REVERSE MORTGAGES: THE PROS AND CONS, THE MYTH AND REALITY.

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!

                                           ---------  3  0  ----------

Email:  ernie.delfin@gmail.com   or zhunrize.foundation@gmail.com

Websites:   www.rotaryeclubGlobalKalingaD3780.org

                    www.foundation4nextgen.zhuncity.com