REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

For those with annuities set to run out of money in the future that are relying on that income and cash flow, what to do?

A prospect with an immediate annuity recently contacted us about looking into a reverse mortgage to replace the income she is receiving from her annuity that runs out in 5 months. She is widowed and also supported an older parent that lives with her. She has her mother’s social security and her own social security along with this annuity that was paying her just over $2000 a month. That annuity was basically paying for her mortgage each month and she was confounded about what to do when that money was no longer available.

She looked into selling the home but it would have been too stressful to find a place for both her and her mother so she started looking into other means. She tried to find a renter for a part of the home but found that no one wanted to pay rent, most wanted a hand out. She tried to refinance into a more affordable mortgage but found that her fixed income was not enough to get a better rate and found it hard to satisfy stricter lender guidelines. Her annuity rep had no answer for her other than to seek us out as he had read about reverse mortgages on this website and found us as this site pops up on the first page of under a search for reverse mortgage.

Her home’s mortgage eating up her monthly annuity payment, it made sense to pay that mortgage off and leave that extra money, almost $2000, in her pocket each month for the next 6 months until that annuity runs out. She went from having NO extra money a month while receiving $2000 in an annuity payment to an EXTRA $2000 a month with that annuity payment. Think about that for a moment. Her income is the same but she now has $2000 in disposable cash each month. That’s hard to get your hands around but since she no longer has a mortgage payment, a good portion of that extra money is going into a savings account for her and her mother, maybe a CD. She’s not using the extra money that was left in the credit line, that money is earning growth, but the money that was used to pay off her mortgage has removed a burden she was facing.

Its not an easy decision for her or anyone, but before you completely cast off any ideas about borrowing against your home’s equity, write down all of the other ways that exist in this world that allows you remain in your home, pay the bills and not have to worry about a mortgage payment for the rest of your life in your home and maybe have some money to enjoy life with. Can you, with certainty, know what the future holds and how your bills will control your life or can you manage how your life can control your bills?

What do I mean by mean?

Just in case we forgot what the meaning of mean is, its the arithmetic average of a set of numbers. Our 6th graders know that as the mean, we know it as the average. In this particular instance, the mean is/are a set of years and their respective rates of growth (or loss) and also their respective rates. While its no secret that we have become a “here and now” society, expecting instant results for just about everything that we desire or come across, we should also remember that history shows the here and now mentality often results in a bubble that bursts. It doesn’t always end that way, sometimes its a softer landing but in most cases, there’s a correction and things kind of return to normal or they for good. Oh, and because we’ve become “here and now” people, when the mean or average changes more than normal, it becomes news and the news loves to create panic. I call it a campaign of fear. If we have 15 straight years of growth and one year of loss, the news and some pundits seem to want to throw out the previous 15 years of math and assume the new drop or gain will go on forever, essentially establishing its own “mean”. Unfortunately for the (forgive the pun) “hear and now” news, they as always, seem to get it wrong and things resume as almost normal- back to the mean.

For the past 15 years, reverse mortgages have been pegged to one index, the Treasury. They use the 1 year Treasury yield to calculate the interest that accrues on any money used (also called the initial rate) and they use the 10 year Treasury yield to calculate how much someone has access to (also called the expected rate). You can read more about that here and . A running mean for that 15 year period shows an What does that, er, mean? Right now the 1 year yield is .44. You add the margin to that to figure your initial rate and its ranged from 1.50 to 2.75 in the past 6 months (the margin has). The 1 year yield is not going to stay at .44, its going to come back up, there’s no where else for it to go. If you’re not currently in a reverse mortgage to stem your cash flow requirements, its going to cost you more in the future based on this mean data. The 1 year Treasury yield can not stay this low.

In addition, take a look at home values. They had experienced a relatively calm 4% mean growth until it all went haywire in 2003-5. Some areas experienced double digit growth for a couple of years at a time and we knew it couldn’t last but we loved following our equity growth. We bought and sold houses with that growth, we bought and sold business with that growth, we attempted to retire on that growth. In hind sight, it gave us a false sense of security and we tapped into it often, everyone said no problem, we’ll remove the boundaries to access that growth because its fueling the country. Everyone. We know how that ended. But now when it comes to reverse mortgages you’ll read about NOT tapping into your home’s equity or strong caution by such prominent sources as Bankrate, Kiplingers, FINRA, AARP, etc. I don’t have historical references from the growth days but I bet they were selling ideas based on growth (without the caution). Homeowners that think their values are going to jump back up have to understand the mean says they are probably at or near the levels they should be, based on the mean.

Take a look at an example of Phoenix home values from 1992 to 2016. The graph shows the mean while it also shows where values went off the map in 2003 time frame.

This all “means” now is a great time to tap into your home’s equity through a reverse mortgage as rates are low and your home’s value is not apt to go too far in any direction for awhile and if your retirement plan was pinned to S&P for example, take a look at another mean. In March 2000, the S&P 500 topped 1550, up more than 15-fold from its low in mid-1982. Although there were several bumps along the way (let’s not forget the Crash of 1987), there was only one calendar year out of all 18 in which the S&P 500 dropped: 1990, when it lost 3.2%. Overall, for calendar years 1982 to 1999, the S&P 500 enjoyed an annualized return of 18.5%. But now where does it stand.

What does it all mean?

HUD requires independent Home Equity Conversion Mortgage (HECM) counseling for all reverse mortgage applicants. HECM counselors are required by federal law to provide information on the costs and financial implications of HECM loans, and on alternatives to HECMs that may be available to consumers. An unbiased source, they provide the following:

Have you considered All Your Options?

Have you looked into all your options? Have you seriously explored the other choices discussed on AARP’s website? If not, go and read all the pages listed there. They make you aware you could sell and move into less expensive quarters, you could rent or look for state based services to supplement your living expenses. Right now thats one of the bigger reasons folks are turning to reverse mortgages, their monthly living expenses have surpassed their monthly cash flow capabilities and with state based services also suffering, the reverse is a welcome option for those that qualify.

Are You Eligible?

a) Are you and all other owners of your home at least 62 years old?
b) Does each owner live in the home at least six months out of the year?
c) Is the home a single family residence, duplex, triplex, 4-unit residence, a condominium, or a planned unit development (PUD)?

If you answered “Yes” to questions a, b, and c, then most likely you are eligible. But only a HECM lender can determine for certain if you are eligible for a HECM.

If you answered “No” to question c, you may still be eligible if you live in certain types of manufactured housing, but not if you live in a mobile home. To see if your home is “manufactured” or “mobile” contact your lender.

Could You Get Enough Money?

Could a reverse mortgage give you the amount of money you would need to get from it? Use the to estimate how much you could get from a HECM loan. Here are some things to keep in mind: If you now owe any money on a debt against your home, you would have to pay off the full amount you now owe in order to get a reverse mortgage. But you could use money from the reverse mortgage to do that. For example, if you now owe $20,000 on a home equity loan and could get $100,000 from a reverse mortgage, you could use $20,000 from the reverse mortgage to pay off the home equity loan – which would then leave you with $80,000 from the reverse mortgage.

If you answered “Yes” to the questions above, then you can request a counseling referral via the and your advisor should provide you with a small list of approved counselors. Unfortunately, not all of those listed on the site are still providing all of their services.

Last year there were 107,000 reverse mortgages originated, this year the number of HECMs is on pace for over 110,000. In 2 years, that’s over 200,000 and that’s not including the fallout from those that had intended to qualify for the reverse mortgage but did not for various reasons, such as qualfying values on their homes, title or trust issues or those that decided to stop the process for other reasons. The problem now is the time it takes for someone to get a counseling session scheduled has increased to weeks in some cases and that is causing some consumers to stop the process altogether. These counselors provide more than reverse mortgage counseling, they are also offering all types of housing and credit counseling as well and it doesn’t take much to realize that their resources are completely tapped out. Last year, 264,989 troubled homeowners sought help from federally certified counselors, a 55% increase from the previous year according to a recent .

The borrowers must now pay for the counseling, it used to be paid for by the lenders but no longer. The costs cannot exceed $125. Some agencies offer free counseling, some offer a lower fee if paid upfront but almost all allow for the client to pay for the counseling at closing by using the proceeds from their reverse mortgage funds. All agencies are different so contact them to find out their policies. Getting the appointment with the counselor is still the biggest headache in this process and as mentioned above, it stops some from proceeding and its hard to explain away that issue.

Reverse mortgage advisors are to provide the client with a suitable number of HUD approved counseling agencies for their clients but not be involved in setting the appointments for the client. Some advisors will give their client a list of 3 agencies to call and will sit with the client during the setup of the appointment to make sure they are being properly taken care of. The counseling could take place in the counseling office or it can be done over the phone. Most take the phone counseling but the face to face counseling provides the client with a better understanding of their options and processes. After a successful completion of the counseling they are provided with a counseling certificate. That certificate goes to the broker or lender they have selected to do business with and then the lender secures an FHA case number based on that required certificate. Then and only then can any real processing begin on the client’s loan. They can’t order appraisal, inspection, title or anything until counseling is completed and the case number is secured. Some folks don’t realize there are many checks and balances in the process to protect the homeowner.

In 2006 we posted an article that they were in the process of updating the system.

HUD is not the only group to acknowledge the system may be failing some.

If someone asked you how you could increase your cash flow right now in this market place, what would or could you do?

You could cash in some of your retirement portfolio: you would be taxed on the money you took from your portfolio and when the market does come back, your reduced principle would now be hindered in its attempt to meet the goals you had expected when you first put it together. So taxes and slower growth potential can hinder that option.

What if you don’t have a retirement portfolio?

You could sell your home and take the cash to buy a less expensive house or rent: you would have to pay real estate commissions (3-6%), moving fees, staging and prep fees, where do you put the keepsakes that don’t fit in a smaller place, taxes, inheritance taxes, etc, Will you be able to sell the home for the price you believe its worth, what if the home across the street was a distressed sale, it will bring down the value of your home as well. You could leave the home alone and wait for the market to come back. Maybe there’s no way you can sell, maybe it carries too much of an emotional connection to leave it. So emotional attachment can hinder that option.

You could cash in your life insurance through a life settlement or your could look into a reverse mortgage. Even with the life insurance, something that seniors are increasingly finding is that when they purchased life insurance policies years ago and expected dividends to cover premiums, they were not covering the premiums because the interest rates have fallen. Then premiums may have risen, or cash surrender values may be eaten up faster than anticipated to pay premiums and policy owners have to dip into their pockets to pay further premiums or the policy could lapse. What to do?

If you don’t have a life insurance policy with significant cash value but own your home and have equity in your home, you just found a way to increase your cash flow by a significant amount.

How much can you get from a reverse mortgage? It depends on your home’s value, the age of the youngest borrower (over 62) and the lowest expected rate. Someone 75 years old living in a $400,000 home could get somewhere around $263,000 out of that home in any form they chose, either as a monthly payment until they move or pass away ($1760 a month in this case) or leave the money in a credit line and take from it when you need the money while it continues to grow in value. Maybe they had an $80,000 mortgage that they took to put a sunroom on the back of the house and pay off some credit card bills. That leaves them with $183,000 in a credit line that could grow $9,000 the first year or to $230,000 in 5 years. The growth is guaranteed, and that growth is based on almost historically low reverse mortgage rates. Should the rates increase, the growth will increase. Has your financial planner talked to you about that kind of growth while the bottom is falling out of the market and your pension is at risk? And what about your home value? If you were waiting until home prices came back, you could still secure the reverse mortgage and grow your credit line money, regardless if the value continued to decline and if the home value does increase, you get the credit line growth and you increase your net home equity should you want to sell or refinance down the road but you are locking in your home’s value at this time with the reverse mortage and you can’t get a value lock anyway else unless you sell (and we talked about that already).

Oh, by the way, there are no taxes on this income. No taxes on the growth. None.

Lets go back to that scenario above where the person sees $9,000 a year growth and the principle doesn’t decline but they no longer have that $430 a month mortgage payment on the $80,000. That person could continue to pay the long term care bills, they could continue to pay the life insurance premiums or put money toward the college tuition program for the grandchildren. Maybe they already bring in $5000 a month from 2 social securities and an annuity. Now they have another $9,000 a year to add to that. They go from $60,000 a year to $69,000 a year but they have decreased their out of pocket costs by $5160 (430 x 12) so they are cash flow positive $14,160 or almost a 25% increase in cash flow. If they were making less, the cash flow increase would be more. Its that easy. They get to enjoy the things they thought they could enjoy when they began planning for retirement years and years ago. If you sit around and worry about what you’re going to have to cut so that you can just barely make ends meet in this very difficult time of our lives, does that help anything? Isn’t it about your quality of life at this point? I’m not advocating blowing it all on the fancy car or the round-the-world trip but if you have a means to enjoy life should you put it off until its too late or put yourself into a position to take advantage of every opportunity. A reverse mortgage gives you that opportunity.

Its your house, its your money and its your life.

The recent signing of the HOUSING AND ECONOMIC RECOVERY ACT OF 2008 (HR 3221) by President Bush puts into motion something that has been long in the making and that’s a modernization of FHA rules for reverse mortgages. Some of the changes facing potential reverse mortgage clients are an increase in the national lending limit from the individual county limits now in place. Folks in some parts of the country will see their lending limit rise from as low as $200,160 to an anticipated $417,000 and that’s good news for those with home values over their county lending limits since any equity access was determined from the lower of the appraised value or the respective county lending limit. In many cases where the reverse mortgage was to utilized to pay off an existing forward mortgage there wasn’t enough cash access to pay off that mortgage and the borrower either had to come to the table with money or look for alternative methods which often led to selling the home and in a down market, that’s neither easy or fun.

Another change is with the origination fee, currently capped at 2% of the lesser of the appraised value or the county lending limit. The new bill will keep the 2% up to $200,000 but cap the origination fee at $6000 which is more than $1200 less than some of the highest fees where county lending limits were as high as $362,790. In that case, 2% of that amount would have resulted in an origination fee of $7255.80.

Higher lending limits combined with lower origination fees are great for those seniors whose circumstances have them looking at ways to increase their monthly cashflow without making risky investments in a roller coaster stock market.

Some new additions to the bill are for folks in co-ops and those looking to use the reverse mortgage as a finance tool to help them purchase a home, most likely in a downsizing event. Currently, only New York co-op owners are able to secure reverse mortgages because of their prevalence. There are other pockets of the country with co-ops and this will be a relief for those co-op owners as other means of financing have disappeared as most boutique programs are no longer available. In the event someone wants to downsize from a larger, more expensive home, the ability to purchase a home using a reverse mortgage is also a welcome addition. As an example, someone in a $400,000 home can sell the home, take a portion of the proceeds for purchase of a less expensive home, say $200,000, and instead of putting up the entire value in cash, they can put down a small portion, in this example, half of the value and finance the other half and not only do they eliminate monthly mortgage payments, they keep a larger portion of their cash in their pocket and in this market, cash is king. Instead of having $200,000 left over from the sale of the home, they now have $300,000 and no monthly payments as long as they live in the home. That’s also great for those that don’t currently qualify for a regular mortgage because of bad credit or insufficient fixed monthly income as those programs have gone the way of the other boutique programs once offered by most forward lending brokers.

Some other features are a prohibition against requirements to purchase additional products as a condition for HECM eligibility such as annuities or life insurance policies. That is good news as the recent negative information about reverse mortgages has been because of this very practice. Folks short on cash flow that need a reverse mortgage should not have their money tied up in any annuity, be it immediate or deferred. The reverse mortgage provides more cash flow with less restrictions than the annuity could anyway in most situations where monthly cash flow is short. Another mention is about a study to determine consumer protections and underwriting standards for HECMs which will help to insure that purchase of any additional products by a consumer is appropriate for the consumer.

We like the new changes, they are consumer protection focused and open up opportunities to help save some homeowners from increasing monthly payments on their forward mortgages that were having a harder and harder time making that increased payment amount and the homebuying function is a great tool for credit challenged or those looking to downsize into more affordable housing.

We came across a truly useful book the other day: Scam Proof Your Life (377 Smart Ways to Protect You & your Family From Ripoffs, Bogus Deals & Other Consumer Headaches). The book is written by Sid Kirchheimer, “AARP’S Scam Alert Expert” and contains a wealth of practical tips and advice to use in protecting against all types of financial mischief from high-tech identity theft to avoiding used car sales scams.

Our initial interest in picking up the book was to see the advice offered for avoiding reverse mortgage scams. Given the authors AARP connection (even highlighted on the cover) we surely thought a chapter (at least a few pages) would be devoted to dangers in the fast-growing reverse mortgage sector. On this point we were disappointed. Not a word about reverse mortgages or reverse mortgage scams.

A chapter is devoted to “Homes”, but it deals mostly with home purchase mortgages and home improvements. Quite surprising that a book about consumer scams carrying the AARP logo on its cover does not mention reverse mortgages.

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Homeowners across the U.S. are facing tight financial situations brought on by the expiration of teaser rates on adjustable rate mortgages (ARM) that seemed like such a wonderful deal just a few years ago. According to Forbes, nearly 2 million homeowners are expected to see their adjustable-rate mortgages reset at higher rates by the end of 2008.

And the problem isn’t just isolated to younger homeowners who bit off more than they could afford. Plenty of senior homeowners are finding themselves in this situation as well. But seniors are luckier because they have available a credit repair tool that’s not an option for homeowners under age 62: reverse mortgages. More About Using a Reverse Mortgage to Get Out of Tight Spots…