In a nutshell: how a reverse mortgage works

Laurie MacNaughton © 2018

Reverse mortgages…you’ve seen the ads a hundred times. But odds are you have a lot of questions.

In a nutshell, here’s the scoop

The first thing to know is a reverse mortgage is an FHA-insured home loan. I always start with this point simply because there can be confusion about the fact this is a home loan, in many ways not unlike any other loan we’ve all grown up with.

Here’s where the difference comes in: a reverse mortgage loan is repaid when the last person on title permanently leaves the home. In fact, the very name itself comes from the fact the loan is repaid in reverse on the back-end, rather than being repaid monthly.

The second thing to know is there are two kinds of reverse mortgages, namely a refinance reverse mortgage and a purchase reverse mortgage.

Reverse Mortgage Refinance

The best-known “flavor” of reverse mortgage is the Home Equity Line of Credit. It only differs from a traditional line of credit in that a reverse mortgage line of credit is not repaid until the last person on title permanently leaves the home. In other words, homeowners can borrow some of their home equity without picking up a monthly mortgage payment.

Reverse mortgage proceeds can be used for any purpose. Common uses include:

  • Financial safety-net in retirement
  • Healthcare
  • Home repairs or improvements
  • Paying off debt

Reverse for Purchase

This is an seniors’-only purchase loan, and it was designed as a way for homebuyers to purchase a retirement home without adding a monthly mortgage payment to their retirement budget.

Homebuyers provide a down payment (typically about 50% of the purchase price), and the loan amount covers the other 50%. There’s never a monthly mortgage payment due.

Buying a home with a Reverse for Purchase loan is an ideal way for homebuyers to double their purchasing power, and it is notably easier to qualify for this FHA-insured loan than it is to qualify for most other home loans.

Homeowner Responsibilities

With either type of reverse mortgage, because they still own the home homeowners remain responsible for:

  • Property taxes (unless property tax exempt)
  • Homeowners insurance
  • Homeowners association dues (if applicable)
  • Condo Dues (if applicable)

To explore how an FHA-insured reverse mortgage might help you or your client with retirement plans, give me a call. I always love hearing from you.

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At 101 She’s a World Record-Holder

I don’t often repost – but this is too good to miss. She began running in 2009…at the urging of her then-79-year-old son.

You go, girl.


In defense of equity consumption

By Laurie MacNaughton [NMLS ID #506562], as first published in Reverse Review, Oct 2017 edition. Reprinted with permission.

To be honest, the seminar topic was probate. But the two opening questions took my thoughts far afield.

“How many here want to leave their kids an inheritance?” Nearly every hand went up.

“How many here are likely to have an inheritance to leave?” Not as many hands went up. In fact, not many hands went up, period.

I sat through the Circuit Court judge’s talk scribbling down my churning thoughts, the foremost of which was this: not leaving kids an inheritance is one thing; having your kids bankroll you as you age is another thing altogether. If you’re the adult child of aging parents, zero inheritance can look great vis-à-vis the potential alternatives.

According to a Pew Research study, more than forty percent of adult children with a parent aged 65 or older helped that parent financially within the past year. If percentages remain constant, the number of adult children bankrolling parents is likely to get worse, a lot worse, because in little more than a decade one in five Americans will be 65 or older.

For many people, the go-to objection to a reverse mortgage is that the homeowner might not have equity left to leave the kids. But this is flawed reasoning.

If a homeowner with a reverse mortgage used all available funds, it is likely there were not other assets to draw from. This means each tax-free dollar the parent used did not come out of the kids’ post-tax income.

An alternate scenario is that the parent did indeed have other assets but did not want to consume those assets, which presumably will go to the kids. Under either scenario the kids are the big beneficiaries – every dollar of her own money Mom used was a dollar either the kids or the taxpayer did not pay out.

Of course, little or no remaining equity is by no means a foregone conclusion, particularly in light of FHA’s most recent changes to the product. But is it true there might not be equity left for the kids? Absolutely. The pertinent issue here is that the parent relieved the adult children from draining their own financial reserves – or at very least, delayed the time when the kids had to step in to help financially. And as boomers’ kids eventually edge toward their own retirement and the reduction in Social Security benefits impacts Millennials’ long-term financial plans, parents’ decisions are bound to become ever more conspicuous.

On a related note, for years I’ve thought it frankly odd how slow some financial professionals have been to amend their mindset about tapping into home equity, even as evidence mounts that homeowners with reverse mortgages tend to enjoy greater odds of financial survivability in retirement. If the popular press is to be believed, the needle does seem to be edging in the right direction, however.

Case in point: recently I met with a wealth manager who said to me, “Our holistic retirement planning includes reverse mortgages.” Moments later he went on to say, “Most of our clients want to leave their investments for their kids.”

Bingo. He has seen how a reverse mortgage can fit into the goal of leaving something for the kids.

This growing awareness is heartening news all around: as aging homeowners get more informed input on reverse mortgages, their adult children, the taxpayer, and the homeowner all stand to remain financially healthier in retirement.

Good news couldn’t come at a better time.

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Don’t freak – but do take note: big changes afoot

Laurie MacNaughton [NMLS ID#506562] © 2017

I am not an alarmist. I do, however, believe forewarned is forearmed.

This week FHA announced some of the most sweeping changes ever made to its reverse mortgage program: starting October 2, 2017 FHA’s reverse mortgage loan amounts will decrease, and most new reverse mortgage applicants will see higher upfront FHA mortgage insurance.

What does this mean? First and foremost it means that if your client, friend, or family member is looking into a reverse mortgage, now is the time to consider moving forward.

Though it will likely take years to assess the true impact of this week’s announcement, this much is apparent now: if a homeowner just barely qualifies under current guidelines, he or she may be ineligible under the new guidelines. Future applicants with little or no mortgage debt will see notably smaller lines-of-credit than they would have under current guidelines. It also means thousands of homeowners will be scrambling to get a place in line for their mandatory FHA reverse mortgage counseling.

NOTE: Loans already established, and those with FHA case numbers dated on or before October 2, 2017, will not be impacted by the changes announced.

History will be the judge as to whether these changes were wise. But one thing is certain: if intentions are to “some day” look into a reverse mortgage, that day has arrived.

If you would like to gather more details, give me a call. I always love hearing from you.

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Hidden costs of poor research can lead to bad reporting

Laurie MacNaughton © 2017

In a recent Washington Post article entitled “Hidden costs of reverse mortgages can lead to foreclosure,” author Jenifer McKim states, “…the risks of the [reverse mortgage] financial arrangement are stark….” What McKim doesn’t say is that the day her article went to print, the Post’s fact checkers apparently all skived off work – or took one last late-summer excursion to Rehoboth.

The implication of the Post piece is that reverse mortgages have hidden fees, namely property taxes and homeowner’s insurance. Taxes and insurance are “hidden fees”?

Ms. McKim, may I make so bold as to enlighten you to a fact of homeownership? Taxes and insurance are not hidden fees of a mortgage, traditional or reverse. If you own real property, you owe property taxes. If you have a mortgage, you must keep your home insured. That’s how it works.

This is not new news to homeowners; indeed, in the first foreclosure example cited in the Post, the homeowner had a traditional mortgage before doing a reverse mortgage. Had she stopped paying her taxes or insurance under the terms of the previous mortgage she would have also faced the threat of foreclosure. The homeowner is now delinquent in her property taxes and facing foreclosure. This has nothing to do with her having a reverse mortgage. It has everything to do with a property tax delinquency.

There is a research piece here, but it has to do with the availability of property tax waivers for the elderly. Misguided reporting overlooks a true dilemma we, as a society, must introduce into the public dialogue. Uninformed dialogue, however, accomplishes nothing productive.

Ms. McKim, I am not unfamiliar with your work and have appreciated much of what you have written. Sensationalistic reporting such as that exhibited in this piece is unworthy of you, and certainly of The Washington Post.


How is a Reverse Mortgage different from an Equity Line of Credit?

Laurie MacNaughton 2017

Answer? In several important ways…

Brought to You By…George Clooney

Laurie MacNaughton [506562] © 2017

I was proud of myself: I got through the whole appointment without saying what was on my mind, namely, “Holy cow – you look just like George Clooney.”

But I also didn’t say the other, more pertinent thing on my mind, which was, “Your parents are in their mid-90’s and you’re only now starting to talk with them about powers of attorneys? How can this not have come up until now?”

I get it – it’s a weird task with loads of emotional baggage in tow. Even after my parents were both diagnosed with cancer I had a hard time broaching the topic.

But on the other hand, speaking as one who frequently deals with issues related to not having documents prepared in advance, let me say this: please, PLEASE, if you’re the adult child of aging parents, ask your parents if they’ve prepared their documents and have kept them up-to-date. If they have not, encourage them to do so in terms as strong as you can muster.

As a reverse mortgage specialist here’s a scenario I see far too often:

Last year mom began showing signs of dementia, but dad was coping with her care. Now, however, mom has completely lost it, dad has medical issues of his own, and he’s no longer able to meet mom’s needs. Finances are under strain, mom and dad need in-home care, and eventually may need to apply for Medicaid.

But dad cannot sign documents for mom. And you, as the adult child, cannot sign for either mom or dad.

Why not? Because they never drew up their Powers of Attorney appointing an agent to act on their behalf. If dad can still make executive decisions, he has the opportunity to draw up a Power of Attorney. But mom? It’s too late.

Here’s why: once someone is mentally incapacitated, the Power of Attorney option is off the table because powers are granted to an agent by an individual who has the mental capacity to do so. This means once mom has lost her mental faculties she can no longer grant you, or anyone else, the power to make decisions for her. So now the court needs to step in and appoint a Conservator and/or Guardian (these are two different roles, though the same person can be appointed for both). In very broad terms, a Conservator deals with fiduciary matters and a Guardian handles legal and medical affairs.

The court gets involved because once a Guardian or Conservator has been appointed for mom, she loses many rights and responsibilities – a decision the state does not take lightly.

The process of becoming Conservator and/or Guardian typically takes a couple months – though emergency guardianships are possible – and can cost several thousand dollars. A little bit of pre-planning can avert substantial cost and non-inconsequential hassle.

As life expectancy continues to rise, many of us will deal with the needs of aging parents. If no planning has been done, in a moment’s time we can find ourselves dealing with an emergency but no legal authority to make decisions.

So please, talk with your parents. Now. Before there is an emergency and no easy solution.

And, if you have questions about reverse mortgage give me a call. I always love hearing from you.