The local Bluebonnet Club discussed the serious financial topic of reverse mortgages at their meeting on Monday afternoon, March 7.
Guest speaker Scott Morgan of Morgan Real Estate offered great information along with some harrowing details on the almost predatory contact made by organizations who promote this doubtful yet legal practice sometimes pitched as 'tax-free income'.
A reverse mortgage is a type of home equity loan where homeowners put their homes up as collateral to receive loan proceeds. Texas authorized reverse mortgages in 1999.
Some companies will send mail-outs or make phone calls to those eligible (starting at 62 years of age) for reverse mortgages almost as much as three times a week. Morgan even mentioned the endorsements made by celebrities like Robert Wagner and brought along a greeting card with two puppies to comfort people in participating in this type of loan.
Texas was the last state in the US to allow homeowners to borrow against the equity in their homes. However, Texans have shown their intelligence, in that only 7,000 Texas natives have chosen to take out a reverse mortgage since the authorization was enacted eleven years ago.
Along with the age requirement of at least 62, interested persons must take part in a HUD (Housing and Urban Development--a US government department) counseling session before the loan is closed. The property must be owned and will be appraised in order to determine the home equity.
Once the reverse mortgage is in motion, loan proceeds are received by the homeowner in various ways. It could be in a lump sum up to 50%, through fixed monthly payments, by a line of credit where payments are given as needed, or a combination of any or all three methods.
The amount of money that can be borrowed depends on a number of factors: the value of the home, the amount of equity the homeowner has, age and current interest rates. Homeowners can expect to borrow anywhere from 45-75% of the value of the equity in the home. Most of the time, the older the homeowner is, the higher the borrowing amount.
The enticing factor with a reverse mortgage is that unlike a traditional mortgage where lenders are paid back each month, no payments are owed during the loan term of a reverse mortgage. But once the loan matures, the lender will eventually get his money.
Several events can trigger the reverse mortgage loan to mature, including moving out of the home for 12 consecutive months, selling the home, death or failing to pay taxes, insurance or maintaining the property as specified in the loan documents. But with the first three stipulations, foreclosure can result.
However, just like with any mortgage, the cost of simply originating a reverse mortgage can be very expensive. If the homeowner dies or plans on selling or vacating the home in the next three years, mortgage brokers estimate that the costs would be extremely costly.
There are also other "red-flag warnings" to be aware of with the reverse mortgage as well.
Shared equity lenders obligate the participant to share a percentage of any increase in the equity of the home when it is sold. In addition, aggressive marketers have been known for convincing senior citizens to invest their loan proceeds into risky investments.
Should you take a lump sum, the increase in liquid assets could result with ineligibility for some of the benefits received through Social Security or Medicaid. Also, if you receive monthly payments, they are subject to change with the changes within market interest rates.
While reverse mortgages are not very prevalent and may not work for everyone, the loan may possibly work for some or for individuals who have no heirs.
But at the end of the day, there is some good news about reverse mortgages. For instance, if the loan payoff is greater than the value of the home when it sells, the lender cannot charge for the difference. Thus, reverse mortgages are non-recourse loans, meaning that you or your heirs are not responsible for any deficiency that might exist when the property is sold.