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Reverse Mortgages

This is a real life example that occurred in Middle Tennessee of how a real life family set up a reverse morgage program for their home.

 After retiring in 1998, Joost Koenig, along with his wife Joan, moved to White House from California to be near their daughter and to escape the escalating costs of the West Coast. Paying cash for their house they soon found living on a fixed income was still difficult in the residential community outside of Nashville.

 “We had to meet out everyday expenses and Social Security is not all that great,” said Koenig, now 83 years old. “About 18 months ago we saw an advertisement on TV about reverse mortgages and called the number to find out more and requested their tape, which we watched.”

 Koenig contacted a friend in the banking business who suggested they contact one of the companies that does reverse mortgages. After expert consultation and reviewing everything thoroughly, the Koenig’s decided to proceed with the mortgage with the lender and three weeks later signed the final papers. 

 “The thing is the house is still ours and eventually our children can take possession later,” Koenig said. “And the first of every month we receive money in our checking account.”

 Government backed reverse mortgages have been available since 1990 when the Federal government legalized them with the Home Equity Conversion Mortgage program.

 “Simply put it is a home equity loan without a payment,” said Brien Brandenburg, regional manager for Wells Fargo Reverse Home Mortgage.

 A reverse mortgages is a real estate transaction that permits citizens, 62 and over, to tap into the equity of their home without having to take on the obligation of monthly payments. There are no credit or income qualifications.

 The only requirement is the loan holders continue to live in the home as their primary residence, Brandenburg said

 He added most seniors select Federal Housing Authority (FHA) loans partly because of government backed insurance. Other loan programs are available.  

 There are five payment alternatives for home owners to select from. The options are a line of credit, lump payment, lifetime monthly payments, term payments or a combination.

 The amount a borrower can receive is based on the value of the home, age of the borrower and the existing interest rate (FHA loans are based on the existing Treasury Bill rate), Brandenburg said.

 A home owner can receive a greater loan when the interest rates are lower, the older he/she is and the more the home is worth. Total payout is determined using a cap set by the FHA and an appraisal. Loan limits vary county by county.

The U.S. government requires any person interested in obtaining a mortgage receive counseling from a qualified expert at one of the Housing and Urban Development (HUD) approved non-profit agencies. In Tennessee telephone counseling is permitted.

 Approved agencies in the Nashville area include Consumer Credit Counseling Services (CCCS), Woodbine Community Center and Legal Aid of Tennessee.

 “Our services are free and unbiased,” said Patricia Lamkin, division manager and counselor for CCCS. “We want home owners to make the right decision on-their-own.”

 Reverse mortgages are not for everyone and interested home owners need to evaluate their personal situations and other alternatives before making a decision, Lamkin said.

 Borrowers should understand the loan balance is going to grow if money is taken out and equity could be going down if the home is not appreciating adequately, Lamkin continued.

 The residence can’t be rented out and the owner can’t be gone for more than six months. Plus the home is not assumable and another name can’t be added to the title.

 Owners are responsible for maintenance, taxes and insurance.

 Home owners deciding on this path should never have to pay anything upfront since everything comes out at the end of the loan, Lamkin added.

 In relative terms, the costs of a reverse mortgage fees are high compared to other home loans instruments. According to AARP, overall costs generally run between 8 and 10 percent of the home’s value.

 Lamkin said the main for not proceeding is cost.

 There are standard fees associated with the loan’s closing costs and include title search, title insurance and document preparation.

 Because of the federally backed insurance of FHA loans, the amount owed never exceeds the value of the residence. Any amount owed is covered by the insurance.

 Because it is a loan, money coming from the mortgage is not considered income by the government and does not count against Medicare payments.

 However, borrowers should be aware putting the money in a savings type account could affect some government program eligibility, Lamkin said.

 Since legalized, reversed mortgages have grown in popularity.

 In 2007 there were 911 FHA mortgages handled in Tennessee, Brandenburg said.

 The government is planning to make the program more affordable with new legislation in 2008.

 With the legislation and a growing percentage of population turning 62 the market for the loans is expected to grow significantly. The number of companies offering the program is expected to increase as well.

 “We are very satisfied with how this has worked out,” Koenig said. “Our children can eventually sell the house for the difference owed and that was important to us.”

For a list of licensed lenders in Tennessee and other states, go to National Reverse Mortgage Lenders Association Web site at www.reversemortgage.org.