montana1122 Asked September 2014
Reverse mortgage vs. HELOC's. Anyone have experience?
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Financial Back up plan - Reverse Mortgage. May have to look at these options......
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On a Reverse Mortgage, there are no outgoing payments, however it may leave no equity when there is a need to sell. Interest builds on top of the 'loan', you may be "entitled " to approx 60% of the existing value
But you can't be thrown out of the house..
#1 This live-in caretaker/squatter problem. Who needs that???
#2 Being unable to pay family a reasonable sum to care take (Medicaid rules).
#3 What do we need AARP for??
- FAILURE TO PAY - property taxes, insurance. For many who have had their home a long time, they are underinsured for the new debt. Or find they now need flood or wind policies. Premiums for new insurance can be lots more and can significantly increase the fees added to the RM each year.
- MOVING TO A NEW RESIDENCE- if RM property stops being your primary, you are out of compliance with loan. If you move into IL or AL or NH, your loan is due.
- BEING OUT OF THE HOME FOR MORE THAN 1 YR - the loan will come due. A cruise or long vacation is OK, but you have to continue to live in the home. Most policies have this.
- ALLOWING THE PROPERTY TO DETERIORATE - you are expected to pay for all repairs & maintenance on the home. The house has to be habitable with no code issues.
Two of the big RM players, Bank of America & Wells Fargo, got out of the new reverse business in 2012. They were like 50% of the market too - they still service & honor the old loans but do not write any new ones. MetLife in 2013. I would image they did it because many RM homes now are negative-equity so they were taking losses on those RM's. What is left in are smaller lenders and brokers. Some are good but some did subprime mortgage lending.
There was a great NYT article Octobe, 2012 by Jessica Silver Greenberg: “R M's Costing Americans Their Homes”. It reads, “The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates.” “Reverse mortgages also have troublesome incentive structures that might encourage brokers to steer seniors toward lump-sum loans, which carry a fixed interest rate, rather than a line of credit with a variable interest rate, the bureau found. In a lump sum arrangement, the interest charges are added each month, and over time the total debt owed can far surpass the original loan.Brokers earn higher fees on these loans and even more money when they sell the loans into the secondary market, where they can get rates nearly double those for variable loans, according to rate sheets obtained by the consumer bureau.” There are over 400 comments with lots of personal RM stories. It is a pretty sobering read.
Another article on RM and subprime is from the National Consumer Law Center, called “Subprime Revisted: How RM Lenders Put Older Homeovers” Equity at Risk” www.nclc.org/images/pdf/pr.../report-reverse-mortgages-2009.pdf
Reverse mortgage does not require monthly payments from you, instead monthly payments are made to you. It is based on equity in the home and when the owner passes the loan becomes due. I do not have experience with these but i would assume that there are many other factors if using it to finance elder care.
You should see an elder law attorney to explain the differences and help determine what would be the best option for your situation.
If all the funds are used up by original borrower-they can continue to live in the home but are required to keep paying upkeep and taxes.
All reverse Mtg are standard gov backed(Reagan actually signed that into law to keep Sr's into their homes longer) The interest rate was never above 3% for Dad's so interest is lower than people think -they do take that out upfront. If you take lumpsome payment that may be different- we took monthly disbursement and his cash flow stopped last Feb.We are now looking to sell his 2nd home that has it's own problems(my brother who has been squatting there rent free for 6 yrs),it is finally on the market and will sell when brother dear co-operates(he's also apple of Dad's eye so Dad has no backbone with him-)Brother dear has postponed sale for a yr with promises of "I'll get a Mtg" but he has not good credit- so we will try tomorrow to borrow against equity in that house so he does not have to go to NH as his cash is below $40,000 and his 2 pensions make him inelliagble for medicaid. Can't get the vet's pension either till that 2nd home out of name.
So hope this helps explain reverse mtg's-as i said they are a federal backed program so the interest rates are standard across the board.
For RM's, I think one needs to be VERY careful with RM.
RM is debt that HAS TO BE REPAID. If homeowners, their kids or heirs want the house (or worst case scenario - have been unpaid caregivers for their parents and have no other home), then the RM, it’s fees, interest and other expenses within the RM has to be repaid once the homeowner dies (or does something to cause RM come due). Under fed rules, lenders allow heirs up to 30 days to let them know what they plan to do and up to 6 mo to arrange financing for 95% of FMV of RM’d house. If not, property can be foreclosed on &/or sold on the open market. There is no gray area, the RM has to be repaid. If it’s an FHA/HUD backed RM & house sells for less than owed, feds pay the difference to the mortgage holder. Family doesn’t have to make up the difference. But if you want to keep the house, you have to pay the RM.
RM’s can work for some….like a healthy couple 63 & 65 which own 400K appraised home outright & plan 10 - 20 years there; home in an area of increasing value; & have guaranteed income to pay taxes, insurance, maintenance for 10 - 20 years; & they do line of credit RM. So when they move, home is 600K which repays RM & leaves $$ for downsized home or CCRC buy-in. But if that’s you, really you don’t need an RM as you can get HELOC or personal loan.
Too often, RM is done by those in financial or health crisis who don’t understand what an RM involves. If RM’d home is lower value, the $ (may be less than 50% of value) is just a band-aid on a bigger $$ problem. They can’t pay for what is required for the RM; or end up moving to a NH. Either way RM default & property foreclosures on or sold on open market.
As of 2013 significant changes happened to FHA backed RM. Now you have to show ability to pay the “required” on the house, like insurance, taxes, etc for years. If not, then have an escrow-like account to cover these costs. If you are low income and struggling, you just can’t do this. No federally backed RM for you. Also now value & condition on house has to be verifiable.
Also RM require things of the property owner. Will do another post on those.
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