There are two types of FHA reverse mortgages: fixed rate and adjustable rate. Adjustable rates are currently tied to the LIBOR (London Interbank Offered Rate). Adjustable-rate mortgages have an index (LIBOR) and margin (the spread above the index that the lender receives as revenue).
The index + the margin = the fully indexed rate. This is the interest rate that is accruing on the loan.
The stories vary, of course, but at the core senior citizens want to feel financially prepared for the next chapter in their lives and a reverse mortgage offers access to the home’s equity, without principal and interest payments, until the last borrower leaves the home. Reverse mortgages are not limited in revenue like regular mortgages. They are considered home equity loans.
If a client is using an adjustable rate, which is often the case, because it offers a line of credit with a growth that equates to the existing interest rate, plus 0.50 percent annually. The line of credit growth is very attractive.
The fixed rate does not offer the line of credit. As of Sept. 13, the LIBOR 1-year rate was 2.05 percent. If we assume the lender’s margin is 1.5 percent; the fully indexed rate would be 3.55 percent. The lender will look at a range of different margins, and the higher the margin, the more revenue is provided to the lender. At the same time the borrower’s loan amount drops. READ THAT AGAIN. The loan amount to the borrower drops when the margin is raised. So it’s very important to have a conversation about the margin the lender is offering you, and how that affects the loan amount.
Misconceptions are common, and so is a lack of trust. The mortgage industry is responsible in large part for the creation of these problems. Addressing the misconceptions is a matter of explaining the reverse product: how it works for them and their heirs in the future. I will typically spend an hour and a half during my first meeting with the client to listen, answer questions, and talk about the misconceptions. The biggest one is that you lose title to your home, because the bank owns it. This is not true – you retain title, and your heirs will inherit the property. Reverse mortgages are HUD/FHA products, and that brings a level of stability and a source of information for the potential borrower.
HUD requires a borrower to attend independent third-party counseling after the receipt of a reverse-mortgage proposal from a lender. The proposal contains a comparison of different reverse mortgage options, an estimate of fees, an amortization schedule, a loan cost-over-time table, and HUD’s booklet Use Your Home to Stay at Home. It’s the official reverse mortgage consumer booklet approved by the U.S. Department of Housing & Urban Development.
As we grow older, we face decisions about aging and about how to navigate our economic and health changes. Will we be able to stay in our homes, and if so, how do we pay for the changes we are facing? The National Council on Aging (NCOA) is committed to helping us understand available options, and resources, both public and private. The mission statement of NCOA is to improve the lives of millions of older adults, especially those who are struggling. Through innovative community programs and services, online help, and advocacy, NCOA is partnering with nonprofit organizations, government, and business to improve the health and economic security of 10 million older adults by 2020. Learn more at ncoa.org and @NCOAAging.
Another important piece is talking with your family. If leaving a large portion of your home’s equity to your heirs is important to you, a reverse mortgage is probably not a good choice. Reverse mortgages get bigger over time; interest is still being charged even though you are not making a principal and interest payment, and FHA mortgage insurance is accruing. You don’t know when you will pass away, sell the house, or move out permanently, and you may not have the equity you’d like to leave to your heirs.
Also, living at home has it’s own set of challenges as we age. There are options that can allow you to “age in place.” There are many factors to consider. Take advantage of the financial and home-health-care professionals that may help guide you.
Dirk Gray is a reverse-mortgage specialist with PSd, Ltd Mortgage. Dirk (505-429-3285, firstname.lastname@example.org) teaches for the New Mexico Real Estate Commission and First American Title.