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Home Equity Conversion Mortgage (HECM) for Purchase Loan (H4P)
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Equity Vs. Cash

Let’s talk about one of the most confusing aspects of a reverse mortgage loan- home equity.  Most people are concerned about the equity in their home, and too often they view a reverse mortgage with the fear of losing that equity. Simply defined, equity is just the value of something (e.g. - value of shares in a company, the net value of your home or any saleable asset, etc.)  A reverse mortgage is just an efficient and flexible way to turn the equity in your home into cash. It’s that simple.

Most of us have worked hard our whole life and have poured thousands of dollars, sometimes more than 30-40% of our gross wages, to pay off our mortgage. Home equity is good, and when we have equity in our home and the mortgage is paid off, the payments stop and that is the goal for most of us. We even celebrate the event with mortgage burning parties in some instances. Yes – home equity is good, but in our retirement years, cash is better!  

Picture home equity as a huge pile of $100 bills locked up in a clear vault that you can see, but you can’t get to it.  It’s nice and perhaps reassuring to look at, but can you spend it?  No – you have to convert it to cash, and there are only two ways to do that other than using a reverse mortgage:  1) you can sell the home, or 2) borrow against it.  With the first option, you are still faced with the cost of a place to live.   When you borrow against your property (e.g. – a home equity line of credit), when you pull money out, what happens?  Answer, you are required to make monthly payments on the amount of cash you access.  We are not in charge of our equity - bankers and buyers are!  A reverse mortgage can allow you to stay in your home, convert some of that equity into cash and not be strapped with monthly mortgage payments, except for taxes, insurance, and maintenance.

What about those homeowners focused solely on having a paid for home that they can pass on to their kids?  Guess what, the kids don’t want the house! They want the cash from the house.   In many cases, they could benefit more from having that money now when they are buying homes of their own, or paying for college, or have other financial needs.  Instead of continuing to make payments to build home equity, why not convert some of that equity into cash and gift some of it to your kids and grandkids.  You will not only be able to witness the benefits of your gifts, but also be able to dispense your wishes and wisdom on how the money is used.  Why not give with a “warm hand” now versus a “cold hand” when you are gone?

A reverse mortgage can be complicated, but for homeowners age 62 or better and either in or nearing retirement, it is the best way to turn some of that equity we have stored in our home into needed cash. You have the option of either a lump sum distribution, monthly income payments made directly to you, a non-cancelable line of credit that is guaranteed to grow, or a combination of these.  And, since a reverse mortgage is payment optional, you are not required to make monthly payments on any cash that you access. You simply have to: 1) occupy the home as your primary residence; 2) pay the taxes and insurance, and; 3) maintain the property, including paying HOA dues, if applicable. 

Home equity is good, but it is no substitute for cash and cash flow, especially in retirement. 

Contact us to today to learn more about how a reverse mortgage just might be an excellent option for you and your heirs in achieving your goals in retirement planning.

 

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How A Reverse Mortgage Loan Works In Divorce

Divorce can be emotionally stressful enough for everybody involved without the added worry of what’s going to happen with their finances. Often, one of the first questions asked is what is going to happen with their current home or where they are going to live. When splitting up the assets, one of the hardest decisions is what are you going to do with the house.

With both parties being faced with going from a dual income to a single income, additional financial tension is created. Even though one spouse may want to keep living in the house, the ex-spouse may not qualify to purchase another residence without refinancing the current home. Selling the house is usually one of the first options people think of. This way it’s easier to divide assets and prevent having to deal with any of the following mortgage issues.    

  • Staying tied to the current mortgage with the ex-spouse
  • Ex-Spouse missing payments with both names on the mortgage
  • Affecting your debt to income (DTI) ratio’s as your name is still on the mortgage
  • Signing a Quitclaim Deed doesn’t waive your mortgage responsibilities

If you are 62 years or older you have an additional solution.

 A reverse mortgage loan can provide between 30-70% cash-out to the borrower.  The funds can be used to buy out an ex-spouse in a divorce settlement or a partner that wants out of a real estate or business partnership. Many people may not qualify for a mortgage in retirement, and if they do, they would prefer not to have a mortgage payment. HECMs are a way in which cash can be borrowed with minimal income and credit requirements without incurring a mortgage payment, although they are still required to pay property taxes, insurance, and maintenance.

Example 1:

Joseph and Margaret* are both 79 and planning to get a divorce. Margaret would like Joseph to sell their house to get enough cash out of the separation to purchase another home. Neither wants a mortgage payment from losing the other’s income.   They currently have a $600,000 paid off home. Joseph plans to continue to live in his current home while Margaret intends to move into a new home.

A reverse mortgage would allow Joseph to continue to live in his current $600,000 home and Margaret to purchase a new $600,000 home.

Joseph Does A Cash Out Refinance With A Reverse Mortgage And Takes Out $300,000 For Margaret.

Norm has no monthly mortgage payments; he must still pay taxes and insurance and maintain the home.

Margaret Uses $300,000 To Do A Reverse Mortgage For Purchase On Her New $600,000 Home.

Margaret has no monthly mortgage payments; she must still pay taxes and insurance and maintain the home.

Example 2

Larry and Betty* have a paid off $400,000 home and are both 82 years old currently divorcing.   Larry would like to purchase the house but is not able to take the cash out that is needed to pay off his soon to be ex-wife with traditional financing. Betty would like to be able to move into an active senior community with the proceeds from the divorce.

Larry Decides To Do A Reverse Mortgage And Obtains A Lump Sum Of $200,000 To Pay Off Betty.

Larry has no monthly mortgage payments; he must still pay taxes and insurance and maintain the home.

Betty Uses The $200,000 To Purchase A $400,000 Home In An Active Senior Community.

Betty has no monthly mortgage payments; she must still pay taxes and insurance and maintain the home.

 Key Reverse Mortgage Divorce Details:

  • Reverse mortgages have limited requirements for any sale or refinance to take place
  • A reverse mortgage may be done before the divorce being finalized (restrictions may apply)**
  • Both parties have no monthly mortgage payments; they each must still pay taxes and insurance, and maintain the home
  • Both parties can now stay in an equal value home without pulling cash from other sources (if there is money owed on the current home there will be less equity to split up.)

 *NOTE: Story is for illustration purposes only. The persons depicted herein are fictional, and any resemblance to actual persons is a coincidence. This information is provided as a guideline; the actual reverse mortgage available funds are based on current interest rates, current charges associated with the loan, borrower date of birth, the property sales price and standard closing costs. Interest rates and loan fees are subject to change without notice. **Information provided is not legal advice; clients should consult an attorney for their specific situation.

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Reverse Mortgage Did You Know Facts

Top 30 Did you Know Facts about Reverse Mortgage Loans.

Some of these facts may surprise you.  It is common that when we talk about reverse mortgage loans with people, they often don’t know a lot about them.   We are happy to share these with you in hopes that it will answer some of your questions.   

Most, but not all, reverse mortgages today are federally insured through the Federal Housing Administration’s (FHA) Home Equity Conversion Mortgage (HECM) Program. This advertisement talks about HECM loans only.

 

  1. Did you know that the reverse mortgage loan is also known as a Home Equity Conversion Mortgage or HECM?

 

  1. The reverse mortgage loan is no longer considered a loan of last resort.

 

  1. There are over 6.97 Trillion dollars of untapped home equity in Baby Boomers’ homes.

 

  1. Reverse Mortgages have an 83% satisfaction rating for borrowers who have a reverse mortgage loan according to a study done by The Ohio State University.

 

  1. You could qualify for a reverse mortgage loan even if you own your current home free and clear.

 

  1. As long as all loan terms are met, borrowers still own their home when they have a reverse mortgage.

 

  1. A Home Equity Conversion Mortgage has been around for over 30 years.

 

  1. President Ronald Reagan signed the HECM reverse mortgage loan into law in 1988. The FHA insured Home Equity Conversion Mortgage (HECM) was signed into law on 2/5/1988, as part of the Housing and Community Development Act of 1987.

 

  1. A house with a reverse mortgage loan can still be inherited when the borrowers permanently move out.

 

  1. Inheriting a property with multiple stakeholders can make the inheritance more complicated.

 

  1. The servicer of a reverse mortgage does not automatically own or take the house when the last surviving borrower leaves home or dies. When the last surviving borrower permanently leaves home, either by moving out or passing away, the loan becomes repayable, along with interest which is agreed upon at the beginning.

 

  1. A reverse mortgage loan is a non-recourse loan. If the loan balance exceeds the home value, HUD/FHA makes up the difference to the investor when the loan is due.

 

  1. A Reverse Mortgage Line of Credit has a growth feature (applies to unused funds).

 

  1. The age to qualify for a reverse mortgage loan is 62 or older.

 

  1. With a reverse mortgage, as long as all loan terms* continue to be met, the non-borrowing spouse can still live in the home should the borrower predecease them. *Terms include living in the house as your primary residence, maintaining the home, and paying home expenses such as taxes and insurance.

 

  1. Mortgage insurance is built into every reverse mortgage loan.

 

  1. The Reverse Mortgage Stabilization Act was implemented in 2013.

 

  1. Borrowers can escrow the taxes and insurance over the life of the reverse mortgage through a Life Expectancy Set-Aside (LESA).

 

  1. Qualifying for a reverse mortgage loan does not include a specific credit score. (However, minimal credit, income and property qualifications do apply.)

 

  1. The borrower, or their heirs if applicable, have up to one year to satisfy the reverse mortgage loan balance when the last surviving borrower permanently leaves the home.

 

  1. There are a variety of ways you can use a reverse mortgage loan to fit your specific needs and wants including lump sum, a line of credit, and monthly cash flow payments.

 

  1. Your heirs are still entitled to the remaining equity balance, if any, after the loan has been paid off. If your heirs want to purchase the home they can by paying 95% of the appraised value or paying off the loan balance, whichever is less.  Note: this does not constitute legal advice. Please consult an attorney for your specific situation.

 

  1. As long as all loan terms are met, a reverse mortgage is not due until a borrower no longer occupies the home or turns 150 years’ old.

 

  1. All borrowers must get HUD-approved counseling prior to getting a reverse mortgage loan.

 

  1. The maximum claim amount on a HECM reverse mortgage loan is now $726,525, for 2019.

 

  1. The proceeds from a HECM can be used to pay for Long Term Care.

 

  1. Accessing a portion of your home equity with a reverse mortgage loan early on could potentially allow all of your investments to last longer. (Note: this does not constitute financial advice. Please consult a financial advisor for your specific situation.)

 

  1. The proceeds from a reverse mortgage loan can be used to help divide assets in a divorce. (This does not constitute legal advice. Please consult an attorney for your specific situation.)

 

  1. Some areas may have access to a proprietary Jumbo Reverse Mortgage. (These reverse mortgage loans are not-HECM loans.)

 

  1. Your current mortgage can be refinanced into an FHA Reverse Mortgage.

 

Bonus:

You can buy a new home using a reverse mortgage loan for Purchase*. (May not be available in all areas.) * The required down payment on your new home is determined on a number of factors, including your age (or eligible non-borrowing spouse’s age, if applicable); current interest rates; and the lesser of the home’s appraised value or purchase price.

It’s important to know all the facts and features of a loan before approaching a lender or a bank.  If you have questions about whether or not a reverse mortgage loan is right for you, it never hurts to do a little research, or ask a local Fairway Reverse Mortgage Planner. 

 

Source: https://www.nrmlaonline.org/about/press-releases/senior-housing-wealth-reaches-6-97-trillion-in-q3-2018

Source: https://reversemortgagedaily.com/2016/03/13/study-reverse-mortgage-borrowers-report-high-satisfaction-levels/

Source: https://www.forbes.com/sites/wadepfau/2016/02/18/a-brief-history-of-reverse-mortgages-in-the-u-s/#7183bbeb6f55

 

 

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Planning for Your Retirement

Planning your retirement can be a lot like preparing for your wedding day. Many thoughts are going through your mind. Do we have enough money to afford this? Is now really the right time? Am I ready to make this commitment? However, for most people that waited longer to retire or get married, they wished they had done so sooner.

Why wait until age 65 or later to retire when it is possible to do it sooner? By using a reverse mortgage loan on your house, you may be able to retire earlier than you thought. Your retirement years are precious, and you deserve more of them. Turning some of the equity you already have built up in your home into available cash flow could allow you to enjoy retirement at an earlier age.

Just like getting married, most people don’t just do all the planning on their own; they often rely on a wedding planner to help answer all of their questions and provide them with the guidance they need.   At Fairway, all of our reverse mortgage planners have taken additional training to be able to answer the question you and your family has.  It’s not just an initial appointment; there is constant communication during the whole process. We understand this is a big decision and there can be surprises along the way and we have the experience to help you with them. 

 The best part is that we have many reverse mortgage planners across the country to help you in most cases to meet with you face to face.  You wouldn’t hire a wedding planner that lives across the country working in a phone room.   We understand you want to be able to rely on the support of your right-hand person knowing they are there for you on your big day helping fix any problems that could arise.

Just like every wedding should have a schedule we wanted to share with you how the reverse mortgage loan process works.  In general, it averages around 30 days to close depending on how quickly you can provide us with the documents and how things go with the appraisal.

  1. Pre-Qualification: Review Fairway’s Items needed list and meet with a reverse mortgage planner
  2. Apply for The Loan: See Fairway’s Items Needed List for updated documents required to complete your application
  3. Receive Counseling: Get counseling from a HUD-approved counselor and obtain a certificate of eligibility
  4. Meet with Reverse Mortgage Planner: Complete your application, sign disclosures, and provide any remaining documents to your Fairway Reverse Mortgage Planner
  5. Appraisal: Appraisal is completed to determine value and eligibility
  6. Underwriting: An underwriter will review your loan application and determine if additional information is needed.
  7. Final Loan Approval: Once all information has been approved, your loan is moved to “Clear to Close” status
  8. Closing Instructions: Closing instructions are sent to Title/ Attorney to prepare the HUD Settlement Statement.
  9. Closing Documents: Closing documents are sent to the title company
  10. Closing Preparation: Fairway will contact you with the final figures and information
  11. Final Closing Step: Meet to sign closing documentation at the title company.  Bring your Photo ID!
  12. The Loan Is Funded!

It’s always wise to seek professional guidance and help for your retirement. Think of all the hard work that went into planning your wedding day. It’s the same concept; it’s best to work with people that have done this and are experts in the field. Ask a local reverse mortgage planner to help you understand the facts and features of a reverse mortgage loan.

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