Reverse Mortgage
We provide reverse mortgages on homes in California and Florida, with a loan amount of up to $4M.
Reverse mortgages are sophisticated loan products that can be structured in many ways and can be customized to your specific situation and needs.
One of the major advantages of a reverse mortgage is that it is relatively easy to qualify for. Your credit score is not as much of a factor in qualifying, and the same with your income (you do need a certain minimum monthly income to qualify, but this is amount is relatively low). The main factors in qualifying for a reverse mortgage are your age and the equity you have in your home.
Depending on how it is structured, a reverse mortgage may enable you to borrow a lump sum of money, it can provide you with monthly payments (which in some cases continue for as long as you live), or it can provide you with a permanent revolving credit line.
What is a reverse mortgage?
The Reverse Mortgage is one of the most unfortunately named loan products in the lending industry, leading to much confusion among the public. The word “reverse” was originally chosen because instead of you making payments to the lender, the lender could make payments to you. However, the scenario where a lender makes payments to you is only one of the uses of a reverse mortgage; the reverse can actually be structured in many ways.
In actuality, there is nothing much “reverse” about a reverse mortgage. It is a mortgage just like any other mortgage. You borrow money from a lender with your house as the collateral. The difference with other mortgage products, and the defining feature of a reverse mortgage, is that instead of making monthly payments to the lender in cash, you make monthly payments to the lender in little bits of equity in your home. Over time, you owe more of the equity in your home to the lender.
Reverse mortgages are calculated in such a way that the amount you owe is not likely to exceed the value of your home during your lifetime. However, even if this should happen, the lender does not have the right to kick you out of your home, providing that you comply with certain minimum requirements. These include:
You have to continue paying property taxes on the home
You have to continue paying home owners’ insurance
You have to take care of property maintenance.
You have to remain living in the home
With these minimum requirements taken care of, you will be able to live in your home for the rest of your life, no matter how much money you owe to the lender.
Reverse mortgage advantages
Reverse mortgages have many advantages, including:
A reverse mortgage is a mortgage that you have the option of not repaying with cash, while still retaining the possession of your home
You can pay the reverse mortgage down at any time if you want (either monthly or with a lump sum). By paying the reverse mortgage down, you regain (part of) the equity in your home
You do not need a high credit score or high income to qualify for a reverse mortgage
It is relatively easy to qualify for a reverse mortgage if you have reached a certain age and have substantial equity in your home
You can choose to receive the proceeds of your reverse mortgage loan as a lump sum, as monthly payments (sometimes for the rest of your life), or as a permanent revolving credit line
The interest rate on a reverse mortgage credit line is generally lower than that of a regular Home Equity Line of Credit
When structured properly, your spouse will be able to continue to live in the house after you die, and the loan will continue in place (i.e. depending on the type of loan you have, your spouse may continue receiving monthly payments or continue being able to use the revolving credit line)
A reverse mortgage, and a reverse line of credit, cannot be cancelled by the lender once granted
Reverse mortgage myths
There are many misunderstandings about reverse mortgages. Some common reverse mortgage myths are:
A reverse mortgage is for “poor” people. False. You do not have to have a low income to take advantage of a reverse mortgage. In fact, high-income home owners and owners of luxury homes can benefit from a reverse mortgage in many creative ways, restructuring their finances to give them peace of mind, finance business ventures and/or discreetly enable them to retain a lifestyle they have become accustomed to over the years.
You can’t sell your home when you have a reverse mortgage. Incorrect. A reverse mortgage does not tie you to your home for the rest of your life. You have the option of remaining in the home as long as you live, but you can also choose to sell the home and move somewhere else. Note that if you do decide to sell your home, like with any other mortgage, the reverse mortgage becomes due (meaning that you will have to pay the lender whatever you owe on the reverse mortgage, as part of your sales transaction). It is advisable to run the numbers on all the possibilities in advance, so that you know what will be the outcome of different life scenarios before committing to a reverse mortgage.
The lender can come after you for more than your house is worth. False. Reverse mortgages are carefully calculated to avoid the chances that you will end up owing the lender more than the value of your home. However, if this does happen (for example because home values unexpectedly plummet), the lender cannot come after you or your heirs for the difference between your home value and the amount you owe. This is a risk lenders assume based on longevity statistics similar to those used in the life insurance industry. Read more about this here.
You will not be able to leave the home to your heirs. Incorrect. After you die, your home may be sold to redeem the loan. Before this happens, your heirs will be offered the option to refinance or pay off the reverse mortgage and keep the home. Additionally, you have the option of paying down or paying off your reverse mortgage at any time, for example if you unexpectedly receive an inheritance or business windfall. Your heirs can also decide to pay your mortgage down or off while you are still alive, with the expectation of inheriting the home after you die. Read more about this here.
You will not be able to leave any of the value of your home to your heirs. Not always true. After you die, the lender is not automatically entitled to the whole value of your house. The lender is only entitled to what you owed them (the original loan amount, plus the interest accumulated over time). After you die (and/or your spouse dies, depending on how the loan is structured), the lender will first offer your heirs the opportunity to pay off the loan and take the house. If they choose not to do so, your house will be sold and the lender will be paid what you owed. Any remaining funds will go to your heirs.
Your reverse mortgage may leave your heirs saddled with debt. False. Even if the amount you owe exceeds the value of your home at the time of your death, the lender cannot go after your heirs for the difference. This is a risk lenders take based on longevity statistics similar to those used in the life insurance industry. Read more here.
When you take out a reverse mortgage, you no longer own your home. Incorrect. When you take out a reverse mortgage, you retain the title and ownership of your home, just like with a “regular” mortgage. Your home remains in your name. As part of this, you continue to be responsible for paying property taxes, home owners’ insurance and taking care of the maintenance of your home.
Taking out a reverse mortgage means that you haven’t done a good job of managing your finances. False. A reverse mortgage or “reverse” line of credit is a financial tool just like any other type of mortgage or mortgage refinancing, for example a Home Equity Line of Credit. There are cases where someone may want to take out a reverse mortgage even when they are not strapped for cash. For example, a business owner may have bought a home some decades ago which has since 20x-ed in value. This home is now worth several million dollars and is expected to rise in value even further in the future. He might want to take out some of this money for a business project, but with the option to not have to repay it. Or he may want to take out a permanent credit line with the home as collateral. When structured intelligently, these are sophisticated options that a high-end borrower can benefit from in ways that may surpass other loan products.
Will people know that I have taken out a reverse mortgage on my home? In California and Florida (the states where we are licensed as a mortgage broker), mortgage trust deeds are a matter of public record. These documents contain the name of the borrower, the lender, and the loan amount. They do not contain any other specific terms of the loan, and they do not specify that the loan is a reverse mortgage.
How lenders make money on reverse mortgages
When providing a reverse mortgage, the lender doesn’t get paid until you and/or your spouse dies. This means that it can take many years before they see any return on their loan. Additionally, providing a reverse mortgage comes with the risk for the lender that your home may decrease in value, or that you live for such a long time that what you owe on your loan exceeds the value of your home by the time the lender gets paid.
For this reason, reverse mortgages are provided by sophisticated specialty lenders. These lenders make long-term projections of the real estate market and calculate the projected risks and profits they can expect for borrowers in different age groups. They do this using longevity statistics similar to those used in life insurance products. They then build these expected risks and profits into the terms of the loan. Read more about this here.
How to know if a reverse mortgage makes sense for you
As you can see, a reverse mortgage has many moving parts and comes with many options that require intelligent structuring in order to get the most benefit from them.
The only way to know if a reverse mortgage would make sense for you is to have a knowledgeable mortgage professional run all the numbers for the different life scenarios that you may run into, and how these would affect your loan. This includes what would happen if you and/or your spouse live longer than you expect, if you live shorter than you expect, or if you decide to sell the home and move elsewhere within a certain number years. You can then compare these numbers to other options, such as taking out a regular Home Equity Line of Credit, a second mortgage, or simply selling your home right now and downsizing to a smaller home.
We can run all these numbers for you with no obligation and with no damage to your credit score. We will educate you about your options and give you helpful advice at no cost. If you would like, we will share your numbers and options with your accountant or financial advisor. At your discretion, they can be part of your phone or Zoom conversations with us, and we can send them all the information pertaining to your options so you can review these separately with them before you make a decision.
If you would like a Free Brainstorming Consultation, email us at info@prosperitylending.us for more information or self-schedule and appointment here.
Disclaimer: This general information is NOT a substitution for the advice of an attorney, accountant, and/or financial planner. Before you decide to pursue a reverse mortgage, you should carefully consider your individual circumstances so you can make a wise decision about the most valuable asset you may own—your home. Factors to consider include whether the proposed reverse mortgage is a recourse or nonrecourse loan, whether the loan would have a fixed or adjustable interest rate, and/or the current and projected market value of your home.