For retirees who didn’t save enough to finance a long-lasting retirement, or for homeowners who want more financial freedom, a reverse mortgage loan could be the solution. It is a great way for homeowners aged 62 and older to convert their home equity into a liquid, tax-free asset without being burdened by monthly payments.
“We can pick and choose the program that is going to be best for you, we represent seven major lenders,” says William (Bill) Smith, Sr., a Reverse Mortgage Specialist and General Manager of Reverse Mortgage West, a California reverse mortgage broker. An Encinitas resident who’s lived in San Diego for more than 18 years, he has helped more than 600 seniors obtain reverse mortgages during his 14+ years in the industry.
Instead of paying down the mortgage principal at a monthly rate, the principal and the interest on a reverse mortgage loan are paid after the homeowner no longer lives in their home. This enables the homeowner to meet any personal financial goals, such as buying a new home or supplementing monthly income. The benefits are many – a homeowner can obtain long-term care insurance, defer social security, and avoid spend-down of current assets, among other perks.
Smith believes in taking a personal approach with each client. “This is probably the most important financial decision that many homeowners will make for the rest of their lives,” he shares. A common misconception he points out about reverse mortgage lending is the belief that the bank owns the home and will eventually tell the homeowner the loan is due so they must leave. This is false; with a reverse mortgage, the homeowner continues to own their home, just as they would any other mortgage.
The reverse mortgage loan is not due until the borrowers sell the home, permanently move out, or pass way. If there’s more money owed on the reverse mortgage than the home is worth, then the borrower or heir is never personally responsible to pay the loan out-of-pocket because the department of Housing and Urban Development (HUD) has guaranteed the loans to the bank.
Heirs will never owe more than the house is worth, even if it is worth less than the amount borrowed. They have the option to buy the home and pay off the loan, or sell the home and take the equity. “Heirs have a privilege,” says Smith. “They can buy the house for 95% of its then-appraised value, or the loan balance amount; whichever is lower.”
A homeowner with a reverse mortgage loan can receive the tax-free proceeds either as a lump sum, a line of credit, a monthly income check, or a combination of each. To calculate the amount a homeowner may obtain, the Federal Housing Administration (FHA) considers three objectives: 1.) Age: The older you are, the more you get. 2.) Value of the home: The more a home is worth, the more the homeowner will receive. 3.) The interest rate at the time of the loan. The lower the interest rate, the higher the proceeds.
HUD caps the home loan value at $625,500. If an individual’s home is worth more, they can still get a reverse mortgage, but $625,500 is the amount considered when calculating the value of proceeds. Reverse Mortgage West offers a jumbo proprietary loan available to homeowners whose properties are worth more than $1M. “When you’re helping somebody get a reverse mortgage, you’re improving their lifestyle, giving them greater peace of mind,” says Smith. “That’s 100 percent of the time.” WSmithReverse.com