I recently ran across a somewhat annoying article written by Utah real estate agent Jen Kirchhoefer in the Ogden Standard-Examiner. Like many articles written by people with little reverse mortgage experience, it was filled with inaccuracies.
The inaccuracies themselves didn’t bother me because I’ve come to expect them from media outlets. Reverse mortgages have been highly misunderstood for a long time. Even well-meaning journalists who do their homework commonly get details wrong.
What really annoyed me was the combination of misinformation and the sarcastic tone of the article. Was the article intended to actually inform or did Kirchhoefer just have an axe to grind? I can’t tell for sure. However, what is clear is she’s not giving seniors a better understanding of reverse mortgages.
Kirchhoefer has the right to dislike a reverse mortgage if she wants to. It’s a free country, right? She has every right to offer her opinions in a sarcastic manner as well. However, she would serve her readers better by at least getting some basics right first.
My goal with this article is correct the inaccuracies and set the record straight. The reverse mortgage is not a perfect solution for everybody, but it is a great option for the right candidate. Seniors deserve accurate information so they can decide for themselves if a reverse mortgage is a good fit.
What is a reverse mortgage really?
The most common reverse mortgage in the United States today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry professionals).
The HECM is a unique home loan program that enables seniors 62 or older to convert a portion of their home’s value into cash.
You always remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit any equity remaining in the home, whether they choose to keep it (by paying off or refinancing the balance), sell it, or let the lender sell it.
The HECM is a non-recourse loan, which means the most that will ever need to be repaid is the value of the home. If the home isn’t worth enough to cover the entire balance, FHA will settle the shortage.
Seniors commonly use the proceeds to eliminate existing mortgage or other debt payments, finance home improvements, supplement income, or supplement retirement assets. You can use the proceeds for almost anything you like.
When you hear or read about reverse mortgages, the program in question is almost always the HECM. There are other reverse mortgage products available, but they are a teeny tiny percentage of the market. Thus, the information I’ll cover now will be in reference to the HECM.
Setting the record straight
Now that I’ve covered some important basics, let’s get back to Kirchhoefer’s article. I’ll address and explain each inaccuracy in turn. Hopefully this will help you better understand reverse mortgages and more easily filter out the misinformation floating around about them.
A reverse mortgage is exactly how it sounds. It is a “mortgage” (and I use that term loosely here), that is available for homeowners over the age of 62 who have equity in a current home they are occupying that they would like to convert to cash.
There is no need to use the term “mortgage” “loosely” because the HECM is in fact a mortgage. It is a debt secured by your home. It’s just a different kind of mortgage than what most people are used to.
With a traditional mortgage, you borrow a large dollar amount and pay it back over time with interest via monthly payments.
A reverse mortgage works in the opposite direction; you borrow a smaller amount initially and gradually borrow more over time. Instead of converting cash into home equity, you’re converting home equity into cash. The idea is to use your accumulated home equity as an income source in retirement.
A HECM works very different than a traditional mortgage, but it’s still a mortgage. Like any mortgage, the HECM has to be repaid at some point – just not in this lifetime. Again, as long as at least one borrower or non-borrowing spouse is living in the home and paying the required property charges, no mortgage payments are required.
Back to the article:
Of course, there is a fee involved.
Of course there is a fee. Is that a scandal? Reverse mortgage lenders have to make a living just like real estate agents do.
Last I heard, real estate brokers routinely charge sellers 4% to 6% of the sales price. According to Zillow, the median sales price in Utah (where Kirchhoefer lives and works) is $341,600 as of this writing. That means sellers are routinely paying $13,000 to $21,000 to Utah realtors these days.
Oh, and you must sign over your house to the bank, but other than that, it’s a pretty sweet deal … especially if you are the lender.
Utterly false. It’s clear from this that Kirchhoefer has a flawed understanding of reverse mortgages. You do not “sign over your house to the bank” when you get a reverse mortgage. The title ownership of the home always remains with the homeowner. That’s why reverse mortgage borrowers are required to continue paying the property taxes and insurance. If the bank owned the home, the bank would be paying the property taxes, right?
If Kirchhoefer doesn’t believe me, she can check out a HECM closing package. She’ll notice it contains a Note and a Deed of Trust just like every traditional “forward” mortgage written in Utah.
The Note is the “promise to pay” and the Deed of Trust secures the debt against the title of the house. This enables lenders to foreclose when necessary. If the home was already “signed over” to the lender, the lender wouldn’t need a way to foreclose, right?
Let’s also not forget that a reverse mortgage borrower is always free to hire a real estate agent and sell their house at some point. Any equity in the home is theirs once the reverse mortgage is paid off. This wouldn’t be possible if the bank owned the home.
Again, reverse mortgage borrowers retain title ownership of the home.
The less predictable things in life are the circumstances I worry most about with people who chose this product, and what could be less predictable than life circumstances? However, if things work out swimmingly, and both you and your co-borrowing spouse get to live in the home until you both die (hopefully at the same time) then this is a perfect product for you. After that, it’s your heirs’ problem. At this point, they are stuck with two options; they can pay off the full reverse mortgage including all the interest, or they can just hand the home over to the bank. Either way, the bank wins.
No, the heirs don’t just “hand the home over to the bank”. If the heirs wish to keep the home, they can simply pay off or refinance the reverse mortgage balance.
If the heirs don’t want to keep the home, they can hire a real estate agent and sell it. The heirs will receive any remaining equity once the reverse mortgage is paid off.
If the heirs don’t want to keep the home or mess with selling it, they can allow the lender to sell it. Again, once the reverse mortgage balance is paid off, any remaining equity goes to the heirs.
Folks, let me be clear on this: the bank doesn’t get the house in the end. The only “win” for the lender is that they’re paid back the loan balance – just like any other mortgage. The reverse mortgage is not some nefarious scheme to get houses from deceased seniors.
However, if your spouse or partner is not listed as a co-borrower, or there are dependents or children living in the home, they are going to be ousted unless they can come up with the money to pay the loan.
This is a legitimate concern that people need to be aware of. This does not mean the reverse mortgage is a bad product, it just may not be right for every goal and situation.
If you have dependents who need to live in the home after the last borrower dies, then a reverse mortgage may not be right for you.
This is no secret in the reverse mortgage industry. The banks are not trying to keep this from you.
The reverse mortgage becomes due and payable in full when the last borrower is no longer living in the home and paying the required property charges. If the surviving dependents can’t pay off the reverse mortgage balance, they will be forced to move out.
Keep in mind this isn’t that different from a traditional mortgage. If the borrowers on a traditional mortgage pass away and surviving dependents can’t continue the payments, they lose the house.
If you’re considering a reverse mortgage and you need dependents to remain in the home after you pass, it may be better to avoid a reverse mortgage. Or, you can take out life insurance or provide some other means to pay off the reverse mortgage balance upon your passing.
The glaring dispute that I have with this product is primarily the fact that the target is senior citizens who are on fixed income and have most of their house paid off. The lender takes their largest financial asset, and puts it at risk at a time in their lives when risk should be at its most minimal.
I strongly disagree with this sentiment. How can a reverse mortgage be risky when you don’t have to make any payments on it? Remember, no mortgage payments are required as long as at least one borrower or non borrowing spouse is living in the home and paying the required property charges.
If you’re a homeowner, you have to pay property taxes and insurance anyway, right? If you fail to pay the property taxes, the county will come after you, right?
Folks, if you’re a senior on a fixed income and you have a mortgage payment, you’re at far more risk financially than you would be with a reverse mortgage. Think about it: what if you have a mortgage payment and run into a financial bind? If you can make the mortgage payment, your home is at risk. The reverse mortgage eliminates such payment risk.
What if you’re a senior on a fixed income and you have no reserves to cover unexpected expenses? Many seniors are in this situation and it’s a big reason so many seniors tack up large credit card balances.
The reverse mortgage helps protect against this risk by providing reserves to cover the unexpected.
What if you’re a senior living off of savings in a 401(k) or IRA? What if the financial markets decline and you’re now selling more shares to maintain your income? This is the essence of sequence risk, and it’s a big reason many seniors run out of money much sooner than expected. The reverse mortgage can protect against this risk by providing an alternate income source. When you have more than one income source, you can better protect and preserve your retirement assets.
A missed opportunity
Kirchhoever is potentially missing out on some business by dismissing reverse mortgages. Does she know it’s possible to purchase a home with a reverse mortgage?
HECM for purchase is a fantastic program because it enables you to finance part of a home purchase with no mortgage payment. Instead of paying 100% cash to avoid a mortgage payment, you make a down payment and the bank finances the rest with no mortgage payment. How cool is that?
Again, your obligation is to live in the home and pay the required property charges. As long as at least one borrower or non borrowing spouse is doing that, no mortgage payments are required.
A great mortgage program
I will be the first to acknowledge that a reverse mortgage is not perfect for everybody. However, it is a fantastic program for many seniors. If Kirchhoever was more open-minded and willing to learn some basics, I think she would understand that. Instead, her article creates unjustified and unnecessary fears about reverse mortgages in the minds of seniors.
If having access to home equity without a mortgage payment would enhance your retirement lifestyle and financial security, a reverse mortgage could be a fantastic opportunity for you.