REVERSE MORTGAGES: THE PROS AND CONS, THE MYTH AND REALITY.
Today’s column is about senior citizen homeowners whose priorities in
life have changed radically, especially in health care matters (that include end-of-
life issues), the distraction of the activities of daily living, exacerbated by declining
CASH FLOW, not necessary in that order. As a senior citizen myself, who has been
in the health care industry as a controller in the past, followed by a career in the
financial services that included real estate, mortgages, insurance and securities,
over the last 4 decades in America, I feel quite experienced and knowledgeable
enough to discuss these issues confronting the aging citizens of this country.
This column, envisioned to be an intermittent series of articles concerning
issues confronting seniors like Medicare, Medicare Advantage products, and
Living Trust, will about Reverse Mortgages that are becoming more and more
popular every year, as they can really help the many senior homeowners and
their family during the last quarter (or less) of their earthly life. With the
increasing life span of Americans, more and more seniors will live through their
nineties and many will even pass the century mark! That phenomenon,
however, is also bringing many unexpected challenges like health care expenses,
and earlier-than-expected depletion of families’ nest egg to afford and maintain
the quality of life of many seniors. More and more people are exhausting their
savings , pension funds every day causing a havoc on the lives of the aging
Cognizant of this actuarial reality, financial institutions have created a
mortgage product especially designed for seniors, called REVERSE MORTGAGE, to
enable them to tap and get the needed CASH from their considerable built up
equity on their primary residences. The rationale is for these senior homeowners
not be compelled to sell their homes, then uprooted into another community
away from their friends and familiar surroundings, but where the housing market
is more affordable to fit their reduced income. For this group of senior
homeowners who are cash poor but equity rich, a reverse mortgage, can be a
good and timely solution to sustain and afford the lifestyle that they have been
used to until they pass away to the next life.
WHAT IS A REVERSE MORTGAGE?
It is a mortgage loan program designed by financial institutions that is
federally insured given to senior homeowners, who are at least 62 years of age,
wherein the homeowners-borrowers receive the loan (cash) against their primary
residence without the legal obligation to repay the loan as long as the husband
or wife is still alive, and living in the same property. The maximum loan available
is based primarily on the age of the younger spouse, the appraisal value of the
property. Typically, the reverse mortgage loan amount is about 55% of the
appraised value (with ceiling limits that vary from one region to another) The
older the homeowner-borrower and the higher the value of the house, the
higher the available reverse mortgage loan amount. The homeowners are
required to live in the property, maintain the property in good normal condition
and continue paying the annual property tax and homeowners insurance.
When the first spouse dies, the reverse mortgage contract continues
until the surviving spouse dies or the property is sold, whichever occurs first. In
the event of death of the last surviving spouse, the heirs (children) to the
property have one year to secure the cash or obtain another loan to pay the
reverse mortgage lender in full, that includes all the accumulated unpaid
interests that are added to the original principal. In the event that the property is
sold at that time, any excess of the selling prices less all selling expenses and the
payoff of the reverse mortgage loan, will inure to the heirs. In the unlikely
event, that the net selling price of the property, however, is not enough to pay
off the outstanding balance of the reverse mortgage loan, the estate of the
deceased borrowers nor their heirs are NOT obligated to pay the deficiency to
the reverse mortgage lender. That is the main reason that there is an FHA
insurance imputed on this kind of mortgage loans.
WHAT ARE THE ADVANTAGES OF A REVERSE MORTGAGE TO SENIORS?
Like student loans, there are some obvious advantages of reverse
mortgage for the right kind of senior homeowners. Foremost is the availability of
extra cash that the senior homeowner can get ----- monthly, quarterly, semi-
annually, annually or lump sum ------ depending on their choice. That extra cash
can be used for any purpose like going to an extended vacation, world cruise and
travel, better and healthier foods, better medicines, much needed dentures,
occasional visits to spa and beauty parlors. (Going to Las Vegas is NEVER
recommended) The withdrawn cash can also be used to improve the same
house, or buying another house in full for the children or grandchildren to
reside. Many reverse mortgage borrowers have also utilized the cash proceeds
as a huge down payment to purchase another jhouse for their children or
grandchildren. A substantial down payment of 20% or more will avoid the PMI
(Private Mortgage Insurance) premium that makes the monthly payment much
The availability of ready cash, which is just a part of the current as well
future equity on the house, can sustain and in many cases can even enhance the
quality of life of the homeowners. This financial tool can also relieve them some
unnecessary stress in just trying to live from one social security check to another
social security check, or some annuity pension, if there is any.
Some elderly parents who can access cash from their huge equity have
also become more generous to their children or grandchildren. For others, with
ready cash, there is no more need to ask monetary help from others, especially
from their children, a healthier situation which could result into a better and
healthier relationships.
Let me share with my readers an example of a very satisfied happy client
in Orange County, California. This man has a fully paid house that he bought over
50 years ago for less than $40,000 but with improvement and additions over the
years, the house is now worth $750,000! As he is now almost 81 years old, he
qualified for the maximum of about almost $400,000! He tapped and got
$350,000 cash from a reverse mortgage lender and used the proceeds to to buy,
in full, a nice, bigger house in Riverside County for her daughter and her family,
who were just renting a house for $1,500 a month, after they lost their house a
few years ago, due to the collapse of the housing market that resulted into a
huge loss as the market value of their house that they bought during the peak
market just about 50% of the balances of their two mortgages: an 80% first
mortgage and 20% second mortgage.
Let me paint the hidden benefits of this dual transaction:
The father’s $750,000 real estate equity (networth) as of the purchase date
of the second house remained the same: $400,000 in the first house ($750,000
value less $350,000 reverse mortgage loan) and the $350,000 value of the 2nd
house without any mortgage.
After purchasing the 2nd house, there are now two properties appreciating,
instead of just one. There are also property taxes that can be deducted by the
daughter from their family’s adjusted gross income. (unfortunately or
fortunately there are no mortgage interests)
Now, the children can put their $1,500 that they used to pay as rent into
some savings account for future investments, or into some kind of annuity or any
other conservative retirement vehicle. The family could also use this amount to
pay the interest on the reverse mortgage (it’s an option) so that the $350,000
reverse mortgage principal does not increase, so that there will be more equity
left for the children to inherit, after the parents die.
WHAT ARE THE DISADVANTAGES OF A REVERSE MORTGAGE?
As in most loans, a Reverse Mortgage has also costs that are incurred, like
the Counseling Service fee that is a mandatory for all borrowers prior to even
starting the loan process, the appraisal of the property that is often paid up front,
and the FHA insurance that is a “necessary evil” for these loans that will add
more dollars to the principal, in addition to the interest rate that is being
imputed every month. Hence, a reverse mortgage would appear to be more
expensive that a regular refinance mortgage loan that has no PMI or FHA
Without any repayment to the reverse mortgage loan, the equity built up
is partially shared with the lender, hence the heirs will be inheriting less from
their parents. There might be a slight chance or potential ZERO inheritance, if
the parents live too long that the outstanding balance of the loan, with all the
accumulated interests, has caught up with the a potentially low appreciation of
WHAT ARE SOME OF THE MYTHS AND REALITY OF A REVERSE MORTGAGE?
Many people have been told that once a senior gets a reverse
mortgage loan, he is in fact giving up his house to the lender, and he will lose his
house. NOT TRUE. The homeowner remains as the legal owner and can sell the
house anytime. Like any other mortgage, the reverse mortgage loan, which is
normally the first lien holder on the house, must be paid off before the title is
transferred to the next owner-buyer.
The Reverse Mortgage lender will never sell the house as long as the
surviving spouse is still residing in the property. They will only have the right to
sell the property after ONE year after the death of the second spouse, IF the heirs
cannot obtain the cash to pay them off.
The reality of any reverse mortgage loan is that is it is almost like any
traditional mortgage loan with the ONLY difference that the homeowner-
borrower is not required to pay any monthly amortization or any payment
towards the interests NOR principal until the house is sold or the last surviving
spouse dies. Like any other mortgage, this Reverse Mortgage Loans are recorded
as first lien against the subject property, that will be paid sooner or later by the
borrowers, his estate or heirs.
COLUMNIST’S OPINION:
As a retired CPA and financial advisor, I believe that like any loan
programs or financial vehicles out there, reverse mortgage is NOT for everybody.
It’s not meant to cure all financial or cash flow problems that seniors may have.
But for many retired seniors who are cash poor but equity rich, it may be a great
timely solution to assist them live a better and healthier life. That extra cash can
stop their living as “starving seniors” who are eagerly waiting for the limited
social security check every month.
Before any senior homeowners get this kind of loan, do ask intelligent
questions and apply the PROS and CONS to their particular circumstance. Avail
of the required mandatory counseling service and never rely 100% to any loan
officer or lender who markets the reverse mortgage products to senior.
You can email or call this writer (714) 742 1365, as a service to my fellow
seniors and readers, I will professionally analyze your particular situation, and
recommend the right and suitable solution to your specific circumstance. Before
you decide to get any financial product, be it reverse mortgage or refi loan with a
cash out or an equity loan, you must fully understand the impact of that product
health to your financial.
May you all have a healthy and happy retirement, fellow seniors!
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Email: ernie.delfin@gmail.com or zhunrize.foundation@gmail.com
Websites: www.rotaryeclubGlobalKalingaD3780.org
www.foundation4nextgen.zhuncity.com