Emotion Isn’t a Great Financial Tool
When I mention a “reverse mortgage” to some of my clients, some think I am trying to steal their house, some think I am trying to steal their money, and others think I am trying to take their children’s heritage away. At some point in my life I sort of felt that way also, but then it happened: I learned about reverse mortgages and studied what was going on in the real estate market. Amazing what a little knowledge can do for your long term beliefs!
First and foremost it is called a reverse MORTGAGE, because it is just a loan, similar in many ways to the 30 year fixed loan. We start the process with a loan application, longer but less intrusive than a normal loan application (1003). We take the information needed to qualify: Generally a driver’s license to prove your age (62 or over) and a Medicare card to prove your social security number. That is all the qualifications you need as a borrower.
The last qualification comes after you speak with a counselor for about an hour over the phone or in person. Then we get an FHA case number and we order the appraisal of your owner occupied house, condominium or units 2-4 where you live. When we get the appraisal back showing your equity, we can determine if you qualify for a loan that will pay off your current mortgage and perhaps give you “cash out” of your property as well. The formula is a ratio of your age and your equity. If the reverse mortgage isn’t enough to pay-off your current mortgage you will have to put up the difference in escrow to get the reverse mortgage.
Once you have all the facts you can choose the type of reverse mortgage you desire: fixed or variable. Once the decision on the type of loan is done we collect the insurance declaration page on your property and draw the docs to be signed. After signing you have a 3 day right of recession as you have on a regular mortgage loan. The loan is funded and recorded and your check, if you quality for one, is sent out to you. It generally takes 30 days from start to finish.
Your new loan requires you to maintain the insurance coverage and pay the property taxes and homeowners association dues, if applicable. In return you never make another mortgage payment the rest of your life, and your spouse’s life, until you and your spouse both pass away or leave the property.
Now the good part:
1. Being a reverse is just a loan, you can refinance it with another reverse or a regular mortgage loan.
2. You can sell at any time you desire and simply pay off the reverse mortgage. The reverse starts with the amount you borrow and has a monthly interest accruing and increasing the amount of the loan. If you take a plan that gives a line of credit the amount you draw plus interest will be added when used.
3. If you live in units (2-4) you collect the rents and keep the money
4. If the value of your house goes down in value, it is irrelevant to the loan.
Now the emotional:
1. The number one objection to the loan by the prospective borrowers is their desire to give the house to their heirs so they will have all the equity the borrowers have paid for over the years. If houses didn’t rise or fall depending on the housing market plus many other factors including, size, style, neighborhood and functional ability for the owner I would agree wholeheartedly with the comment. Unfortunately houses do rise and fall and don’t come back to even the original price very quickly, if at all, after a drop in home values similar to what we have just gone through..
2. A better way might be taking the reverse mortgage, which means no more payments, and make the payment to yourself. If your payments are $2000 a month for principal and interest you can take the entire payment and put it in an account which will be for your heirs. If you live 10 years the account will be worth $240,000, without interest, to leave for your heirs. They also will have a year after you pass to decide what to do with your house. They can sell it and take the profit, refinance it and keep it as their house, use it as a rental, pay it off or simply walk away from it without any obligation.
The last thing people would want to do is pay on their mortgage until the end of their life and be in a bad real estate market having a property without equity.
If on the other hand you have your house paid off and you’re 62 or older you can get a reverse mortgage and take out the maximum dollars you qualify for and not make a payment ever again on the house. You could take the cash and get a second home and have two houses without mortgage payments!
In conclusion I suggest you keep the emotions for the important things in life; births, birthdays, graduations, marriages and memorials! When it comes to money try to rely on knowledge and facts.
Schlesinger Roger (2014 February 10) Emotion Isn’t a Great Financial Tool. Retrieved on March 7, 2014 from finance.townhall.com
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