The TRUTH about REVERSE MORTGAGE (Everything you need to know) By Julie A. Colangelo Reverse Mortgage Development & Training Manager
A LETTER FROM THE HEART By JULIE A. COLANGELO The reality of our world today and traditional financial thinking just doesn t work anymore. I read a pamphlet by Leonard A. Renier a Financial Planner, The Family Legacy, and he asks the question what in the last several years has the financial services industry done to improve the lives of the average American? He is talking about saving for retirement. Salaries have not kept up with the cost of goods, shelter or raising a family in most of the world. The landscape changed about 10+ years ago and those getting ready to retire or recently retired don t have enough money either. Nobel Prize-winning economist Robert Merton said in a recent article the idea of leaving the house as a bequest is flawed. He continues we need to start thinking about the house differently, viewing it as an asset rather than treating is as As millions of Baby Boomers reach their retirement years, a poor economy and shakey job market has made the transition into retirement a little more difficult. part of our legacy. We must live in the economy that surrounds us. If you are getting ready to retire are you able to have the same standard of living in retirement as you did when working? Do you have to work a bit longer? Do you want to work that long? Will you be able to work that long? For those that have retired
is it the retirement you worked so hard to obtain? I m an advocate of Reverse Mortgage. Not because I sell mortgages, but because I want to have the same standard of living as I do now when I retire, and frankly that just isn t going to happen unless I tap in to the largest single investment I have ever purchased: My house. I was taught to buy a house pay it off and never touch the equity. Why? We were not meant to retire with a mortgage payment because in retirement our expenses need to be lower and housing is the highest expense we have. I can still retire, comfortably and for my life, in my home with no mortgage payment Again quoting, Robert Merton The house is like an annuity. It provides the housing you need for as many years as you need it. I believe, if planned properly, a Reverse Mortgage can be the fourth bucket of money in retirement planning. HOW DOES A REVERSE MORTGAGE WORK? Reverse Mortgage is a general term. There are proprietary reverse mortgages and the gold standard FHA Home Equity Conversion Mortgage (HECM) Reverse Mortgage. It is a financial product that when used correctly with a plan in place can be the fourth bucket of money in retirement planning. First let me explain that a Reverse Mortgage whether a refinance on your current home or a purchase money loan on a new home is exactly the same as having a traditional conventional mortgage lien on your home. Your home is not a liquid asset. In order to make the equity in the home liquid you need to use the home as collateral to get cash out in the form of a loan. You sign a promissory note, and a Trust Deed (or Mortgage) lien is recorded against the home and released once the monies are paid back in full. The difference between the Reverse Mortgage loan and Conventional loan is making a monthly payment. In the end both loans need to be repaid. With a Conventional loan you must make a monthly payment. Interest accrues on the balance each month and you receive a statement to pay the interest due + any monies that go towards the principal balance. Very little is applied to the principal balance in the first 9-11 years. The loan balance decreases over time. With a Reverse Mortgage loan you do not make monthly payments. The interest accrues on the balance and each month they add the interest due to the balance; therefore the balance increases. In a nutshell you either pay monthly on the loan until it is paid in full, or sell the property and pay off the loan at that time. In the case of a Reverse Mortgage all monies due are paid upon death of all borrowers on Title, refinance of the loan or sale of the property. With either loan upon sale any equity/monies left over after repayment of the loan is kept by the property owner, estate or the heirs.
CHAPTER ONE Has Your Retirement Dream Turned into a Nightmare? REMEMBER the excitement of getting married, growing your family, and planning your Retirement Dream? Whether you planned well or not, there are just some forces you cannot control (the economy). At age 65 when most people plan to retire, they find that they may have to work longer. Why? Retirement assets depleted in the Stock Market (not that the Stock Market is the wrong place to invest, it s just that when you are 65 and it is in the down mode, you don t have enough time to wait for it to come back up ). Inflation, cost of goods, medical and pharmacy increases, helping family members. What you budgeted for your Retirement is night and day compared to what that budget will cover today. You may have enough to live but is it the comfortable retirement you planned? What does live comfortable mean to you? My fairly comfortable plan was to retire at 62, travel, shop, gifts for nephews (college expenses), dine out a few times per week, go to shows etc. I ve worked hard, made pretty good money, funds into retirement every month, but forces have adjusted my plan. Now, I know that I will have to work longer, much longer. In my work, I see my scenario every day. Fortunately for me, I have no children, and don t have to worry about leaving a legacy. That is not the case for most retirees. Some are struggling to make ends meet. Because medicine is so good these days people are living to 100! What is plan B? Social Security, government subsidized programs, help from children? If you lived the American Dream and purchased a home then you may be able to realize your retirement. A home purchase is one of the single largest investments people make. Yes, I call this an investment. You invested your hard earned money into it, you paid interest on it, and now it can work for you through a Reverse Mortgage. Do not let fear of the unknown or ignorance (lack of education) of this product deter you from knowing your options.
w MYTH #1 The Lender Will Take Title to My Home No, the borrower remains on Title. As with all mortgages, the lender is merely an interested party. All lenders no matter the mortgage product will place a lien on your home until the loan is repaid
MYTH #2 The Lender Takes Part of My Equity When the Loan is Repaid Any remaining equity in the home is the homeowner s or the heirs.
Strategic Uses For A Reverse Mortgage Wait to take distributions from current retirement fund & social security to have more cash in future and/or stave off income tax Pay-off an existing mortgage to extinguish the monthly mortgage payment (more cash in pocket) Reduce monthly mortgage payment (make the interest payment to keep loan balance the same while growing equity) Divorce Supplement income for additional cost of healthcare & medicine USING A REVERSE MORTGAGE TO PURCHASE A NEW HOME To determine the loan amount on either a Conventional or Reverse Mortgage purchase money loan the bank determines the amount they will lend and the buyer comes in with the remaining monies (in the form of a down-payment). Down-payment equals instant equity. On a conventional loan the loan amount is determined by what the borrower qualifies for income and credit wise as well as the offered interest rate. On a Reverse Mortgage the loan amount is determined by the borrowers age (minimum 62 yrs. old), the value of the property and the offered interest rate. Example using a Reverse Mortgage for Purchase loan based on a borrower 62 years old. If you have retired, would like to sell your existing home to upsize, downsize or move closer to friends and family, and do not want to have a mortgage payment then a Reverse Mortgage may be right for you. Downsize to a smaller home or remodel existing home for safety Cannot qualify for traditional mortgage financing (i.e. self-employed borrowers). Monthly cash flow restraints that prevent you from making the full monthly payment on a conventional mortgage. Establish a line of credit for future use or emergencies Gift Funds
CHAPTER TWO TheADVANTAGES of downsizing when you RETIRE The obvious ones Less upkeep Lower utilities Less cleaning Less junk in the garage Lower expenses means more cash on hand Road blocks Capital Gains ($250,000 exclusion for single and $500,000 exclusion for married) Veteran s benefits (health etc.) Expense of moving Expense of making your new home comfortable Finding new Doctor s, shopping, friends The main reasons Comfort Zone vs Retirement Dream Upgraded home Closer to grandkids Property Tax advantage in CA (Prop 60/90 transfer your current tax base to your new home if equal or lesser value) No mortgage payment FINANCING Possibly more cash on hand after sale depending if you have a current mortgage that needs to be paid off and proceeds are just enough for a down-payment on new property. *If you don t think you have enough funds to purchase your retirement dream home with NO mortgage payment take a look at the HECM for Purchase loan aka Reverse Mortgage for Purchase. The program is insured by the government, you remain on Title, there can be equity to leave as an inheritance and much more. If used properly a Reverse Mortgage can be the most versatile financial product in your toolbox.
MYTH #3 My Children Will Lose Their Inheritance This could happen if the only inheritance you are leaving your children is your home, and how old you are when you take out the Reverse Mortgage. An amortization table is presented to the borrower at application showing the projected amount of equity in the property each year. A 4% annual growth rate is used to determine the rising value of the home to show retained equity. It is projected out until the borrower reaches age 99. In many cases if planned properly there will still be equity to leave your heirs
CHAPTER THREE Can I Receive Monthly Payments? Scenario #1 Scenario #2 Existing mortgage is $250,000. The Reverse Mortgage loan proceeds are $250,000 (enough to payoff existing mortgage). The payment you would normally make is now extra cash in hand. Existing mortgage is $100,000. The Reverse Mortgage Loan proceeds are $250,000. In this example there is enough proceeds to payoff existing mortgage, extra cash in hand due to NO mortgage payment, plus receive additional monthly payments or establish a line of credit. Fixed Rate - lump sum cash out. A maximum of 60 percent of the approved loan amount (principal limit) is available at closing. The remaining loan funds cannot be accessed after loan closing. Adjustable Rate *line of credit to be accessed in the following ways: Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. Term - equal monthly payments for a fixed period of months selected. Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted. Modified Tenure - combination of line of credit and scheduled monthly payments for as long as you remain in the home Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower *Line of credit can never be canceled or frozen unless borrower fails to pay property taxes, insurance, HOA (if applicable), or fails to maintain the property in good repair.
The Cost of the Loan Third party fees and commissions are regulated by the Federal Housing Administration. The Initial Mortgage Insurance Premium fee traditionally has been high. Today, depending on the amount of equity liquidation accessed in the first 12 months of the loan this fee can been greatly reduced. The Mortgage Insurance protects the lender from loss. If Lenders didn t have this protection, Reverse Mortgage loans would not exist. Guarantees: Loan advances will continue as expected Credit line can never be frozen or cancelled. However, a conventional or reverse mortgage loan can be called due or your home can be foreclosed upon if the homeowner fails to pay property taxes, insurance, HOA, and to maintain the home in good repair. If the loan balance is higher than the value of the property the insurance will cover the deficit to the lender Cost is based on percentage of loan proceeds used in the first year of the loan. Current guidelines allow for 60% usage in the first 12 months. Example: Appraised Value $450,000 $450,000 Approved Loan Amount $247,050 $247,050 Proceeds allowed in first 12 months $148,230 $148,230 Current Lien on property $200,000 $140,000 Percentage of proceeds used 81% 58% IMIP $11,250 $2,250 Closing Costs $2500 $2500 Line of credit after 12 months $34,000 $100,000 Other Guarantees: The Reverse Mortgage loan is a non-recourse loan. The only assets that can be attached to repay the loan is the collateral itself; which is the property. Savings, life insurance, autos, jewelry, etc. will not be required to be liquidated to repay the loan.
CHAPTER FOUR A Housing Solution For Gray Divorce Clients Demographic studies reveal that Baby Boomers currently aged 52-70 have the highest rate of divorces and 2nd marriages. Some of those baby boomers have delayed divorcing until their senior years. Fifty-five percent of couples were married more than 20 years, according to a report by Susan L. Brown and I-Fen Lin, sociologists at Bowling Green State University. Divorcing later in life presents more financial problems. The biggest issue being the home as it is the single largest investment couples purchase together. Do we sell and split the proceeds? What are the tax consequences? Do I buy my spouse out? Can I afford the house on my own? Am I trading equity for liquid assets? I m ready for Retirement and how will I start over? All very valid concerns. The bottom line is both parties will need shelter- whether it is paying a mortgage or paying rent. Being a Mortgage Consultant I see no upside to paying rent. If there is enough equity in the house to do a cash-out refinance here are some options: One spouse buys the other out with a Reverse Mortgage and has no mortgage payment. The departing spouse can purchase a new home with a Reverse Mortgage with 50% down and have no mortgage payment. Sell the home, split the proceeds and each buy a new home with 50 percent down using a Reverse Mortgage for Purchase with no mortgage payment. By the time we reach retirement we shouldn t have a housing payment. Since retirees don t have the same income coming is as when they were working it just isn t affordable. Nobel Prize-winning economist Robert Merton said in a recent article the idea of leaving the house as a bequest is flawed. He continues we need to start thinking about the house differently, viewing it as an asset rather than treating is as part of our legacy. The house is like an annuity. It provides the housing you need for as many years as you need it.
When does the Reverse Mortgage loan become due? Just like a conventional mortgage, a reverse mortgage can be called due or your home can be foreclosed upon if the homeowner fails to pay property taxes, insurance, HOA, and to maintain the home in good repair. Selling the property Moving to another property & taking up residence for more than 12 months Moving to an assisted living facility for more than 12 months Moving and renting out the home Death of all borrowers on Title and/or the Eligible Non-Borrowing Spouse If the owners on title decide to sell the home, and there is equity in the property, they do not need to notify the Reverse Mortgage Lender. The home is sold using your Realtor of choice and the Reverse Mortgage loan will be paid off through escrow. If the borrowers are deceased then the heirs must notify the Servicer of their intent to sell/refinance as soon as possible. Again, if there is equity in the property after the loan is paid in full that remaining equity goes to the heirs. A Reverse Mortgage is not assumable even if an heir is 62yrs or older. However; they can purchase/refi the property using their own/new Reverse Mortgage loan or refinance with a traditional conventional loan. Whether the heirs decide to sell or refinance then communication with the Lender/Servicer is key. Typically you have 3 months to list the home for sale or to obtain financing to payoff the Reverse Mortgage. If there are circumstances beyond your control then you are allowed extensions in 3 month periods up to 12 months. During this time the loan servicer will want to see the efforts of the family to facilitate the repayment of the Reverse Mortgage Loan, but if the family is not making any attempts then the loan servicer must eventually step in. If the loan balance is higher than the current appraised value (no equity in the home) the borrowers or heirs must contact the Servicer of the loan. Typically, they will issue a deed in lieu of foreclosure, and hire their own Real Estate Agent to sell the home. It is almost as simple as handing them the keys to the home. Because this is a non-recourse loan the Lender cannot attach any other assets the Estate/heirs may have. The mortgage insurance pays the Lender any remaining monies due on the loan after sale proceeds are applied.
Qualifications Borrower must be 62 years or older (loan amount is based on the age of the youngest borrower on Title or the Eligible Non-borrowing Spouse) Generally need at least 50% equity in the property to take advantage of the program to the fullest although it is not necessary Loan Amount depends on age of the borrower, value, and interest rate (generally 50% of value for homes valued at or under $636,150). Jumbo loan are available. Call for more info. Must occupy the property as your primary residence Limited income and credit review (no Fico, residual income requirements only) Maintain property in good condition, pay property taxes, homeowners Insurance, and HOA fees (if applicable) Third party independent counseling
The Next Step Call Julie to determine if you qualify, request a quote via email, or meet in person UPON YOUR DECISION TO APPLY FOR A REVERSE MORTGAGE Call and schedule counseling (done by a 3rd party company and can be done over the phone.) Julie will provide you with a list of agencies. Estimated fee $110-$250 Meet with Julie to sign the initial loan application The entire process takes approximately 40 days AFTER counseling is complete The only money out of pocket at application is the appraisal fee of $475.00 depending on your location or uniqueness of your home and the counseling fee. If there is a hardship discuss your options with Julie.
Real-life stories An Opportunity to Keep His Family Home Greg W. and his two siblings labored through a two-year Probate before acquiring their parents house. Since his siblings already owned their homes, Greg wanted to buy the family home. At 62, he hoped to retire in three years and did not want a 30-year mortgage payment. A Reverse Mortgage netted him the proceeds to give his brother and sister their share of their inheritance and keep the house without ever making a mortgage payment or using any of his retirement funds. Keeping Quality of Life despite a Huge Life Change Shirley O. and her husband of more than 30 years were divorcing. They had no assets other than their home, in which she wants to stay since all of her friends were in the neighborhood. Each receives Social Security and a small pension. Using a Reverse Mortgage, Shirlley was able to pay her soon to be ex-spouse his portion of the equity and get $50,000 in cash to keep as a line of credit to use for emergencies only. Shirley was able to stay close to her friends and maintain her lifestyle - all this with no house payment. No More Struggling and Peace of Mind Barbara K. is 62, has been self-employed for 32 years and owns her own home. Other than her mortgage, she has very little debt. Some months she has financial struggles especially when unexpected expenses arise. For example, her home needed a new roof which she was forced to finance due to lack of funds. She needed some breathing room but due to her inconsistent income she could not qualify for a traditional home loan or equity line. A realtor advised that her only option was to sell her home. But Barbara got a Reverse Mortgage, which paid off her current mortgage, extinguishing the monthly payment. Barbara is still young and still works, so she makes interest-only payments on her Reverse Mortgage which are about half of what her payments were before, and this will keep her equity intact until she decides what to do when she retires. Call to see what your options are Julie A. Colangelo Reverse Mortgage Development & Training Manager Mobile: (562) 618-1644 Office: (714) 919-8069 Email: JulieC@EssexMortgage.com www.essexmortgage.com NMLS #234887 Data Mortgage dba Essex Mortgage is an Equal Housing Lender. The corporate office is located at: 1100 Town and Country Road, Suite 100, Orange California 92868. Tel: 714-935-2581; California Bureau of Real Estate License No. 00936013 California Department of Business Oversight #603-G833 www.nmlsconsumeraccess.org NMLS #70377 Equal Employment Opportunity / Equal Housing Lender 2014 Data Mortgage DBA Essex Mortgage, all rights reserved. Essex Mortgage is not affiliated with any state or federal agency.