Archive for the ‘Reverse Mortgage Details’ category

Cash is King for Seniors

June 24, 2009

j0433118I love the phrase “Cash is King.” Who won’t accept cash? I suppose some would prefer us to use credit so they can increase profits, but the bottom line is, having cash puts us in a position of power. It holds much value, especially in an economy that we are in today. Cash is King!

When you think about it, reverse mortgages are simply a tool that will allow those 62 or older to receive cash by simply leveraging ones home. No risks, no losing your home to the bank, no payments, just plain “risk free” cash (Yes, Cash is King)! In fact, it can provide a guaranteed source of income for as long as you live in your home. How many of us prefer cash over credit? But when cash flow is limited, sometimes we make do with credit. This can be a short term solution, but a long term disaster!

Leveraging one’s home in order to access cash is the primary purpose of reverse mortgages. It simply is choosing to use the equity to secure interest payments so that you can use the available equity for life’s needs or desires. This is cash flow at your fingertips! No hassle, no worry, no fear . . . . just freedom!

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Balancing the Cost of Reverse Mortgages

May 12, 2009

CB068300It seems that every so often the issue about the cost of reverse mortgages flashes across my computer screen. In every industry there are skeptics about a solid financial product, but the reality remains, users of the product are much better people to ask. For example, if I was to find out if a particular brand of lawn mower is worth the cost, I wouldn’t ask the person who sells the lawn mower. I would ask the people who have had the lawn mower for an extended period of time. Neither would I ask manufacturers of a different lawn mower. Both groups of people would have a potential bias towards that particular lawn mower. I also wouldn’t ask a company that specializes mowing lawns as a service for they may play down lawn mowers as better sell their service.

However, the people that would provide good, unbiased information are the users of that particular lawn mower. Preferably they would be people who have used the lawn mower for a few different seasons. They would know if the lawn mower stands up to the reputation that is out there.

The same has to be said about reverse mortgages. Though it is always a good idea to get information from non-users, it is important to not judge the product by people who have not used the product, or don’t know many people who use the product. It sounds silly, but this is what happens with albeit “professionals.” They have a judgement about reverse mortgages, but they often have not known many people who have taken them out. They sort of clump everybody into one big group as having the same needs and needing the same solution to a problem.

And so, we get input from various levels of professionals who are not in the industry and don’t have a working knowledge of how the product has been used. The overriding issue is the cost. It is funny to hear this because from the many clients who have taken out a reverse mortgage from me over the past 4 years have never come back and said that it was too expensive. The overwhelming majority is that it changed their life. You see, the value of the benefit far exceeded the cost. The cost was a non-issue after they realized the overwhelming benefits.

Lastly, in dealing with the cost, one needs to look at what the costs are for. In this case, a huge part of the cost is what is the driving force behind the program, the FHA Insurance Premium (2% of the appraised value). This protects the lender as well as the borrower from any future liability in the event the balance exceeds the value at the time of sale of the home. This is called “Peace of Mind”. Peace-of-mind is a beautiful thing! What is it worth? You might just want to ask an independent senior who no longer needs to rely on others to make ends meet. It really is a beautiful thing!

So, for everybody who falls into the mode of “Reverse Mortgages are just too expensive,” my suggestion is to ask around to seniors who have benefited from a reverse mortgage. I think you’ll find that most will tell you that the benefits far outweigh the cost.

For another perspective on Reverse Mortgage costs, visit this link.

HECM for Purchase

April 30, 2009

CB028929Recently, HUD has authorized the use of a reverse mortgage to purchase a home. Sounds a little odd, but is actually a great way for seniors to downsize with the added “No Monthly Payment” that reverse mortgages offer.

Here is how it works. Let’s say that a couple are in a two story home that they really don’t see as a functional house for them as they age and their ability to get up and down the stairs becomes more difficult. Though their income is at a point where they don’t really want to add an additional monthly payment. A HECM for Purchase will allow them to come in with a down payment, likely used from the sale of their home, of anywhere between 35%-40% (depending on the age of the youngest borrower) of the appraised value of the new home and not have any payments for the remaining years of their life while they live at home.

The reverse mortgage comes with all of the guarantees that a typical reverse mortgage would have. Though it was possible to do a reverse mortgage in the past on a purchased home, it could only be done after the original mortgage (we call it a forward mortgage) was approved and completed. The problem with this is that they would have to double pay closing costs, origination fees for both loans. This provides more flexibility and options for those who would like to move, but didn’t feel that they wanted to pay the additional fees upfront.

Be aware that because it is a different type of transaction and that underwriting is more along the lines of a traditional mortgage underwriting, if there are plans to rent their existing home, disclosures of income may be a requirement, as well as other disclosures may be required.

For more details surrounding this new program, visit here.

Delaying the Reverse Mortgage Decision

April 9, 2009

j0382674I have recently had several conversations with the seniors about waiting for the right time. In all financial decisions, timing is very important. I have posted other blogs about this very issue. However, we are at a time in the industry, as well as the economy, that waiting may be the wrong decision. Let me explain.

The reverse mortgage industry is in a unique situation. Interest rates, though in the past have not played as critical of a role as they are today. For many years, the only RM product used was a 1.50% margin. It very rarely changed, and when it did, it was an anomoly. We then saw the margins decrease to 1.0% then 1.25%. Today we live in an economic environment with live pricing. What intereste rates (spreads) were even a weeek ago, is likely different today. The secondary market (Fannie Mae) plays a critical role in these numbers.

My clients have been surprised by this phenomenon. Back in January the spread was at 2.50%, which provided x number of dollars of benefit. They thought they would wait a bit to make a decision. Well, today, that spread is at 3.25% or higher, depending on the lender. They no longer have the same amount of financial benefit that they did in January.  So, what should people do and how should they evaluate their situation. Here’s my take . . .

If, in evaluating a reverse mortgage provides the benefits that accomplishes your goals, why wait? In today’s ever changing market, home values are likely to stay level at best in the near future, and may even decline. Interest rates will likely go up, too. Margins are changing more than ever. Obviously, we want our clients to get the greatest benefit possible. But waiting for things to get better, in the short run, usually does not pencil out. More and more frustrated seniors are kicking themselves because they have waited. If the benefit accomplishes the goal, usually there is not a good reason to wait to move forward with the application. If it does not accomplish the goal, then it does not accomplish the goal and choosing not to move forward is probably the right decision.

Whenever there is confusion, it is wise to sit down with a good financial advisor . . . one who understands reverse mortgages and can assist you with decisions. I know several advisors that are non-partial and are available to give good advise, if needed.

Cash Flow Advantage = Tax Free Income

April 3, 2009

eaglefinancialgrp1Recently I was handed an article from a friend from the magazine Portland Home. In the Feb/March 2009  edition, Eagle Financial Group (EFG) wrote an article about reverse mortgages. I was very impressed! Today we are seeing  that financial advisors are getting asked a lot of questions about this unique method of increasing cash flow. EFG did a nice job on the article and actually brought up a benefit of reverse mortgages that I haven’t commented much on. . . . the issue and benefit of tax free income.

One of the ways in which reverse mortgages are used is to receive a monthly income (draw) that is guaranteed for as long as the homeowners remain in their home.  Based on the value of the home and the equity available, this could range from as much as $2,000 per month or more. Eagle Financial Group brought up the point that one could decrease the amount of income recieved from other means, that is taxable, while increasing the tax-free income from the reverse mortgage. This would lower the amount of taxable income yet keep the total cash flow level (if you so wish). It provides some flexibility in the amount of taxable income one recieves, and could kep one in a lower tax bracket during retirement. Now wouldn’t that be nice!

Now that this product is getting the attention of the financial advisory world, it appears that there is becoming more creative means of using the reverse mortgage as a legitimate tool for retirement planning.  If your financial advisor is not aware of the details surrounding reverse mortgages, feel free to share my blog with him/her. As a teacher at heart, I enjoy working with financial advisors and helping them to provide solutions for their clients.

My Thoughts about Fixed Rate Reverse Mortgages

March 6, 2008

j0309031.jpgEver since I started offering reverse mortgages about 3 years ago, one of the most common requests were for a fixed rate reverse mortgage. The look on my clients face when I told them that the reverse mortgages were all adjustable made me cringe. “I don’t like adjustable rates,” was a common statement. “They just make me nervous,” says another. I often gave them hope in that a fixed rate reverse mortgage was on the horizon. Well, for a conventional mortgage, adjustable rates can make people nervous. But for reverse mortgages, it really makes a lot of sense given the way that fixed rate reverse mortgages have been set up.

After following the fixed rate reverse mortgage products for several months, it is becoming more and more apparent that it is not the great deal we were all hoping for. Limitations and risks are a big part of this product.

When we take into consideration that the required lump sum draw requirement is often many thousands of dollars, I am not sure it is a wise move. The only way I could see it being beneficial is if: a) there is an investment (low risk) plan that the client has discussed with a financial advisor, 2) the borrower has to bring money to the table in order to close the loan, 3) if the rate gives the borrower a peace-of-mind about their future equity.

If any of the above are not true, then it would take a lot to convince me that it is the right move. If you simply do the calculations you will see what I mean. Interest will accrue much quicker on a $100,000 than on, let’s say, $20,000. If this is done year in and year out, it will eat up the equity at a faster rate . . .  something that we don’t want to see with our clients. However, if that $100,000 has been placed in an appropriate financial product (I stress . . . . with a knowledgeable financial professional that cares about your money more than his/her wallet) that earns tax free interest, etc. then hopefully you will have made up any interest that has accrued on the reverse mortgage. In this type of situation, then it may make sense to consider a fixed rate reverse mortgage.

If the borrower has to bring money to the table at closing, then it certainly makes sense. In this case there is no money to take out in the lump sum, so it doesn’t increase the amount in which interest is accruing on. Secondly, if the client is at all concerned with their equity being consumed, then it makes even more sense.

One last thought that is a concern. The fixed rate, in most cases, cannot be locked until just prior to closing. This allows a bit of risk when the interest rate spikes. For someone that doesn’t like surprises, this makes me nervous for my clients. A small difference in the interest rate may wipe out a good chunk of available cash for the lump sum. For those who are bringing money to the table, it increases the amount they would need to bring . . . .  ugh. I don’t feel good about that at all.

Overall, I really don’t like the fixed rate option. In a small number of cases, it may make sense. But as a rule, be very, very careful!

When Social Security Isn’t Enough

December 7, 2007

j0422392.jpgIt seems like every time I turn around, whether it be an advertisement, or simply a conversation with friends, I am reminded to develop a savings plan and stick to it! Whether it be saving for retirement, or saving for an inevitable event, we live at a time where the future is more and more unpredictable. With the instability of the world and the ever increasing cost of living, it is prudent to plan for the future, wherever life takes us. 

As a Certified Senior Advisor, I meet with many seniors who grew up in an age where planning for retirement was more or less having a pension and supplementing their retirement with social security income (or vise versa). In the day, one of the common worries was “Am I going to live long enough to enjoy my retirement.” Today, the common concern is “Will I have enough money to live throughout my retirement.” Or, stated another way, “Will I live too long?” Not simply just to survive, but to live in an independent way to enjoy life. When the savings runs dry, what are some strategies supplement social security to keep up with all of the demands of growing older? 

When evaluating financial products that can help to supplement income, most financial advisors will look for investment products that can provide a guaranteed “rest of life” income. For many seniors, this works well, and financial advisors have a myriad of products to help accomplish this goal. However, in order to take advantage of these programs, one has to have a lump sum of money to invest. Unfortunately, not everybody has the $50,000 to $100,000, or more, to invest. So, what else is available in order to supplement income and/or provide an emergency fund for unexpected events? 

As a Reverse Mortgage Specialist, I have worked with many seniors that are in the situation described above. The life savings has been spent and the quality of life has become a struggle trying to find peace in the midst of life’s financial storms. Though reverse mortgages have been around for many years, they are beginning to catch on as a viable financial product and provide the “peace-of-mind” for many seniors.  So, what is a Reverse Mortgage? In short, it allows senior homeowner’s 62 years old or older to use their home equity as an income source. Some of the main benefits of a reverse mortgage are:  

  • You retain full ownership in your home (Title does not change) 
  • No monthly payments
  • Can provide ongoing lifetime income.
  • Money received is tax-free
  • No financial requirements to qualify.
  • Does not affect Social Security or Medicare. 
  • No restriction on use of funds available.
  • You may continue to live in your home for the rest of your life.
  • Can receive the money in a variety of ways (i.e. lump sum, LOC, income)
  • You will never owe more than your house is worth.
  • Remaining equity will go to your heirs.

There are a variety of reverse mortgage products available. Each one is a little different, so it is very important to communicate to your advisor what your ultimate goal is in getting a reverse mortgage. Secondly, there are strategies one can use in order to preserve a portion of your equity, if that is a concern. Most importantly, however, is to learn about reverse mortgages as a part of a complete retirement plan. Though one may never need it, it is a great solution for many who find that their monthly cash flow is falling short.

Always feel free to contact me if you have any questions about reverse mortgages. You can contact me at greg.gulliford@pmrmtg.com or toll free at 1-888-480-6636.