage as they are primarily asset-driven rather than credit-driven.  Borrowers can choose to not make any mortgage payments at all, pay interest only, pay interest and principal, or make any payment they wish.  As long as the borrower pays the property tax payments, the insurance payments, the HOA and maintains the home, they can live there for as long as they wish and retain full ownership of the home.  In this article, we are going to discuss the pros and cons of reverse mortgages more formally referred to as a HECM or Home Equity Conversion Mortgage.

FHA insured Reverse Mortgages

The majority of reverse mortgages on the market are FHA-insured mortgages.  This means they are regulated by HUD and the rules and guidelines are written by HUD.  It also means that the HECM mortgage is insured by HUD with an upfront mortgage insurance and a monthly mortgage insurance premium.  This is a pro and a con.  The pro is the mortgage insurance premium protects the homeowner and the heirs from ever owing more than 95% of the home appraised value at the time the loan is paid off.   This is called the Non-Recourse feature. When the borrower or the heir is ready to pay off the loan and they think the mortgage balance is more than the value of the home, they can call the loan service company sending them the monthly statement, and request an appraisal.  A licensed appraisal familiar with FHA appraisals will visit the home and perform an appraisal.  The borrower can then sell the home or refinances it for 95% of the official appraised value and any negative equity is paid by the insurance policy.  That is a big plus or pro.

However, given the current rate environment and assuming just 4% home appreciation, it is unlikely borrowers taking a reverse mortgage will encounter negative equity.  Take a look at this sample amortization chart. This is for a 68-year-old borrower that is looking to refinance out of their regular conventional mortgage at a 4.5% interest rate and payments of $760 per month.

This borrower will no longer have a monthly mortgage payment, and has elected to take $21,720 in cash at closing to update their kitchen and bathroom and will be able to access $59,509 additional cash after the first 12 months.

Note the actual interest rate that they will close on is 2.320% (3.261% APR for a 17 Year term) but the chart assumes a rate of 3.56% for purposes of estimating this example.

This loan has a line of credit automatically assigned to it.  I love this feature because it allows the borrower to customize the loan amount over time and adds an extra layer of security to the loan.  In this example, the borrower never uses the line of credit and it grows to $142,494 at age 99.  However, should they decide to use it, let’s say the stock market crashes in year 10, they can just make a call to the service company and arrange the amount they want.  They have been used to taking monthly withdraws from their brokerage account of $2000.  So instead of further depleting their brokerage account during the downturn, and to give the account time to recover, they instead draw $2000 per month from their reverse mortgage line of credit.  They do this for 2 years and their brokerage account has now recovered the losses and has extended the borrower’s cash reserves for many more years.

Reverse Mortgage Refinance  2021-02-26 155057

Disclaimer, not all loans will perform this way.  Rates and fees vary as does property appreciation.  Your actual loan details will vary. This is not an offer to lend.

Do I give my house to the bank?

Everyone always assumes the interest will overtake the equity with a reverse mortgage, and to be honest, in the early days of high-interest rates and low equity growth, it did in many cases.  In the early days, borrowers could access much more equity at one lump sum, which many borrowers spent right away.  This left many without the resources to pay the tax and insurance which forced a foreclosure, (just like traditional mortgages) and that is why most people thought that when you took out a reverse mortgage, you just signed away your home.  The NEW reverse mortgage has lower amounts of equity available at closing and lower monthly mortgage insurance rates.  This, combined with high appreciation rates, make it extremely likely that the heirs would inherit a significant amount of equity.

Do I have to have to have my home paid for to get a Reverse mortgage?

Absolutely not.  In fact, you can buy a house with a Reverse Mortgage, HP4 loan.  Here are some details on my Reverse Mortgage for purchase page.  I would highly recommend anyone who is 62 or older that still has a mortgage, contact me for a free custom plan to eliminate that mortgage payment.  Even if you are not retired, refinance that traditional mortgage into a reverse mortgage.  That gives you all kinds of options.

  1. You can take that extra money and reduce any debt you have.
  2. You can take that extra money and put it into a catch-up IRA or 401K
  3. You can buy long term health care insurance
  4. You can avoid taking your social security until you are 70.  
  5. Or you can just enjoy the lower interest rate

So how does one qualify for a Reverse Mortgage?

Like I said earlier, it is really pretty easy to qualify.  The fastest and easiest was is to complete an application now with no obligation and get a custom reverse mortgage retirement proposal completed just for you.  For more details, visit the Reverse Mortgage page on the website, you can even request a free brochure.

Richard Woodward   Reverse Mortgage Specialist Certificate

NMLS 217454

Your Local, Direct, 5 Star Rated Mortgage Lender

Office:  (214) 945-1066

 www.mortgageprosus.com

                                           

Equal Housing Lender. This is not an offer of credit or commitment to lend. Loans are subject to buyer and property qualification. Rates and fees are subject to change without notice.

What is a Reverse Mortgage and how does it work?

What is a Reverse Mortgage and how does it work?

A Reverse Mortgage is a mortgage specifically designed for those 62 years of age and older who want to have more control over their mortgage and their assets.  It is similar to an FHA mortgage but with lots of extra options and protections.   They are easier to qualify for than a traditional mortgage as they are primarily asset-driven rather than credit-driven.  Borrowers can choose to not make any mortgage payments at all, pay interest only, pay interest and principal, or make any payment they wish.  As long as the borrower pays the property tax payments, the insurance payments, the HOA and maintains the home, they can live there for as long as they wish and retain full ownership of the home.  In this article, we are going to discuss the pros and cons of reverse mortgages more formally referred to as a HECM or Home Equity Conversion Mortgage.

FHA insured Reverse Mortgages

The majority of reverse mortgages on the market are FHA-insured mortgages.  This means they are regulated by HUD and the rules and guidelines are written by HUD.  It also means that the HECM mortgage is insured by HUD with an upfront mortgage insurance and a monthly mortgage insurance premium.  This is a pro and a con.  The pro is the mortgage insurance premium protects the homeowner and the heirs from ever owing more than 95% of the home appraised value at the time the loan is paid off.   This is called the Non-Recourse feature. When the borrower or the heir is ready to pay off the loan and they think the mortgage balance is more than the value of the home, they can call the loan service company sending them the monthly statement, and request an appraisal.  A licensed appraisal familiar with FHA appraisals will visit the home and perform an appraisal.  The borrower can then sell the home or refinances it for 95% of the official appraised value and any negative equity is paid by the insurance policy.  That is a big plus or pro.

However, given the current rate environment and assuming just 4% home appreciation, it is unlikely borrowers taking a reverse mortgage will encounter negative equity.  Take a look at this sample amortization chart. This is for a 68-year-old borrower that is looking to refinance out of their regular conventional mortgage at a 4.5% interest rate and payments of $760 per month.

This borrower will no longer have a monthly mortgage payment, and has elected to take $21,720 in cash at closing to update their kitchen and bathroom and will be able to access $59,509 additional cash after the first 12 months.

Note the actual interest rate that they will close on is 2.320% (3.261% APR for a 17 Year term) but the chart assumes a rate of 3.56% for purposes of estimating this example.

This loan has a line of credit automatically assigned to it.  I love this feature because it allows the borrower to customize the loan amount over time and adds an extra layer of security to the loan.  In this example, the borrower never uses the line of credit and it grows to $142,494 at age 99.  However, should they decide to use it, let’s say the stock market crashes in year 10, they can just make a call to the service company and arrange the amount they want.  They have been used to taking monthly withdraws from their brokerage account of $2000.  So instead of further depleting their brokerage account during the downturn, and to give the account time to recover, they instead draw $2000 per month from their reverse mortgage line of credit.  They do this for 2 years and their brokerage account has now recovered the losses and has extended the borrower’s cash reserves for many more years.

Reverse Mortgage Refinance  2021-02-26 155057

Disclaimer, not all loans will perform this way.  Rates and fees vary as does property appreciation.  Your actual loan details will vary. This is not an offer to lend.

Do I give my house to the bank?

Everyone always assumes the interest will overtake the equity with a reverse mortgage, and to be honest, in the early days of high-interest rates and low equity growth, it did in many cases.  In the early days, borrowers could access much more equity at one lump sum, which many borrowers spent right away.  This left many without the resources to pay the tax and insurance which forced a foreclosure, (just like traditional mortgages) and that is why most people thought that when you took out a reverse mortgage, you just signed away your home.  The NEW reverse mortgage has lower amounts of equity available at closing and lower monthly mortgage insurance rates.  This, combined with high appreciation rates, make it extremely likely that the heirs would inherit a significant amount of equity.

Do I have to have my home paid for to get a Reverse mortgage?

Absolutely not.  In fact, you can buy a house with a Reverse Mortgage, HP4 loan.  Here are some details on my Reverse Mortgage for purchase page.  I would highly recommend anyone who is 62 or older that still has a mortgage, contact me for a free custom plan to eliminate that mortgage payment.  Even if you are not retired, refinance that traditional mortgage into a reverse mortgage.  That gives you all kinds of options.

  1. You can take that extra money and reduce any debt you have.
  2. You can take that extra money and put it into a catch-up IRA or 401K
  3. You can buy long term health care insurance
  4. You can avoid taking your social security until you are 70.  
  5. Or you can just enjoy the lower interest rate

So how does one qualify for a Reverse Mortgage?

Like I said earlier, it is really pretty easy to qualify.  The fastest and easiest was is to complete an application now with no obligation and get a custom reverse mortgage retirement proposal completed just for you.  For more details, visit the Reverse Mortgage page on the website, you can even request a free brochure.

Richard Woodward   Reverse Mortgage Specialist Certificate

NMLS 217454

Your Local, Direct, 5 Star Rated Mortgage Lender, Specialty Lending Manager

Office:  (214) 945-1066

 www.mortgageprosus.com

Contact Us

Nexa Mortgage - Richard Woodward
7820 Hague Ct
Plano, TX 75025
Phone: (214) 945-1066

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Richard Woodward
Branch Manager
NMLS #217454
Company Licensing
Company State License#
AZMB - 0944059
NMLS# 1660690

Equal Housing Lender