IS THE BANK GOING TO TAKE YOUR HOME? NOT WITH A NEW REVERSE MORTGAGE.
One of the primary myths that is fixed by the New Reverse Mortgage is around the idea that the bank takes the home when the homeowner passes away. This is absolutely a Myth but in all fairness the myth was born of situations where it appeared to be fact.
To clarify this myth, we must look deeper at the terms of the old Reverse Mortgage.
Old Reverse Mortgage
In the old days (5+ years ago), Reverse Mortgages were intended for people to keep for the remainder of their lives. The terms and guidelines on Reverse Mortgages back then allowed a homeowner to borrow a high percentage of their home’s value and carried very high interest rates. As a result, the home would almost inevitably go upside down or have negative equity by the time the homeowner passed away.
In these situations, once the home goes upside down there was little reason for the family to keep it and most often they would just walk away, the bank would then foreclose, and the bank would resell the home as if it belonged to the bank.
I know of a woman here in St George Utah who took out an Old Reverse Mortgage about 20 years ago. At the time she was allowed to borrower 70-80% of her home’s value and she had an interest rate in the 7% range. Over the past 20 years she’s not made any payments so as of today her home is worth $350,000 but her Reverse Mortgage balance is over $600,000.
The pros of this situation are that this woman can continue to live in this home until she passes away and she’ll never have to make a payment aside from her property taxes and insurance. Likewise, her family will not be held responsible for any of the losses when she does pass away. If the family does want the keep the home when she passes they can purchase it for 95% of the $350,000 value or $332,500 and FHA will cover the $267,500 loss. In most situations like this the woman will pass away, the kids will walk away leaving the home to the bank and the bank will foreclose and resell it.
New Reverse Mortgages
FHA insures the losses on most Reverse Mortgages, so you can imagine the problem FHA would face if every HECM Reverse Mortgage were in the same boat as the example above. The losses would cause the agency to be bankrupt within a few years. For this reason FHA has implemented a number of drastic improvements over the past five years to fix these issues and insure the New Reverse Mortgage is around for the long-term. Some of these changes include:
- Reduced Interest Rates
- Reduced Mortgage Insurance Rates
- Reduced Closing Costs
- Reduced Loan Amounts
What these changes mean is that FHA has taken a more conservative approach to protect the homeowner, their estate and the Reverse Mortgage Program. By reducing these factors the homeowner and the home retain more equity for a longer period of time.
Under the old Reverse Mortgage terms, the equity was expected to run out between the ages of 85 and 90. But under the New Reverse Mortgage terms it is projected that the home’s equity will last a person well beyond 100. This means that if the homeowner needs to relocate, move into an assisted living facility, or just leave a little more equity/inheritance to the family the new HECM terms make it much easier to do so.
HECM Reverse Mortgages are the mortgage loan my generation will retire with. When I retire in 30 years a Reverse Mortgage will be as common as a 401k, Pension, or any other retirement planning tool. Make no mistake that these changes are a great thing and will insure that the New Reverse Mortgage will still be available in 30 years.
If you or someone you know has any questions about the New Reverse Mortgage please give us a call for the answers.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor’s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770