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by Dr. Oneida Cramer
The reverse mortgage is having an extended honeymoon with Texas homeowners ever since the first loan took effect in January 2001, when Texas became the last state in the US to offer such lending. During its initial year of operation, the reverse mortgage has been embraced by a steady growing number of people, primarily from those just learning about it, according to Scott Norman, founder of the Texas Association of Reverse Mortgage Lenders and representative with Lehman Brothers, Financial Freedom, the largest reverse mortgage lender and servicer in Texas and the US.
?Our company is growing probably by 40%-50% every year,? Norman said. ?We think that in five years, reverse mortgage will be an absolute financial stable for at least half the families in the US.? Approved by the 76th Texas Legislature and a voter referendum in 1999, the reverse mortgage has been reviewed by a lot of people, and nobody has come out and said anything against it.
?I think probably the most unfortunate thing about a reverse mortgage is its name, ? Norman said. ?It lends a little bit of unnecessary confusion just because ?reverse? really throws them off and ?mortgage? entails that you?re going to have to turn back around and qualify for a loan and make payments. The ironic thing about a reverse mortgage is that it?s designed for people 62 and over?for people on fixed income. They may not have the income or asset base to qualify for a traditional mortgage. So, the loan?s ability to make money is unique in the sense that the lender defers the income until the time the home is sold or the borrowers pass away.?
Basically, a reverse mortgage is a loan defined by the home?s equity.
?It?s very much like a traditional mortgage?a lien against the property,? Norman said. ?The homeowners own the home. It?s their property. They can sell the home or prepay the loan at anytime without penalty.? A reverse mortgage is also much like a traditional loan because interest accrues until the loan is paid off.
?The mortgage is never going to be paid, really, until the house is sold,? Norman said. Then, generally, the proceeds from the sale cover the costs in the loan, and any surplus goes to the borrowers, if they are living, or into the estate.
A reverse mortgage normally ranges between 33% and 55% of the equity in the home. The size of the loan is based on two factors: the ages of the homeowners?the older the borrower, the larger the loan?and home value. And the loan is administered in one payment or as monthly payments that continue as long as the homeowner owns the home.
?Let?s say you?ve got a $200,000 home that?s paid off,? Norman said. ?Let?s say you were born in 1935; you?re 67 years old and female. I can give you two options. I can give you a lump sum payment, which would be, in this case, just under $75,000 or a monthly payment just under $500 a month ($6,000 a year).? If you live to be 97, you will have received thirty years of monthly payments for a total of $180,000. The loan would accrue interest at an adjustable rate, currently just under 4%. Adding up interest plus payments would bring the total loan to a sum that is greater than the $200,000 value of the home. Likewise, thirty years of accumulated interest on the $75,000 lump would amount to a sum totaling more than the original value of the home.
?To protect the lender, there is a government insured insurance policy that allows the product to be offered, just incase the borrower lives beyond the life expectancy, the lender does not go broke offering the product,? Norman said.
A reverse mortgage comes due upon three circumstances: (1) the death of the borrowers, (2) after the homeowners go to a nursing home, or (3) after the home has been vacated for a consecutive 12-month period.
?If you leave for three months, or you leave for the summer, or if you leave for the winter, nothing happens,? Norman said. ?Once you?re gone for a year, that means you?re probably not coming back. Our concern, since no one is living in the house, no one?s got a vested interest concerning the roof, the property taxes, and the insurance.?
?A reverse mortgage is going to work for about one in three couples,? Norman said. Some homeowners may not be in a situation where they need the loan yet, or they might want to sell their home eventually and buy another. But about a third of the homeowners don?t want to sell the house: this is where their memories are; this is where their families grew up. They want to live in the house and borrow against their own equity. There are a lot of ways to use the money from reverse mortgage?pay bills, maybe travel, prescription drugs, maybe a nurse to come a few days a week?just to name a few possibilities.
Ideally, the reverse mortgage works best with a home that?s completely paid off or is 85% paid off.
?If you?re got an existing mortgage on the house, the first thing the lender is going to do is pay off that mortgage, ? Norman said. ?Let?s say that the homeowner has a $50,000 mortgage left on the $200,000 house and borrows the equivalent of a $75,000 loan. After the lender pays off the $50,000 mortgage, the borrowers gets a lump sum of $25,000 or monthly payments of $150 until the house is sold. In this case, a reverse mortgage provides relief from the financial obligation of making monthly mortgage payments rather than long-term monthly income.
?A reverse mortgage is designed for your basic all American, Dallas County tax payer,? Norman said. It is for somebody who?d like to have an additional $500 a month or the ability to pay some credit cards, fix their roof or buy a new car. Some people, more sophisticated investors, can use this in estate planning?put it into a tax-free annuity or other vehicle. It would lessen their estate taxes.?
?There?s really not a down side unless you are bent on leaving your house with all the equity to your children,? said Norman. ?We really don?t see that. Most of our calls are from the children, which surprises me a little bit. Most children make their parents get one.?
For more information about reverse mortgage, go to www.texasreversemortgage.com and plan to attend a seminar by Scott Norman on Monday, February 25 at 10:00 AM at the Chicago Title north of the Galleria. You must RSVP, toll free, 877-RM-TEXAS.
Dr. Oneida Cramer
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