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Reverse Loan; Fixed or Adjustable?

Reverse loans offer many choices to senior borrowers, but it can be confusing to decide which one to use because they are different from traditional mortgages, no mortgage payments are required and they are easier to qualify for on a fixed income.

And they also do not have a loan term.  Reverse loans are still a mortgage, but unlike what we are all accustomed to.   They are different, but similar in that both are liens against the subject property.

In the past when applying for a mortgage to buy a home or refinance, the most popular one was the Fixed rate, because you always knew what your mortgage payment would be, unlike an Adjustable Rate Loan where it can change and possibly increase over time.

And everyone always shops for the lowest interest rate, but that meant you had to pay more Points to get a low interest rate, but if you chose a higher rate the Points would decrease, or possibly be a “Zero” Point loan.

However, with a reverse loan, it is entirely different.   There are no Points, but an Origination fee and sometimes, there isn’t any fee at all.

The other difference is how the selected interest rate determines how much money you will receive from a reverse loan.  Sometimes the lower interest rates provide less money, and cost more, but if the loan is being used to pay off an existing mortgage and freeing up more cash flow, then that would be a consideration.

And then there is the question whether or not to chose a Fixed interest rate or the HECM Line-of-Credit.  is the borrower paying off a large mortgage?   Then the Fixed rate might be the best choice.

But if there is a small mortgage or none at all, then the HECM Line-of-Credit would be the preferable choice, as it will give the borrower more flexibility with their funds, plus it has a “growth” feature that will provide additional funds in the future.

Anyone reading this is most likely thinking, it’s confusing.   And it is.   And that is exactly why it is important to meet with a Reverse Loan Consultant who can provide you with a personalized proposal and eliminate some of the confusion.

In the midst of Covid-19 and the uncertainty of the future, more seniors are now actively investigating the benefits of a reverse mortgage and many have applied for their own loan to preserve their savings and have a financial “safety net”.

And maybe you should, too.

 

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Covid-19 and Seniors at Risk

It has been a while since I have written anything in my blog, because like everyone else, my life was turned upside down with the pandemic and it’s destructive swath across the world, taking lives, ruining economies, creating fear, anxiety, and uncertainty.

Anyone who had a 401-K, some sort of a retirement plan or at the least, a savings account have seen them dashed, drained away and depleted within days and the Stock Market will continue to reel in uncertainty for most likely, a very long time.

Eventually, we will get through this terrible time, but if you are a senior, you may not have the ability to wait it out until the markets recover and are very worried about running out of money.  I am here to say, that this is the one time a senior has an advantage over younger people because they have an option that younger people don’t have.

If a senior age 62 or older, lives in their home  (even if they have a mortgage on it), they could apply for a reverse loan.   However, too many are afraid of them because they think the Lender will end up owning their home  (false),  they have to still make payments (false), there is “fine print” to trick them (false) and they are “too good to be true”.  (False again.)

  • The FHA HECM is the most regulated mortgage in the lending industry, to protect seniors from financial abuse.
  • Anyone who wants to apply for a reverse loan must complete telephone counseling with a HUD-approved Counseling Agency.
  • There are no mortgage payments, however, the borrower must continue to pay property taxes, Homeowner insurance and keep their home in good repair.
  • There are no restrictions on how the borrower uses their funds, except they are discouraged from buying annuities or other investment products.
  • They can remain in their home for their entire lives and leave it to their estate.

The reverse loan industry is seeing an increase in loan applications at this time because obviously money from a reverse loan will give them the safety and security they need and take away the fear and anxiety about running out of money.

The loan is safe, well-regulated and an ideal solution for all senior home-owners to consider right now.   From the time the HUD Counseling is completed, the loan processing time takes about 45 days, however, it might begin to take longer with the increase in applications.

Although I am located in California, anyone who reads this may contact me if you have questions.   I can point you in the right direction for a reverse loan consultant in your state.

Don’t hesitate.  If you have a home or Condo and you are old enough, you have this opportunity for financial security.  Look into a reverse mortgage.  Now.

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Refinancing a Reverse Loan

Like any other mortgage, there may be a time when it’s optimal to refinance a reverse loan due to a drop in interest rates, increased home value or that the borrower is several years older than when they did their original reverse mortgage.

As of this posting, interest rates have decreased and many reverse loan borrowers are being solicited to refinance their current loan into a new one, however, there are some guidelines that have to be followed and not every borrower will pass them.

There has to be a tangible benefit to the homeowner to refinance their reverse loan and at the same time protect them from being taken advantage of and being charged unnecessary fees.

Regulations are in place to protect seniors from being taken advantage of and this has resulted in 3 “tests” to determine whether or not it would be beneficial for the borrower to refinance their current loan into a new one.

The borrower must pass 2 out of the 3 tests to be considered eligible to refinance their existing mortgage and if they do, they can apply for the new mortgage.

There is a”seasoning’ requirement and this means the loan has been in place for not less than 18 months from the time it was originated, funded and closed. Otherwise, the borrower will have to wait, although there are some exceptions to this, that could be discussed in an additional post.

  1. Closing Cost Test.   The increase in available loan proceeds must exceed five (5) times the total closing costs amount  This is the “benefit factor.”

2.  Loan Proceeds Test.  For any reverse mortgage refinancing the available Benefit Amount from the new HECM is the amount of the Principal Limit available to the borrower MINUS the HECM loan balance being paid off and the Closing Costs for the new mortgage.   This must equal or exceed 5% of the HECM Refinance Principal Limit.

3.  Rate Reduction Benefit Test.  The borrower must recover the total costs of the new loan through savings in the annual interest rate charged on the new loan within 4 years.

Confused?  Of course and the only way a borrower can find out if they would qualify for a refinance would be to provide a complete copy of their most recent mortgage statement to a reverse loan professional and have them do the calculations for you.

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Over the years I have refinanced many of my former clients, but they all have to pass the tests and most of the time they do.   If they wish to refinance into a Jumbo/Proprietary reverse loan, that can be done too, and the qualifying tests are very similar.

When in doubt, call your loan professional and ask them.   It might be a benefit to you at this time while the interest rates are so low and you might be entitled to more of your equity and increased cash flow.

 

 

 

 

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Reverse Mortgages in California

For seniors who live in California and would like a reverse loan to gain access to their equity, they often find that the FHA Home Equity Conversion Mortgage does not allow them enough of their equity to be available to them, and they end up leaving equity “on the table”.

Home values in California tend to be much higher than other parts of the country and since the HUD Lending Limit for reverse loans is capped at $765,600 that means if a borrower’s home value is considerably higher than that, their loan will be capped at the lower value and they would receive less money from the loan.

When that happens, the loan amount will be determined by the above Lending Limit.   But what if your home’s value is much higher than that?  If it is, then the next possibility is to apply for a Jumbo Proprietary reverse loan that I have discussed in previous posts.

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Not only are they more affordable in fees, but they will allow more of the equity to be available to the borrower.  It could be a Fixed-rate, a Line-of-Credit or even a 2nd. Trust Deed if the borrower is comfortable keeping an original loan in place.

Some of them have fees and other options do not, depending upon the loan and interest rate that is selected at the time of the loan application.

When considering a reverse loan, it is very important to know what your options are and what would be the best one for you to secure more funds from your home to protect your retirement funds, plan for caregiving expenses or take a dream vacation.

Please contact me if you would like a personalized proposal and more in-depth information about how a reverse loan might be just perfect for you.

 

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Options for Receiving Money in a Reverse Loan

The FHA HECM reverse mortgage is a Line-of-Credit that allows the homeowner and borrower three options to receive their money.  It is very flexible and the borrower can change the terms at any time they may want to, but what are they?

One option  ( and most borrowers will choose this), is to have money wire transferred to their checking account when the loan closes and funds.

Or they may wish to receive a tenure payment that will be funded to them every month for the rest of their lives.

Or a Modified-Term payment that I discussed in the previous post.   Regards of which option may be used, they all can be changed at any time or do a combination of them.   Whenever the borrower wants to make a change or receive additional funds from their account, all they have to do is contact the Loan Servicer and for a small fee of $25-$30 they can request a change.

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Maybe they want to receive their money every month for the rest of their lives.   This would be the Tenure option and it will continue to be deposited into their account indefinitely as long as they occupy the property.  Even if the funds in the reverse loan are exhausted.

Regardless of which option or combination a borrower may utilize, the borrower is required to live in the home, pay the property taxes and Homeowners Insurance and keep their home in good repair.

And what is the most common choice used?   Cash at the close of the loan and request funds from the Line-of_credit when they want more money in the future.

 

 

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