Biggest California Reverse Mortgage Myths
- The Bank Owns My Home: Absolutely not! The bank or California reverse mortgage lender does not own or take your home, nor do they have any rights to it. The lender simply has a lien against your property. The title is all yours. Eventually, when the California reverse mortgage ends upon the death of last person living in the home, voluntary sale of the home by you, the homeowner, or if you voluntarily move out of the home for at least 12 months will the lender want their money back and will use the house as collateral. At this point the home is usually sold. The bank get's what is owed to it, and you or your heirs get the remaining proceeds.
- California Reverse Mortgages are Costly: It is true closing costs for reverse mortgages are more costly than typical forward mortgages. The reason is the costs are based upon the value of the home (up to $417,000) rather than the actual loan amount. Additionally HUD charges 2% of the value for the upfront mortgage insurance premium. With this in mind the reverse mortgage is a fairly costly mortgage if the intent is to use it as a quick fix. It is far more cost effective if it is to be kept for an extended period of time. Most reputable lenders should attempt to offer alternatives to a reverse mortgage if the borrower plans on paying off the mortgage inside of 3 years.
- My Heirs Will Owe the Mortgage Company: California reverse mortgages are known as "non-recourse" loans, meaning if, under the circumstance more is owed to the mortgage company than the value of the home at sale, the maximum amount the heirs are required to pay the lender is the value of the home (sale price) minus closing costs. The bank cannot come after the family ("non-recourse") for the difference.
- Income From a Reverse Mortgage is Taxable: It is not taxable and doesn't affect social security and Medicare.
- I Must Have Good Income and Credit to Qualify: There is no credit or income qualifying for a California reverse mortgage. The qualifications are that your home is your primary residence and you are 62 or older.
- Reverse Mortgages are just for the cash poor: A California reverse mortgage can serve as an excellent financial planning tool. This may be why homes with values over $750,000 are one of the fastest grow segments in the reverse mortgage business.
- My Home Must Be Owned Free & Clear to Get a Reverse Mortgage: Not at all. In fact, many get a reverse mortgage specifically to pay off a mortgage to remove the burden of that payment.
Top 7 ways seniors are using money from their California reverse mortgage
Income from a reverse mortgage may be used at the borrower's discretion. These are some of the top ways people are spending this money:
- Paying Monthly Bills
- Purchase of long-term care and life insurancev
- General living expenses
- Home repair and remodeling
- Prescription Drugs and healthcare costs
- Travel and other recreation
- Helping family members
How seniors receive money from their reverse mortgage:
- Fixed Monthly Payments: This offers a monthly, tax free, income for life. In this instance a calculation will be made, based upon your age, what is currently owed on the house (if any), and the value of the house, as to how much tax-free income you will receive, for life, on a monthly basis. You can give us a call for this calculation. It takes no time at all.
- Lump Sum: Senior may take entire amount out all at one time. Again, amount is based upon age, value of home and if a mortgage currently exists on the home.
- Line of Credit: Allows money to be taken out at any time and interest is accrued only on moneys taken out. This has become the most popular plan because it allows you to take money out on an "as needed basis", and any unused portion of the line of credit actually accrues interest.
- Combination: Most people, unless they plan on using the entire portion of the California reverse mortgage immediately, tend to combine two of the plans listed above. Example: Jerry and Susan Brown own a $200,000 home. The lender will loan the smiths up to $115,000 for the reverse mortgage in California. The Browns have a mortgage on their home of $55,000. They use the reverse mortgage to pay off the existing mortgage, and use the remainder as a line of credit. Of the $115,000, $55,000 is used to pay of the current mortgage and $60,000 remains in a line of credit for the Browns
Eligible Properties
Eligible properties for a California reverse mortgage include single family residences, 2-4 unit properties in which the borrower lives in at least one of the units, manufactured homes built after 1976, condominiums, and townhouses. Manufactured homes must be at least a double wide with an FHA approved foundation.
All properties must be your primary residence. A primary residence is considered a home, as defined above, in which the borrower lives in the home at least 6 months out of the year.
HUD requires neutral third party counselor prior to getting reverse Mortgage
Prior to obtaining a reverse mortgage you are required to talk with a HUD approved reverse mortgage counselor to discuss the workings of a reverse mortgage. The goal is to make sure a reverse mortgage is the proper decision for you. This infuses a neutral third party to offer helpful advice and allows you, the consumer, to be more informed about the process.
If you receive Medicaid or SSI Benefits:
Income received from a California reverse mortgage is not taxed and does not affect social security or Medicare benefits. However, your Medicaid benefits may be affected if you don't use your income from the reverse mortgage immediately.
Your income is counted as an asset. As such if you receive income from your reverse mortgage and it is not used you may exceed the maximum assets allowable. At that point you would be ineligible to receive Medicaid benefits.
This is why many people tend to chose the California reverse mortgage line of credit because they can take money out on an "as needed basis". Clearly, if money is taken out on an "as needed basis" it will be spent.
HUD doubles lending limits for reverse mortgages in California
The National Housing Act, signed by Presidedent Bush on July 30, most notable for it's mortgage bailout provisions, also included raising the FHA national reverse mortgage lending limit to $417,000. The former limits for a California reverse mortgage ranged 200,160 to $362,790. As of November 3, 2008 reverse mortgage lenders could begin funding California reverse mortgages with the new lending limits.
Under the new law, a homeowner, with a home valued $417,000 or more, can borrow from $200,000 to as much as $300,000. This represents a substantial difference particularly for those counties formerly in the lower end of the spectrum.
How to qualify for a reverse mortgage:
One of the beauties of a reverse mortgage is you don't qualify based upon credit or income. Remember, you are not responsible for making a payment. Traditional lending practices require the lender to make a calculated gamble on the borrower's ability to repay the loan. Therefore, the lender has to scrutinize the borrower carefully. Since there is no payment to a lender there is no credit and income qualifying. This takes out 80% of the hassle of the loan process. Don't worry about bringing in your 1099s, your tax returns for the last 3 years, bank statements, etc. etc. You get all the benefits and none of the headache!
In fact the only real qualifying is figuring out how much money you are going to receive. That is simply a factor of your age, interest rates, and value of the home.
April 9, 2009: Reverse Mortgage Limits Increased to $625,500
Reverse mortgage terminology is a little confusing. As such we will do our best to clarify what this means to you if you are seriously considering a reverse mortgage. Loan limits and home value can be used interchangeably. Loan limits do not mean the lender will lend up to $625,500. It means the lender will use home value up to $625,500 as a basis for the loan. Any home value above $625,500 will get no additional credit. The home with the higher value will use the FHA loan limit.
Based upon the home value, up to $625,500 the lender will determine how much it will actually allow the borrower to cash out. The next two determining factors are the age of the youngest borrower on the mortgage and interest rates. Using these two factors the lender will lend between 45% and 75% of the home value or loan limit.
In California this is limit increase from $417,000 to $625,000 was absolutely necessary as so many borrowers can now get far more out their home to pay bills, supplement income and most importantly to pay off traditional forward mortgages.
March 10, 2009: Where to Go for Reverse Mortgage Answers
This website offers a tremendous guide to the reverse mortgage. It will go over the basic workings of the reverse mortgage and help you understand some of the pitfalls to avoid. The reverse mortgage is a sound financial tool, but it is not to be used without thought.
With this in mind some excellent websites exist to help you make informed choices about your financial future as it pertains to the HECM.
Your first step should be to get a basic understanding of reverse mortgages by going to the the National Reverse Mortgage Lenders Association. Here you can learn about the reverse mortgage and research local lenders who offer reverse mortages. Perhaps even before you go to the NRMLA you may want to get some down and dirty facts about the reverse mortgage. The Federal Trade Commission has a good site to get Basic HECM Facts.
If you decide to go forward with a HECM you will be required to talk to a HUD approved reverse mortgage counselor. The counseling is designed to give you a neutral third party to discuss the reverse mortgage and to offer options if perhaps there are any. Go to approved reverse mortgage counselors. Many people have questions as to how the money received through the reverse mortgage will affect benefits like Medicaid, SSI, Medicare and Social Security. Go to the National Association of Area Agencies on Aging to find a local counselor. You may have other questions as a senior. Maybe you don't know where to turn for these answers. The Society of Certified Senior Advisors is a good resource to get your bearings.
January 15, 2009: How to Qualify if One Spouse is Younger Than 62 - Ramifications
California reverse mortgage companies factor the amount of available funds, for a borrower to receive, based upon current interest rates, home value, and age of the youngest borrower. Older reverse mortgage borrowers receive more money their younger counterparts.
If two borrowers are on the mortgage (i.e. married couple) the reverse mortgage lender uses the age of the younger of the two borrowers as the determining age factor.
This makes sense from a lenders point of view. After all, the mortgage doesn't end until the last surviving spouse either kicks the bucket or sells the house. From a lenders point of view the California reverse mortgage cannot exceed value or the lender loses money.
The thing the lender must take into consideration is how interest accumulates and compounds over time. The mortgage company has to lend less to the younger borrowers because they live longer, and interest has more time to eat away at the equity.
If a married couple needs a large amount of money from the reverse mortgage many times this is not possible because the age of the younger spouse is prohibitive. But what if the other spouse is quite a bit older and would qualify?
How some people get around this is by disclaiming the younger spouse from the note and deed of trust. They can now cash out at the larger sum.
Fabuloso! The borrowers have their needed cash.
But not so fast, there are problems in doing this. Sometimes, in the busy scheme of things, we forget that we will not be here forever! Yes, we too will pass.
If the older spouse passes away first, the bank will eventually find out and will call the note due. From there the surviving spouse has about 12 months to pay the bank back.
Most borrowers in California get a reverse mortgage on a needs basis. Most likely, the borrower left behind wont have a choice but to sell to reimburse the bank.
Houses are more than just buildings, and that is especially true for seniors. A house is a memory-filled home. If disclaiming a spouse to get a reverse mortgage is on the table be positive the loan merits the probability of losing the home and its memories in the end.
Disclaiming the spouse should be done on a need basis and both spouses should understand and accept the future consequences.
How is Equity Affected by a California Reverse Mortgage?
Reverse mortgages are negative equity loans, in their purest form. They allow the borrower to take out a loan without the obligation of paying back the lender on a periodic basis.
Naturally, the California reverse mortgage lender has to make money somewhere, so they do it at the end of the loan. Interest simply accrues on the principal loaned to the borrower. At the end of the mortgage, the lender recoups the investment and makes its profit.
The scary part for the borrower is the interest accruing so much that it eats away at all of the equity in the home. This is a fair thing to be concerned about.
What people need to remember is multiple forces are at work; ones that eat away at equity and others that add to equity. I’ll cover the two main forces.
Certainly the accruing interest cuts into the borrower’s equity. Conversely, real estate appreciation greatly slows this process.
In most cases normal real estate appreciation adds to the home’s equity, even with the accrual of interest against the home from the California reverse mortgage.
Most people qualify for a certain amount of money based upon the value of the home. Most don’t take all of this money. Most let a good deal sit in a line of credit where it isn’t accruing interest against the home’s equity.
But let’s assume the California reverse mortgage borrower uses all of it immediately. Let’s say the house is worth $200,000 and they qualify for $130,000. And they take it all out right now.
Basic math tells us interest will accrue and eat into the borrower’s equity as fast as it can in this scenario. From the get-go, interest is accruing on $130,000.
With a 6.125% fixed rate (very close to the current rate) accruing interest against the home, and 4% national average house appreciation, it takes over twenty years for the loan to accrue enough interest to eat away at all of the home’s equity.
In the same example, let’s say the borrower only used $100,000 immediately. In twenty years there would still be over $100,000 in equity. In the latter example the borrower actually had a net gain.
Most people don’t take into consideration how powerful home appreciation can be, especially when looking at the negative side of the California reverse mortgage.