How the back-end of a reverse mortgage works

Laurie MacNaughton and Neil Sweren © 2019

Within the past few years I lost both my parents and I can attest to this: dealing with estate issues is not fun, no matter how much advanced planning parents have done. This said, the more informed one is, the more smoothly things roll.

For those dealing with a home having a reverse mortgage, there may be questions regarding how the “back-end” works. The answer depends upon whether the property with the reverse mortgage is underwater at the time the last person on title permanently vacates the home.

Selling the home if the house is NOT underwater

If the loan balance is less than the current property value, the sale is handled like any other home sale. There is nothing unusual about paying off a reverse mortgage with one exception: there are certain time constraints the lender MUST follow once the last person on title no longer occupies the home as his/her primary residence.

If the property is not underwater, the buyer’s lender requests a written payoff statement from the reverse mortgage servicer. At closing, the loan balance is paid off – just as would be the case with any other mortgage.  After the loan is paid off, any and all remaining equity goes to the seller, which often is the borrower’s heirs or estate.

Selling the home if the property IS underwater

If the loan balance exceeds the property value the process is a little different.

Reverse mortgage payoffs are not negotiated like other short sales or short payoffs.  The lender must accept as satisfaction of the lien the first offer that is at least 95% of the home’s current appraised value.

Reverse mortgage loans are non-recourse in nature, so the borrower and his/her estate CANNOT be held responsible for any shortfall.  This is true even if the borrower has millions in other assets.  The house repays what it can, and any shortfall is covered by the FHA insurance fund.

It is important to understand this is not a short sale, and that there is no negotiation required or permitted. The lender is prohibited by HUD from accepting less than 95% of the home’s appraised value.

What if the heirs want to keep the home?  

The lender does not care how the reverse mortgage is paid off, only that it is paid off. If the family desires to keep the property, the loan can be satisfied by refinancing or by paying off what’s due.

In an underwater situation, the 95% figure noted above holds true for family members who want to purchase the home: heirs can buy the home for 95% of the appraised property value – which is not the full loan amount.

Important note on time frames

It is important to note there are mandated time constraints placed upon the lender, and the clock starts ticking the day the last surviving borrower no longer occupies the property. Once the home is unoccupied, the borrower or his/her estate have six months to pay off the loan. In addition to the initial six months, up to two three-month extensions can be requested (for a total of one year) if more time is needed.

Extensions are not automatic; documentation that the home is listed for sale, a sale is pending, or that a family member is applying for financing on the home will be required in order for an extension to be granted.

Communication is key

The loan servicer should be contacted immediately once the home is vacant. Reverse mortgage servicers deal with “back-end” situations every day and help borrowers and family members through the process. However, they can’t help if they don’t hear from anyone. All reverse mortgage servicers send monthly loan statements to borrowers. Those statements contain all loan and contact information necessary to make contact with the lender.

If you have questions regarding an FHA-insured reverse mortgage, give me a call. I always love hearing from you.

 

Too good to be true?

Laurie MacNaughton © 2019

The conversation often progresses along a similar path: first skepticism of reverse mortgages, to comprehension, to the following statement, “This sounds too good to be true.”

I get this progression, as I myself walked this precise path when I first learned about reverse mortgages.

There are a few seemingly “too-good-to-be-true” elements of FHA-insured reverse mortgages, the first of which is its mode of repayment: this is a home equity line-of-credit that doesn’t saddle homeowners with a monthly mortgage payment. Rather, the loan is repaid on the back-end, in reverse, when the last homeowner permanently vacates the property. There is simply no other home equity loan that does that.

But another feature of a reverse mortgage is much less well-known, and is the following: the unused balance in the line of credit grows over time, much the same way money in a high-interest savings account grows over time. However, unlike monies in a savings account, the compounding growth on a reverse mortgage line of credit is not taxable. This growth, along with the principal, is there for the homeowners to use as needs arise.

And this growth can be substantial – at today’s rates and terms, homeowners starting off with some $90,000 in their line of credit might expect to have some $165,000 in ten years. This means that if the homeowners were to do a reverse mortgage before they need the funds, and were to let the line of credit grow for 10 years, by the time they start accessing the monies there would be far more available to them than there had been at the outset. And, as I mentioned, this growth is always tax free.

Several misconceptions often surround reverse mortgages, including the question of who owns the home. The answer, without any caveats, is “the homeowner.” End of story. The second question often is whether the homeowners, the heirs, or the estate, can end up owing the lender if the home were to decrease in value. Again without any caveats, the answer is “no.” And a third question I am often asked is whether there is a prepayment penalty if the homeowner moves. Nope, never – there is never any kind of prepayment penalty.

As an aside, I once went to someone’s reverse mortgage seminar, and the speaker said, “Reverse mortgages are a miracle.” Maybe I have a higher bar for miracles. Or maybe, as a reverse mortgage specialist, I take exception to silly statements like that. Reverse mortgages are not a miracle. But they’re also not a mystery; they’re just a mortgage – a mortgage with some amazing features, it’s true, but just a mortgage, in most regards just like any other mortgage we all grew up with.

There is never a one-size-fits-all financial product, as financial needs vary and every homeowner’s circumstances are a bit different. So are long-term financial goals.

But this much is certain: with longevity being what it is, none of us is likely to get by on just our Social Security. Few will survive on just an IRA, a 401(k), or pension – or, for that matter, on a reverse mortgage. But when added together, all these can contribute to financial health in retirement, and a reverse mortgage can play a very important role in financial wellness in the retirement years.

If you would like to discuss your financial needs, or those of a loved one, give me a call. I always love hearing from you.

Can we refinance using another reverse mortgage?

Laurie MacNaughton © 2019

“My wife and I took out a reverse mortgage a few years back. Can we refinance using another reverse mortgage?”

It’s a question I get at least a couple times a week, and the answer is…“maybe.”

The reason there is no perfunctory answer is for the much same reason there’s no one-size-fits-all answer when it comes to other home loans: it depends upon the value of the home and upon how much is owed on the loan you currently have.

As I venture into an explanation, a brief word of review becomes necessary.

A reverse mortgage is simply a home equity loan, in many ways like any other home equity loan. The biggest difference is that the loan is not repaid on a monthly basis; rather, the loan typically is repaid in one lump sum on the back-end, in reverse, when the home is sold.

The loans we all grew up with are repaid monthly in a forward direction, and for this reason they are technically called “forward” mortgages. Yup. That’s the real terminology.

With a reverse mortgage the amount a homeowner can borrower is a function of five things: the age of the youngest homeowner; the value of the home; interest rates; current lending limits; and the specific reverse mortgage program one selects.

And here’s where we get back to the question at hand, namely whether homeowners with a reverse mortgage can refinance using another reverse mortgage.

The first calculation is a given – if a couple did a reverse mortgage 5 years ago, they are now…5 years older. The older the homeowners the more they qualify for, so age works in their favor.

The second factor, home value, may also be in their favor, as many of our homes have appreciated nicely over the past few years. This is not a given, of course, and a new home appraisal is always required.

Interest rates have remained fairly stable, even with recent rate hikes, especially when viewed from an historical perspective.

The fourth element, or lending limits, may also be in the homeowners’ favor, as FHA announced higher lending limits in late 2018.

The final factor, namely product type, is currently proving the most interesting. New “flavors” of reverse mortgage have come onto the market, with more due out in 2019, and they are filling a niche long underserved. Homeowners in higher-value homes may benefit from some of these new offerings.

All this said, the determining factor in whether a reverse-to-reverse refinance will work ultimately boils down to how much is owed on the current reverse mortgage. If homeowners qualify for more than is due on their current reverse mortgage, a refinance may be possible.

As an aside, it always bears mentioning: because homeowners retain title to the home – in other words, because they still own the home – property taxes, homeowners insurance, routine maintenance, and other applicable responsibilities such as condo fees or homeowner association dues are still paid by the homeowner. Homeownership is homeownership, and nothing changes in this regard.

If you would like to explore the possibility of refinancing, give me a call. I always love hearing from you.

Triple whammy: the gender wealth gap in retirement

Laurie MacNaughton © 2019

Here’s what I’m not going to address, except in passing: the wage gap between the sexes. Why? It’s not because I doubt its existence. Rather, it’s because for most retirees the peak earning years are past, and they are now drawing down savings and investments.

What I am going to address, however, is the wealth gap between men and women during the retirement years.

Meet Rosemary, a woman who has spent her entire adult life caring for loved ones – first her profoundly handicapped brother, and then her Alzheimer’s-afflicted mother. When her mother died last year, Rosemary started looking for a job. At age 66. With no official work history. We’ll come back to Rosemary in a minute.

Retirement income typically consists of investments, savings, and, for most Americans, Social Security. In fact, information published by the Social Security Administration states half of retirees rely upon Social Security for 50% of their income; one in five relies upon Social Security for 90% of his or her income.

But here’s the catch: didn’t work 35 years? You’re not getting maximum benefits no matter how much you earned during the working years, unless you qualify for a spouse’s, or former spouse’s, benefits.

And if you never worked, as in Rosemary’s case – or if you worked fewer than 10 years – you may fall into a group called “never beneficiaries.” People in this category may qualify for no benefits at all, unless they can claim benefits through a spouse or former spouse.

To reiterate, there are two important numbers to understand: first, you have to work at least 10 years to qualify for Social Security benefits. Second, your monthly Social Security payment will be based upon your 35 highest-income years.

Women disproportionately represent never-beneficiaries because they step out of the workforce far more frequently than do men in order to care for children or elderly relatives, and no amount of curing the wage gap during the working years is going to fully close the wealth gap during the retirement years for these women.

For some women it’s a triple whammy: fewer years worked, lower wages paid during those working years. Add to this the fact women, on average, live longer, and you start to see the magnitude of the problem.

So, what are some cures for women already of retirement age? That can be tricky one, as working is simply not possible for some older citizens. However, for those who can work, even a small income can make a big difference. Also, I am a huge believer in the role faith-based organizations play in a community, as well as the effectiveness of service organizations and other non-profits. Some groups will assist the elderly with smaller home repairs, and many offer other forms of assistance. Many of our local jurisdictions have shuttle services for those needing transportation.

And what about prevention? There are many, many things we could do better, but following is some very low-hanging fruit. First, we must offer financial education early enough in life for it to have a meaningful impact. It does no good to start talking to people about retirement finances when they’re so close to retirement age they have no hope of working a minimum of 10 years. Second, we need to reexamine the wage gap and the many, complex reasons it still exists. And we need to take a very close look at things that are working, such as recent legislation passed in Oregon, whereby employees are automatically enrolled in Roth IRAs.

As for Rosemary, she is doing well. She had the great blessing of inheriting her mother’s home, and was able to do a reverse mortgage to help with her finances. She works as a cashier at a local grocery store, and has qualified for basic health care coverage through her employer.

Many of us, at one time or another, have turned to family for childcare or for eldercare. Twice I myself served as the primary caregiver for aging or ailing family members, and feel blessed to have had that privilege. However, circumstances were such that I was able to step back into the workforce. Not everyone is that fortunate. But I believe we, as a nation, ought to insist upon having this complex discussion.

New year, exciting new options in retirement financing

Laurie MacNaughton © 2019

His name is Richard, and his question to me was the following: “If my paid-off home is worth $900,000, why do I only qualify for some $220,000 in a lump sum with a reverse mortgage?”

Not only is this a great question, but it’s also a very common one. The answer, however, involves a few basics facts about how a reverse mortgage works.

First, the amount of equity homeowners qualify for is based upon age. More specifically, the loan amount is based upon the age of the youngest homeowner. Second, just like with any other home loan, a reverse mortgage is impacted by interest rates. And third, the amount one qualifies for differs according to the “flavor” of the reverse mortgage the homeowner selects – traditionally there have been two basic types, either a fixed rate or an adjustable rate.

Over the past few months, however, a plethora of other reverse mortgage offerings have come onto market. These loans, sometimes called “jumbo” reverse mortgages, are proving true game-changers for homeowners in higher-valued properties.

Which leads me to my conversation with Richard.

Richard initially enquired about a fixed-rate, FHA-insured reverse mortgage. Until very recently virtually all reverse mortgages were Home Equity Conversion Mortgages, or HECMs. But the HECMs are not always ideal for those in higher-valued homes.

Jumbo reverse mortgages are designed to meet needs of borrowers in homes valued up to $4,000,000. These non-FHA loans have some distinct advantages, with the most prominent being the following: at Richard’s age (78), he currently qualifies for some $430,000 at closing. Because he is looking to establish a special needs trust for an adult handicapped child, the larger amount available may better fit his goals. Second, closing costs on these loans are notably lower than those of an FHA-insured reverse mortgage. And third, at least one of these new offerings is available to homeowners aged 60 or older, rather than 62.

At the time of publication of this post, the new reverse mortgages were not yet available in Virginia as lines of credit. This means the full amount must be taken at closing.

Just like with other reverse mortgages, homeowners must continue to pay their property taxes, homeowners insurance, and other applicable property charges such as homeowners association fees or condominium dues.

I am the first person to say a reverse mortgage is not right for everyone. No one financial product is. However, a reverse mortgage can be an important addition to many homeowners’ long-term financial plans.

No one is likely to get by just on Social Security. Few will survive just on an IRA, a 401(k), or pension – or, for that matter, on a reverse mortgage. But when added together, all these contribute to financial soundness.

For more information about how a reverse mortgage may help with your retirement financing, give me a call. I always love hearing from you.

Wait…what? Line of credit growth and reverse mortgage

Laurie MacNaughton | © 2018

There is was again, that same question: “Should we do a reverse mortgage now, or should we wait until our investments are gone?”

Turns out there is research on this – lots, in fact, some sponsored by retirement groups and some by academic institutions.

Regardless of the source, conclusions are consistent: homeowners who do a reverse mortgage early in retirement, while they still have healthy savings, benefit more than do those who wait until their finances are under stress.

This is largely due to two factors.

First is asset preservation during market downturns. Needless to say, the past few months have been a bumpy ride in the investment realm, and paper losses turn into real losses when you have to draw upon a 401(k) or other investments during a downtick. If you’re able to ride out a downturn you benefit financially in the long run.

Second is on account of what may be the most under-reported aspect of a reverse mortgage line of credit, namely the growth added to the unused funds in a reverse mortgage line of credit. If this causes you to say, “Wait…what?” it should, as this is something that does not exist with other types of home loans.

Here’s what this feature of an FHA-insured reverse mortgage means to you: each month a small amount gets added to the funds in your line of credit. This growth compounds over time, and it’s there for you to use when you need it. The growth is not based upon home appreciation, but rather upon prevailing interest rates. It’s counterintuitive, but if rates go up the line of credit actually grows more quickly.

What this tax-free growth may look like over time can be astounding. For illustration purposes let’s consider a husband and wife, both of whom are 68 years old, and whose paid-off home appraises for $400,000. If their line of credit at the time of closing contains about $168,000, in five years’ time it may have grown to over $206,000 – assuming interest rates remain steady. Again, growth is pegged to prevailing interest rates, and the line of credit grows more quickly if rates go up.

This line of credit can create a valuable hedge against having to sell investments in a down market. It can also create a safety net that forestalls the need to apply for Social Security before full retirement age.

Optimally, a reverse mortgage provides just one part of a long-range financial plan for retirement, because as life expectancies continue to increase, retirement is going to take more than your monthly Social Security check. It’s going to take more than a well-funded 401(k). In fact, it’s likely to take more than a pension, an annuity, an IRA, or a bank account – or a reverse mortgage – can provide. But when added together, these can combine to create a long-term means of maintaining financial wellbeing in retirement.

If you would like to discuss how a reverse mortgage might help your retirement plans, give me a call. I always love hearing from you.

 

Don’t tell – our national aversion to discussing personal finance

Laurie MacNaughton © 2018

As I write this I’m visiting long-time friends in Germany. Over dinner the past few evenings our conversation has turned to retirement, as within the next decade both they and I will be approaching retirement age in our respective countries.

During our discussions a couple data points have piqued my interest, including the fact that though average Germans save more than average Americans do, a 2018 survey indicates they do not have appreciably more in retirement savings. According to the survey this is largely due to the fact median incomes in Germany are somewhat lower, and the cost of living higher, than in the States. When I asked my friends about their retirement funding they pointed to their daughter and said, half-jokingly, “She’s a big part of the plan.”

But here’s a personal observation: we Americans tend to speak of retirement finances with much more judgmentalism and a much greater degree of shame and secrecy. Did your 401(k) take a big hit after the financial crisis? Tsk-tsk. Have you not saved the recommended $1.5 million for retirement? For shame. Are you considering a reverse mortgage? Don’t tell friends or family – not now, not ever.

I see the impact of this attitude played out time and time again. A homeowner encounters an unexpected event – illness, loss of a spouse, loss of employment shortly before retirement, a later-in-life divorce – and suddenly needs access to a significant amount of funds. Because we Americans do not feel comfortable openly discussing finances, for many the only option is to look to their bank for a traditional home equity loan.

But here’s the thing: let’s say the homeowner qualifies for a traditional home equity loan. For the first 29 days after closing everything seems fine – cash need solved.

However, day 30 is the kicker because now there’s a mortgage payment due. And, for some homeowners this new loan payment is on top of an existing mortgage. Even if the homeowner can juggle payments over the near term, over the long term the situation can be a recipe for disaster.

So what are some potential alternatives? First, awkward as it may be, the homeowner needs to talk to family. They’re going to know sooner or later, and these conversations do not get easier over time – nor do financial situations typically get better over time. Over the years many adult children have told me they wish their parents had been more open in discussing financial matters.

Second, the homeowner should speak with a qualified financial planner, wealth manager, or elder law attorney who can help put together a long-range financial plan.

Third, the homeowner should consider using the home as a source of retirement funding. Several options exist here, including selling the home and downsizing, renting out a portion of the home, or doing a reverse mortgage.

Money is not a moral issue, though it can feel like one. Running short on money is not a sin, though we can be made to feel it’s one. And asking for help is not a weakness, though our culture may imply it’s one.

If you have questions about how a reverse mortgage may benefit your loved one, or if you would like contact information for elder law attorneys, financial planners, or wealth managers – or just about anyone associated with aging-related issues – give me a call. I always love hearing from you.