Reverse Mortgages

[dnf777]

I've always looked at RMs as a way to steal old people's homes from them, and give them a little pocket change until they die. I think they're disgusting and immoral. I have lost respect for Rob Wagner, Henry Winkler, and the rest of the endorsers.

But Gerry, how can a homeowner take out a lean on their house if its been r-mortgaged? Its no longer their home, its the bank's. The bank won't offer a RM if there are liens against the property. My understanding is that since YOU own the home free and clear, a RM is basically mortgaging the home BACK to the bank, with the most generous "death clause" in the world! Kind of like saying that when Lehman Bros died, anyone holding a mortgage under them got to keep their homes, and the remaining debt forgiven. (just an example...I don't know if Lehman actually underwrote morts)

[TxHillHunter]

I've always looked at RMs as a way to steal old people's homes from them, and give them a little pocket change until they die. I think they're disgusting and immoral. I have lost respect for Rob Wagner, Henry Winkler, and the rest of the endorsers.

But Gerry, how can a homeowner take out a lean on their house if its been r-mortgaged? Its no longer their home, its the bank's. The bank won't offer a RM if there are liens against the property. My understanding is that since YOU own the home free and clear, a RM is basically mortgaging the home BACK to the bank, with the most generous "death clause" in the world! Kind of like saying that when Lehman Bros died, anyone holding a mortgage under them got to keep their homes, and the remaining debt forgiven. (just an example...I don't know if Lehman actually underwrote morts)

You can use the RM to payoff existing liens if, after doing so, the LTV still meets the underwriting criteria. Additionally, there are lenders out there (or at least there were) that will take a 2nd lien position behind a RM 1st....crazy, but it happens.

[Gerry Clinchy]

I've always looked at RMs as a way to steal old people's homes from them, and give them a little pocket change until they die. I think they're disgusting and immoral. I have lost respect for Rob Wagner, Henry Winkler, and the rest of the endorsers.

Prior to the FHA loans, I might have agreed with you.

But Gerry, how can a homeowner take out a lean on their house if its been r-mortgaged? Its no longer their home, its the bank's. The bank won't offer a RM if there are liens against the property.

The reverse mortgage is a primary lien. So, if there is a balance on the existing mortgage or equity loan, those are paid off & rolled into the reverse mortgage. Just like any other re-fi.

Once the reverse mortgage is in place, there would be no need for another mortgage lien. The homeowner can draw on the equity in a lump sum, regular monthly disbursements, or disbursements upon request as needed.

The house is the bank's? No more so than with any other mortgage.


My understanding is that since YOU own the home free and clear, a RM is basically mortgaging the home BACK to the bank,

Yes ... that is exactly the point of a reverse mortgage. If a homeowner (keeping in mind an older person) has no cash to pay the property taxes, the equity from a reverse mortgage can do that. If you own the home & have no cash, the taxing authorities will take the house for a whole lot less than the equity that could be drawn out with a reverse mortgage.

There may be little or no income to fit this person into a traditional mortgage, where eligibility is based on the ability to pay the monthly mortgage payments.

with the most generous "death clause" in the world!


With the FHA reverse mortgages, if the homeowner dies, the mortgage company agrees to take no more than what the house brings on the open market or the remaining balance on the loan ... whichever is LESS.

If the homeowner gets to a point where they have no more equity, the homeowner can sell the house & pay off the mortgage ... just as would be the case with any other mortgage. They still get whatever equity is left after selling costs (30%, less selling costs, if the home has maintained its value from the time the reverse mortgage was written).

There is also no pre-payment penalty. If the homeowner drew against the line of credit due to illness, and then wants to pay some of it back, they can do so.

It's very much like a home equity loan, you might say.

Traditional mortgages have a clause in them stating that if the mortgagee dies, the mortgage becomes due and payable. That's why you need life insurance ... to pay off the mortgage so spouse & children don't have to sell the house to pay it off.


Kind of like saying that when Lehman Bros died, anyone holding a mortgage under them got to keep their homes, and the remaining debt forgiven. (just an example...I don't know if Lehman actually underwrote morts)

I don't quite understand that last statement, so can't address it.

However, that is the position the bank is in with reverse mortgages. If the house was over-appraised (during the housing boom), it's possible that in places like AZ, FL and CA, the sale of the home on the open market would be less than the outstanding balance on the loan, the balance IS forgiven. The heirs to the deceased homeowner do NOT have any responsibility for the loan.

No, I don't broker mortgages of any type ... but as a Realtor® I do need to be familiar with them.

As a Realtor®, if I had an elderly person who wanted to stay in their home, but was selling due to the cost of maintenance of the home, I would feel that guiding them to a reputable reverse mortgage lender would be a good thing for them. Wouldn't make me any money though.

[Gerry Clinchy]

You can use the RM to payoff existing liens if, after doing so, the LTV still meets the underwriting criteria. Additionally, there are lenders out there (or at least there were) that will take a 2nd lien position behind a RM 1st....crazy, but it happens.

Yes, you can use the RM to pay off existing liens if the LTV meets the underwriting criteria.

Not entirely crazy for a homeowner who may expect to get a job and pay some of the loan back ... but is relieved of making any mortgage payments with a RM.

I think the FHA RMs do not allow you to have a 2nd lien. I could be wrong on that.

If used for the most beneficial uses, an RM can simply make retirement easier by relieving the homeowner of the cost of property taxes and maintenance and repair ... and no monthly mortgage payment.

My property taxes are about $4200/year (& going up again this year). Where else could a person live for $400/month + utilities? Not many places even in the most inexpensive cost-of-living areas in the US.

Homeowners must also maintain homeowners' insurance.

[Julie R.]

My stepfather had taken out a RM on the waterfront house he and my mother owned on the Chesapeake Bay. They fit the profile; both in their late 70s, retired, with no liens on their home of 30+ years, and it needed some major repairs as it was an older home and they were planning on selling it. Well of course we all know the market tanked, and my stepfather passed away 2 years ago. It turned out to be far better for Mom to get rid of that RM, it was expensive and there was much cheaper mortgage money available. It seems in their RM at least, there were escalation clauses and it was a very costly way to borrow money. Her interest costs were far lower with a traditional mortgage.

[TxHillHunter]

Yes, you can use the RM to pay off existing liens if the LTV meets the underwriting criteria.

Not entirely crazy for a homeowner who may expect to get a job and pay some of the loan back ... but is relieved of making any mortgage payments with a RM.

I think the FHA RMs do not allow you to have a 2nd lien. I could be wrong on that.

If used for the most beneficial uses, an RM can simply make retirement easier by relieving the homeowner of the cost of property taxes and maintenance and repair ... and no monthly mortgage payment.

My property taxes are about $4200/year (& going up again this year). Where else could a person live for $400/month + utilities? Not many places even in the most inexpensive cost-of-living areas in the US.

Homeowners must also maintain homeowners' insurance.

My "crazy" comment was directed at any lender who would place a second behind a first that increases over time, especially in light of the current home value roller coaster ride.

Personally, I would only view an RM as a last resort. To use your example, you can live in that house for roughly $400 per month, with or without the RM....put aside the $400 per month and pay the tax man at the end of the year.

I realize that there are folks who have fallen on really hard times in the last few years, especially some retired people, which is likely the cause of the increased use of RMs. But let's use these "rainy days" to learn ourselves, and teach our kids about the importance of saving for the days when we no longer work. I'm pretty certain that almost anyone who saved 10% their whole lives would not find themselves in the position of needing an RM.

[Gerry Clinchy]

Julie, I believe that at one point all reverse mortgages were variable rate. Now there are fixed rates available.

With that thought in mind, interest rates are now at an all-time low, so a good time to grab a fixed rate RM. Like a home equity loan, you only pay interest on the outstanding principal, not on the whole line of credit that may be available.

One must still be very careful in shopping for the best deal on the upfront fees (which can be rolled into the loan).