Reverse Mortgages Are a Good Thing For the Right Homeowner

I hear people say all the time, “Oh, a reverse mortgage? I’ve heard those are bad,” or some variation. I’d like to tell you why they can be a lifesaver for the right person.

First, Who Is Not Right for a Reverse Mortgage

For instance, my parents are debt free, and pay for everything in cash. They aren’t rich, mind you—my dad was a union plumber, and my mom stayed at home with us, and they have a modest house which they have lived in my whole life and which has only had one mortgage on it that was never refinanced—but they were very good with their money. If there was something they wanted to buy, they saved up until they had enough to buy it. So they have two cars free and clear, and a free and clear title to their house. They now subside on a monthly social security check and a plumber’s pension, which is more than enough for their monthly bills and a couple of dinners out a month. They are not the kind of people who would benefit from a reverse mortgage. I wouldn’t even bring it up to them.

Description of Someone Who Could Use a Reverse Mortgage

Then there’s my uncle. He buys a new truck every few years and finances it. He refinanced his mortgage a couple of times in the last several years to take some cash out for home improvements and to lower his interest rate. I don’t know his exact age, but he’s a little bit younger than my father, and is going to be coming up on retirement age soon. I don’t know exact figures, but I can give you a ballpark of what his income will be upon retirement. Probably somewhere in the neighborhood of $1000 a month for social security, and $2000 a month for pension, give or take. So, he might have a mortgage payment of $1200 per month, and a car payment of $600 per month for the SUV. And if he’s been making $60,000 per year, he has been making his payments no problem. So, he retires, and figures he’ll have enough coming in that he shouldn’t have any problems. But all of the little things add up-gas bill, electric bill, cable bill, water bill, phone bill, cellular bill, sewer and waste bill, etc. And let’s not forget about the normal maintenance items that we have: car tires, oil changes, license plate renewals once a year, repairs and maintenance around the house (water heater, furnace, air conditioner, windows, paint, etc), a new lawn mower or snow blower every so often. You get the idea. And before you know it, he has almost nothing left in savings, and is scraping by and juggling monthly bills.

If you’ve never really been broke and struggling, you probably don’t appreciate what a terrible place it really is to be in. And there are probably people you know: friends, relatives, people you see at church or at your child’s school who are in a very bad place financially, but you’d never know it. They might be embarrassed or ashamed, or be private people, and nobody would ever know what they are going through. And it’s a pretty easy place to slip into, especially for seniors living on a fixed income who can’t just go out and get a job.

Many Seniors Can Use Some Help

I grew up in Northeastern Wisconsin, a little south of Green Bay. Our neighborhood—our whole town in fact—was very middle class. When I was a kid, I had a paper route. It was $3.50 a week, or $14.00 month, for the daily paper, including Sundays. (Yes, it was over 20 years ago, and I am showing my age.) I had a lot of older couples on my route. I had one lady pay me every week with all change-and no quarters. She’d give me a little baggy with pennies, nickels, and dimes, with exactly $3.50 in it every week. I had a few customers that I could only collect after the 3rd or 5th of every month—after their check came in. Looking back, I didn’t realize at the time that many of them were fairly strapped financially.

Now, let’s fast forward, back to today. Let’s take a senior living solely on social security (which probably won’t be around by the time I retire, but that’s a whole other article entirely), and a modest pension. Over the last several months, nearly all investments have taken a serious beating, so their retirement checks are likely less than what they were getting. And if somebody has some serious medical problems, it can throw the seniors into a tailspin. There can be medications or rehab that isn’t entirely covered by insurance. Or if one of the partners has to go into a nursing home, it can be devastating. Now you have somebody who had a modest living, and has been thrown into a desperate situation.

If that person has a home worth $150,000 with a mortgage of $50,000 on it, they probably have payments somewhere around $500 a month. They’ve lived in that house forever, and really don’t want to move. They can do a reverse mortgage, get $50,000 cash, and have their mortgage payment gone forever. And the title to the house stays with them, and they can’t be foreclosed on. Now, you just replenished their savings, enabled them to be in control of their monthly expenses, and helped enormously with their security and peace of mind.

What’s the Other Side of the Coin?

This sounds too good to be true? What’s the downside, you ask? Of course, there is no free lunch…ever. Yes, it is a mortgage, it is a loan, and yes, there is interest on it. It is a negatively amortizing loan, which means the balance goes up over time because no payments are being made. But, if it ever ended up being upside down, the homeowner is not responsible for that amount. They can sell the house, and HUD eats the difference. Reverse mortgages are fully government insured, backed by HUD and FHA, and have many protections in place for the seniors.

Looking at Some Myths About Reverse Mortgages

• MYTH: I can end up owing more than the house is worth.
• FACT: If the balance increases, or home values go down, and the balance is higher than the current value, the homeowner will only owe what the house is worth, or what they can sell it for. If the borrower(s) should pass, the heirs have a full year to sell the house or refinance the loan into their name.

• MYTH: I will have to pay all that money back.
• FACT: The loan is only secured by the property, and as long as one of the borrowers is living there, nothing can change, even if one passes, or is moved to a care facility.

• MYTH: I will have to pay taxes on that money.
• FACT: The money is taken from the equity in the house, and does not count as income, and will not be taxed.

What Does It Take to Qualify for a Reverse Mortgage

So many of the things you may have suspected or heard are likely untrue. Ok, so reverse mortgages aren’t all bad; who qualifies for them? The qualifications are fairly simple:

• There is no credit requirement. Somebody could have poor credit, or the house could even be going into foreclosure, and they can get a reverse mortgage.
• There are no income requirements. Since the loan never has to be repaid, there are no income requirements to qualify. The only requirements are age and equity.
• The homeowners have to be at least 62 years old. If one is 62 or older, and the spouse is not yet 62, it probably makes sense to wait until both are 62, so both can be put on the loan, and both are covered.
• Generally, the maximum loan to value (LTV) is around 60%, so there has to be a good amount of equity. They can bring money to the closing to get down the necessary amount if they don’t have enough equity in the house.
• Reverse mortgages can be used to purchase a home. Instead of buying a $300,000 home, putting down $150,000, and making mortgage payments on $150,000, they could do a $150,000 reverse mortgage and never have to make a mortgage payment.

I’d personally never try to give somebody a reverse mortgage if I didn’t believe 100% that they were the right kind of candidates for it. And the government has put protections into place for the seniors, including required counseling before closing, to help guard them. Feel free to contact me with any questions, concerns, or comments.

The Chicago 77 would like to thank la4ko for today’s photo which he shared via the Creative Commons License.

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