reverse mortgages money

Borrow Money from HECM or HELOC?

This is not an easy question to answer because it depends entirely upon the details and circumstances of the potential borrower and what they are trying to achieve.

Whenever anyone is looking to borrow equity from their home they could possibly do a refinance of their existing mortgage and then request cash back at the close of escrow.

Ideally they would be reducing their interest rate on the mortgage they are refinancing and then receiving the extra funds they requested and are happy with their decision.

They will have a mortgage payment to make each month and it might be larger than what they had been previously paying, because they have taken out cash from their equity and increased their loan amount, even if they reduced the interest rate.

The applicant will have to go through a lengthy Underwriting process, have excellent credit, job stability, cash reserves and enough income to meet the “debt to income” ratios and of course  good FICO scores.

This can be a very stressful process as it is more difficult to qualify for traditional mortgages than it was in the past and a great deal of documentation must be “willingly” provided by the applicant to complete the loan process.

And of course, they will have points and fees included in their loan amount as well and depending upon the size of the loan and the interest rate they choose, those fees will vary.

But what if their current loan already has a low interest rate and they want to keep it?

They could consider a Second Trust Deed that would be at a Fixed rate, a Home-Equity-Line-of-Credit or if they are aged 62 or more, a reverse loan/HECM/Home Equity Conversion Mortgage.

Unlike a HELOC, an FHA HECM reverse mortgage will not record in a second position and any existing mortgages on the property will have to be repaid from the funds from the reverse loan.

I will discuss these last two options in my next post.


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Fees or Costs Allowed on a Reverse Loan

In my previous post I discussed the one fee or expense on reverse loans that conventional mortgages do not have.  And that was the FHA insurance premium for MIP.

Conventional mortgages allow what some would call “Lender junk fees”, which typically are for processing, underwriting and other “back office” costs the lender will pass on to the borrower.  And they can add up to additional $1800 to $2000 on a traditional mortgage.

But they are not considered “allowable fees” to a reverse mortgage borrower and cannot be charged and built into the loan.

What are the fees that a reverse loan applicant can expect?

  • Flood Certificate – Pulled by the Appraiser
  • Appraisal fee
  • Credit Report
  • All title settlement, title insurance, transfer fees and recording fees.   These are based on the loan amount, the Title company and county or state.
  • Document preparation fee
  • Notary
  • Payees;  all third party fee and third party providers must be disclosed on the HUD-1 Settlement Statement per RESPA.  List all required loan fees, including fees paid outside of Closing on their worksheets.

All HECM/Home Equity Conversion Mortgage are subject to FHA’s requirements on allowable closing costs.

In my next post I will provide a list of fees that are not allowable and cannot be passed on to the borrower.

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Seniors Don’t Want to Sell Their Homes

In my previous post I shared several reasons why seniors might use a Reverse loan and without being redundant, I won’t repeat those reasons in this one.

If a senior homeowner opts to sell their home and not use a Reverse loan for whatever their goals are, here is what must be taken into consideration.

  • Preparing their home for Listing and doing any necessary repairs and or “sprucing” up the property before it goes on the market.
  • The costs for whatever those repairs and cleaning up might be.
  • Agreeing on a Sales price and Broker fee  ( typically 6%) and entering into a Contract.
  • Allowing strangers to walk through your home that can be disruptive and annoying.
  • Cleaning out years of stuff that have accumulated over time and this can be quite “daunting”.

Now, that’s just the business side of selling a home, but what about the emotional and psychological component?

  • Leaving a home that you have loved for many years and is filled with a lifetime of memories.
  • Possibly leaving behind good neighbors, friends and a community that you are comfortable with.
  • Giving up connections to your Doctors and other professionals who’s services you use to assist with your life.
  • Leaving behind a part of “you” that is ingrained in your home and leaving that part of “you” behind for the rest of your life.
  • Grieving over this experience of leaving…..
  • And the serious question;   “Where will I live and how long will the money I receive from the sale of my home, last”?

Sometimes well meaning family members, think that this is the most logical solution for their senior parents.

But is it?

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Use a Reverse Loan or Sell Your Home?

The first time I ever speak with anyone who’s seeking information about Reverse loans, I always ask them why they are looking into one and how it would improve or change their life.

Most of the common reasons are the following ones:

  • Eliminate an existing mortgage and stop having to make mortgage payments each month.
  • Increase “cash” flow.
  • Home improvements
  • Money for unexpected expenses, especially for care-giving and medical bills.
  • Avoiding withdrawals on savings and investments.
  • Traveling
  • Downsizing and buying a new residence.

If the reason to use a reverse loan is for cost of living expenses and increased cash flow, the funds from it can certainly make a difference in the quality of life for a senior, but what is the other option or options?

Sell their home?  Or possibly rent out a bedroom or two, to family members or strangers?

Most people don’t want their privacy compromised by having strangers living in their home and having to tolerate someone else’s habits and behaviors that may not be compatible to their way of doing things.

Plus, it can be dangerous or at the least a bad experience.

This leaves the other option of simply selling their home, taking whatever money they net after paying Broker fees, home inspection costs and paying off an existing mortgage.

Hopefully they will net enough money to afford rent payments and continue to live on their own until they run out of their funds from the sale of their home.

Let’s discuss this last option in my next post.   Does it make sense?   Is it a good idea?

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Jumbo Reverse Mortgages

If a homeowner lives in a property that is valued above 1MM and they would like to have more funds than the FHA HECM would would provide them, they could consider using a Jumbo Reverse loan as an option.

This is a non-FHA mortgage and thus becomes more affordable in the Closing Costs, because the Lender does not charge any Mortgage Insurance Premium/MIP which the FHA HECM loan does.

Given that the value of a property will be capped at $636,150 for the FHA loan, then it stands to reason if the property has considerably more value above that limit, the homeowner may want to consider using a Jumbo reverse loan instead of the FHA option.

Overall, the fees to complete the transaction are lower and just like the FHA HECM loan, there are no mortgage payments, the borrower remains on the Title   ( And in a Trust if that is applicable) and the property goes to the borrower’s estate when the last borrower passes away.

And there are no prepayment penalties if the borrower decides to repay the loan back, typically through the sale of their home.   This also applies to the FHA HECM reverse mortgage as well.

They must pass the Financial Assessment, just like they would on the FHA loan and continue to pay their on going property taxes, Homeowners insurance and any HOA fees that might be associated with the property.

This is an excellent option for anyone who has a very large amount of equity in their home and may want to retire an existing mortgage and it’s payment, have extra funds for monthly expenses or possibly medical bills and care giving costs and increase their monthly cash flow and limit the amount of “draw downs” on a retirement portfolio.

If anyone like to have the details about this loan, it would be best to contact me in that I can discuss the details with you and how you may ( or may not) benefit from it’s use.

It depends upon on each person’s personal circumstances.

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