The Street: Education is Key When Discussing Reverse Mortgages

With the amount of equity floating around in the U.S., reverse mortgages could be a good a good financial decision in the right circumstance, explains a recent article onThe Street.

There is $12.5 trillion in home equity in America and about $14 trillion in retirement assets, according to the article. Reverse mortgages could be used by homeowners 62 and older to help supplement Social Security and other existing income sources like medical expenses, long vacations or even purchase a new home.

A perk about the product that the public was often confused about in the past is that homeowners will never relinquish title to their homes. “The reverse mortgage enables seniors with insufficient income to tap their home equity without selling their domicile,” the article says. “Moreover, the income can make it possible for a retiree to deal taking Social Security payments in favor of larger payments down the road.”

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There are some facts that homeowners need to know before taking out a reverse mortgage though. A small, but important detail that often is overlooked is the fact that the amount withdrawn during the initial year of taking out a reverse mortgage determines the mortgage insurance premium when the loan is closes.

The fees used to be extremely high, in some cases, but now, the Department of Housing and Urban Development (HUD) limits origination feed to just 2% of the first 200,000 of the maximum claim amount plus 1% of additional home value, but not exceeding at total of $6,000. according to the article.

Reverse mortgages can be extremely complicated for those homeowners taking a look for the first time, but with the proper education, they can see how the product could benefit them to support their overall retirement plan.

Read the full article on The Street.

Written by Alana Stramowski

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  • Here is what Alana quotes: “‘Moreover, the income can make it possible for a retiree to deal taking Social Security payments in favor of larger payments down the road.’” BUT here is what WSJ actually stated: “Moreover, the income can make it possible for a retiree to delay taking Social Security payments in favor of larger payments down the road.”

    Here is another interesting statement: “A small, but important detail that often is overlooked is the fact that the amount withdrawn during the initial year of taking out a reverse mortgage determines the mortgage insurance premium when the loan is closes.” Not only is the wording clumsy but it is not the amount that is withdrawn during the initial year that determines the amount of the upfront MIP but rather the amount available to be taken from the principal limit in the first year. In other words if the amount available to be taken out of the principal limit in the first year including any amounts disbursed at closing totals 71%, the upfront MIP will be 2.5% even if all that is taken is 59.9%,

    The following claim is a little difficult to swallow: “Reverse mortgages can be extremely complicated for those homeowners taking a look for the first time, but with the proper education, they can see how the product could benefit them to support their overall retirement plan.” I wish educating people were that easy. Few people learn by going to class alone.

    In one case I not only watched the DVD with the senior so that she and her son could ask questions as we went through it just after they had already seen it but I went over the finance docs at one meeting and all other docs at another. It was not until the fifth meeting that they signed. Even then, the senior had a several need that was presumed to be about 70 months so she took maximum tenure payments to cover it. When the event was over, everyone agreed she should stop the payouts.

    About 60 months out, we got a call from a Realtor angrily questioning the size of the balance due. It was 2011 and the home values in this desert community were close to 60% of the value they were when the HECM was taken out. It turns out the woman was looking to sell her home but the balance due meant she would not have the money she needed to step up into a nicer facility when she sold the home.

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