How to Trade-Up (or Down) Using a Reverese Mortgage

Home prices in many markets have gone up recently. This is leaving many retirees with sticker shock when it comes to trading up, or even trading down.

Consider Anna and Olaf who are in the process of selling their $400,000 home. They’ll be left with net proceeds of approx. $364,000 after paying 9% in sales expenses (transfer taxes, real estate commissions, etc.). The new house they want to purchase costs $500,000, leaving them $136,000 short.

  • Option 1: sell or liquidate $136,000 worth of investments or retirement assets. They will need to “gross up” the withdrawal for taxes if the funds are in a taxable account such as a conventional 401(k). Assuming a 25% tax bracket, they will actually need to withdraw $181,333 from the account, pay their 25% income taxes, and walk away with net proceeds of $136,000. Ouch!
  • Option 2: use a $136,000 Home Equity Conversion Mortgage (HECM), also known as a “reverse mortgage”. In this case, there would be no monthly mortgage payment. Anna and Olaf could preserve their retirement assets and buy their new home without any impact on their cash flow.

Please contact me for more information or if you’d like for me to run the numbers for your situation.

Or click here to apply for a mortgage loan.

Don Parsons
NMLS Number: 287222
Commerce Home Mortgage
Corporate NMLS Number: 1839
(949) 428-3099
450 Newport Center Dr. Suite 200
Newport Beach, California 92660

The Reverse Mortgage – 62 & over – Is it a Wise Option?

As the Reverse Mortgage ads heat up (conventional mortgage rates moved up and refinances became scarcer) due to a new strategy by the big lending house hounds, to attract business, I wanted to address a few things regarding this very important mortgage product.  The Reverse Mortgage in general is a fantastic product, for the right people.  If you call up the local TV ad sales person who has a script in hand, they will not know anything about retirement, tax or financial implications, or the art of mortgage planning integrated with your personal financial goals and retirement plan.  “If you are 62, you should have this product” goes the script. And then the numerous benefits are rolled off the tongue much like the Storage Wars auction on TV, which I happen to enjoy on occasion…… Yup!

The Reverse is not necessarily a last resort loan as many believe, just to keep the client in the home, but rather it is a financial tool that can assist a person in not drawing down their 401K, IRA’s, or savings; the retirement assets of course, subject to taxation whether it is voluntary distributions or RMD’s (required minimum distributions).

The challenge with this product is that the required HUD counseling (over the phone for 1 hour) is pretty much a FAQ session where the counselor simply lays out the options and answers a few questions. Other than that, the “salesman” (referred to as a Reverse Mortgage Specialist, and there are even certifications bantered out to impress you during the “sales pitch”) will try and convince you how easy and non-qualifying this product is, along with the stream of tempting uses of the equity in your home towards vacations, toys, better life style, and possibly a pitch for your favorite charity tossed in for good emotional measure.

house-of-moneyHowever, it is critical to understand ALL the components of this product and whether it is a wise decision to obtain it or not.  Maybe it would be great for a client, but just not now, maybe a year from now…..Only by working with a professional mortgage planner can a family really weigh the pros and cons of this type of loan product.  Often my questions relate to “how other family members, if involved, feel about the reverse; are they able to attend a meeting to discuss the product and it’s options; what are the type and amount of current assets, liquid and non-liquid of the client; what are the plans for living in the current property (you must occupy the residence though there is no stipulation on how much you can travel, or vacation, etc.)  Does the client understand they are “still owners and on title” of the property, and still responsible for property taxes, insurance, HOA if applicable and maintenance; are they aware that at this time there is no deficiency or liability if in the unlikely event the loan exceeds the value of the property when client moves out or departs.  Are there any repairs or modifications to the home that need to be done at some point for the convenience of the client, such as handrails, or wheelchair access, etc.?  The Reverse with adequate equity often can distribute monthly income just like social security, (for virtually any purpose) except it is NOT taxable, and there are NEVER any monthly loan payments while living in the property….. We have only scratched the surface here and as rules continue to change (at end of year several changes occurring and more qualification likely) the Reverse Mortgage will be getting more difficult to obtain.

In conclusion, if you or anyone you know has an interest in the Reverse Mortgage product, please contact me for a free interview and analysis of the situation so we can be sure you make the best and wisest decisions.

Shake Up in Reverse Mortgage Lending?

Recently Wells Fargo departed from the Reverse Mortgage Market. This after B of A pulled the plug not too long ago.  The facts of the matter are; Reverse Mortgages are still plentiful and will remain available to seniors unless HUD (unlikely) cancels the insurance program.

However they may be tweaked in two specific areasFirst, the loan limits will most likely drop from $625,500 (high cost areas like LA/Orange counties) to $417,000.  Secondly, there is an effort and need to protect lenders from T&I default.  (Property Taxes and Homeowner’s Insurance)  This is primarily what has been the bone of contention for those leaving the arena. FHA guidelines have not made income or credit a “qualifying criteria” for obtaining a reverse mortgage. (exceptions being liens, judgments, etc.)   After all, there are no mortgage payments required by the homeowner until you no longer occupy the property and then you or your heirs must refinance or sell the property to pay off the mortgage.  The solution to this does not need to be complicated or layered with reams of new guidelines as only the government can invent, but rather some common sense underwriting by the lenders themselves.

Probably the important focus currently is that with each congressional budget comes the squeeze for dollars; senior programs are always targets.  The reverse mortgage will be no different.  While I believe some common ground can be found to solve the tax and insurance defaults, the loan limit reductions are a more serious situation in my opinion.  Innumerable seniors will not qualify for the lower limits program due to existing loan balances/lack of equity.  That means many who have had their IRA’s or 401k’s ravaged by the markets the last several years will be drawing down their retirement dollars much faster and will end up out of money, possibly having to sell their home and move in with family or a small apartment, unless they can access a program like the Reverse Mortgage with high enough loan limits.

There is a rare “jumbo product” available, at least currently, but at a much higher interest rate and is not near as good a solution.  IF YOU KNOW SOMEONE THINKING OF APPLYING FOR A REVERSE MORTGAGE AND WAITING, WE NEED TO DO AN IMMEDIATE ANALYSIS BEFORE THE LIMITS CHANGE.

Lastly, never before has experience and skill in this industry meant so much for clients struggling and trying to navigate safely in these financial times, whether it be real estate or mortgages.  Fully 1/4 of my time is voluntarily invested in taking calls of folks referred to me who do not know what to do with their home or mortgage. “I just had a cousin get in the business…” I have this guy or gal I just met in my networking group who does this…..” I heard this ad on the radio where……”  “I was online and found….”
STOP!!! STOP!!!  Run, don’t walk from this, as fast as you can and call and EXPERT! This is not the time to give out 3 names to CYA or refer a “nice guy”.  This market is for experts only.  Little to no experience?  Don’t apply, sorry.  We have had enough bad advice and ‘used car sales tactics selling rates and fees”  by so called lenders.  The financial success or failure of humans is at risk!

Reverse Mortgages – Dream Loan or Equity Pit?

The Reverse Mortgage Purchase Option

This link goes takes you to a 2 page document that discusses briefly using a Reverse Mortgage to purchase a property.

Often seniors (those 62 and over)  will consider placing a Reverse Mortgage on their home for a multitude of reasons, many of which are the same if you use the Reverse Mortgage to “Purchase” a home.  Click on the link above for a brief summary of the FHA HECM Reverse Purchase Mortgage.  Many who have lost homes and had some liquid assets can still buy a home using the “Reverse Mortgage” without the 2-4 year waiting period which is required in normal mortgage loans.  Feel free to contact my office at 949-428-3099 for additional information or a meeting to discuss your or a family members possible needs for this specific type of product.