Yesterday, an article in the NY Times described the problems that a senior encountered with a reverse mortgage. What was bothered me was that the entire article referred to a reverse mortgage as a loan. Nothing could be farther from the reality.
Reverse mortgages must follow a set of rules established by the federal government. These rules are not entirely comprehensive, but they do have a broad scope, e.g.
- Not every financial institution offers these deals. There are government approved lenders for the different areas of the country.
- The different lenders will charge different fees, offer different valuations for your home, as well as the amount of your payments.
- The maximum amount for which you can “sell” your house is limited by a government scale that varies by location. It tops out at about $350,000 no matter what your house is actually worth. Typically, you should be offered about 75% of your home’s value up to that maximum.
- The bet the financial institution is making is that you will die before their payments to you exceed the amount that they can realize by selling your house after you die.
A reverse mortgage has its place, but that place is defined by a narrow set of circumstances. Specifically -
- You are effectively selling your house in exchange for the right to live in it until you die.
- Once the deal is done, you have ceded control over your house. Theoretically, you could regain the home by paying back everything you have received plus interest, but that is unrealistic. Effectively, you have sold your house.
- The bet you are making is that you will live much longer than the norm, and the total payments that the financial institution must make to you exceed the amount you could realize by selling your house today. In a very real sense, you are betting your house.
What’s a senior to do?
- Depending upon your relationship with your children, it may be wise to let them know that you are thinking of selling your home. Since the home may form the core of any inheritance they might envision, they might choose to help you financially rather than lose the asset of your home.
- Evaluate any total dollar offer as if you are selling your house . . . because you are!
- If your house is worth more than the maximum permitted for your area, this deal is not for you. It may be time to sell the house, as beloved as it may be, and move into a rental.
- If you have modest income, you may qualify for Section 8 housing, a government program that limits rents to a certain percentage of your income.
- If the total offer sounds like a fair selling price for your house and your forbearers have a history of extended longevity, you may be among the small percentage of people for whom a reverse mortgage is a good deal.
- If you do decide to apply for a reverse mortgage, plan to get three different quotes. Also, don’t be afraid to ask for help. The AARP can offer some independent help.
Some other sources of information include - Reverse Mortgage Summary, Reverse Mortgage Calculator and Comparison Tool, HUD Vouchers, and HUD on Reverse Mortgages.
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March 5th, 2008 at 10:09 am
When you shine the spot light on one thing, the rest of the stage disappears. You focus on the RM not being a loan and that you are selling your house. This has never been true in the 12 years that I have been doing Reverse Mortgage s. It (the Reverse Mortgage) is no different than a forward mortgage. You still own the house, the Bank has an interest in it, and in either case if something happens to the borrower the Bank will be satisfied and the remainder, if any (in both cases) goes to the estate or family if there is any.. The difference being is that over the years the home pays you instead of you paying for it. This can make the retirement years as good as they should be.
The Reverse Mortgage is not for everybody but it is available to all that qualify.
Jim Saeger RMS
MyFloridaReverse.com