Author Topic: Reverse Mortgage Refinance - bad idea?  (Read 5659 times)

Pixelshot

  • Stubble
  • **
  • Posts: 146
Reverse Mortgage Refinance - bad idea?
« on: December 30, 2014, 09:29:01 AM »
My mother is 75 and in good health. She owns a home in AZ which has increased in value and will likely increase more.

She put in 30k when she purchased the home a few years ago and now wants to have the cash back. She explains that since the home has increased in value, she feels like she should have the cash. She also has a co-signer (my sister) who wants to be removed from the loan.

Someone cold called her one day and explained that she can do a reverse mortgage refinance which will allow her to pull out the cash and remove my sister from the loan. She says that the guy explained that this is a new program for people who are of retirement age and that it makes sense for her to do it. I think it's snake oil.

In my understanding, the reverse mortgage will essentially give the house away to the bank and, although she will have the cash, the bank owns the house.

My mother has said that the house is her inheritance to her kids. Yet, I feel like this is a dumb financial choice for many reasons and will in effect eliminate the inheritance altogether. None of the kids expect to inherit anything, but we don't want her to simply give away a large chunk of cash.

By the way, she is in good financial health and has a 5k/month fixed retirement income. She doesn't really need the cash, she just wants it.

Am I right to be concerned or might this actually make sense for her to do?









Pixelshot

  • Stubble
  • **
  • Posts: 146
Re: Reverse Mortgage Refinance - bad idea?
« Reply #1 on: December 30, 2014, 09:37:02 AM »
I think this may be the type of loan she's talking about (Home Equity Conversion Mortgage, or HECM) explained in this article:
http://www.bankrate.com/finance/mortgages/new-fha-reverse-mortgage-boon-to-seniors-1.aspx

one of the passages is confusing to me but sounds important:

"HUD recently clarified that the borrower cannot choose between paying the loan balance or paying an amount equal to the value of the home. Instead, when the loan is due, the borrower must either pay the balance due or default on the loan, in which case the bank sells the house and uses the proceeds to satisfy the loan.
However, even if that happens, you or your heirs will never owe more than the value of the home."

Pixelshot

  • Stubble
  • **
  • Posts: 146
Re: Reverse Mortgage Refinance - bad idea?
« Reply #2 on: December 30, 2014, 09:39:36 AM »
and another article says:

"When you take out a reverse mortgage loan, the title to your home remains with you. Just like a traditional mortgage, you are borrowing money and using your home as security for the loan. You must continue to pay for repairs, property taxes, and homeowners insurance or the bank can foreclose on the home.

"If you move out, sell the home, or the last surviving borrower dies, you or your estate will need to repay the loan. The loan balance will include the amount you have received in cash, plus the interest and fees that have been added to the loan balance each month. To repay the loan, you or your heirs will probably have to sell the house. If there is money left over from the sale after repaying the loan, you or your heirs can keep the difference."

--

http://www.consumerfinance.gov/askcfpb/234/if-i-take-out-a-reverse-mortgage-loan-does-the-bank-own-my-home.html

FarmerPete

  • Bristles
  • ***
  • Posts: 346
Re: Reverse Mortgage Refinance - bad idea?
« Reply #3 on: December 30, 2014, 09:39:55 AM »
My understanding is that this is only a good option if all of the following are true:   

1) Need more cash to live on than SS and your retirement provides. 
2) Don't want to leave anything for your heirs. 
3) Are bad at math.

Pixelshot

  • Stubble
  • **
  • Posts: 146
Re: Reverse Mortgage Refinance - bad idea?
« Reply #4 on: December 30, 2014, 09:42:53 AM »
Thanks FarmerPete - I guess I don't really understand WHY it's a bad option assuming there are no fees for the mortgage and that you understand taking the cash out is like stepping backward in time and buying the house without a down payment. In other words, what exactly is the down side?

MarciaB

  • Bristles
  • ***
  • Posts: 484
  • Age: 58
  • Location: Oregon
Re: Reverse Mortgage Refinance - bad idea?
« Reply #5 on: December 30, 2014, 09:45:30 AM »
Can she take out a home equity line of credit (HELOC) and pay back your sister and recoup the 30K?

FarmerPete

  • Bristles
  • ***
  • Posts: 346
Re: Reverse Mortgage Refinance - bad idea?
« Reply #6 on: December 30, 2014, 09:52:19 AM »
Why was your sister a cosigner?  Does your mom have bad credit?  Has the problem been fixed?

From the articles I've read, they wont give you a reverse mortgage unless you've got 50% equity or more.  Also, doing a reverse mortgage wont undo your current mortgage.  Obviously, you can pay off part/all of your current mortgage with the reverse mortgage if you do a lump sum.  If it was me, I would ask my mom what she wants the money for and then figure out how to get her what she wants without getting the money.  Also, if you decide to pursue a reverse mortgage, for the love of God, please find a reputable company locally that will do it for you.  Not all reverse mortgages are equal, and most salesmen eat old people for breakfast.  I know AARP has a list of approved companies.  That could be a good start.  Call the bank that holds her mortgage and speak to someone there.  Maybe there is a better option.

Pixelshot

  • Stubble
  • **
  • Posts: 146
Re: Reverse Mortgage Refinance - bad idea?
« Reply #7 on: December 30, 2014, 10:15:42 AM »
when my mother bought the house, she was in the middle of selling another two houses so the bank wouldn't give her another loan without a co-signer. My sister was only a co-signer; she didn't front any cash. Is there a better way to remove the co-signer from the loan now that the other houses sold?

I'm still a little unclear, though, what exactly is the down side? I'm sure that there is one (e.g. the bank owns the house at the end... or something like that) but I need to explain it to her in basic terms that even I don't really understand.


Catbert

  • Handlebar Stache
  • *****
  • Posts: 1708
  • Location: Southern California
Re: Reverse Mortgage Refinance - bad idea?
« Reply #8 on: December 30, 2014, 11:28:51 AM »
In terms of the "bank owning the house in the end" it is really no different than a regular mortgage (or HELOC).  When your mom dies either you can pay off the mortgage (reverse or regular) and have the house OR the bank will sell the house and give you whatever money is left.

Fees and mortgage rates are both pretty high on reverse mortgages (higher than regular mortgages) because the lender collects no payments for possibly many years.  The other major difference is that if the house is no longer her principle residence (e.g., she moves to assisted living) the reverse mortgage becomes payable in full and can't be turned into a mortgage rental. 

Not a bad deal if a/someone NEEDS the money and b/will be in the house long enough to make the fees reasonable.

The other option to get your sister off the loan is to do a regular re-fi.   
« Last Edit: December 30, 2014, 01:00:59 PM by mary w »

Rocketman

  • Stubble
  • **
  • Posts: 118
Re: Reverse Mortgage Refinance - bad idea?
« Reply #9 on: December 30, 2014, 12:16:31 PM »
The reason banks like reverse mortgages are because of the FEEs they make off them. If she gets it she will have at least the following fees:

Loan origination
PMI insurance ( or its equivalent in reverse mortgages- because someone needs to take the risk if she lives in the house until she is 114 years old)
Annual compliance fee (to make sure she is maintaining the house and she is still qualified to keep the reverse mortgage.)

Did I mention that banks love these because of the fees.

Good luck

ken

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: Reverse Mortgage Refinance - bad idea?
« Reply #10 on: December 30, 2014, 12:45:15 PM »
As Rocketman says, this is all about the fees. There will also be interest accrued on the money they are providing your mother. Banks offer this because it is good for them.

The only time a reverse mortgage makes sense is when the homeowner is cash poor and needs the money as an income stream. There is protection that the owner can stay in the house even after they deplete the equity. The banks can afford that risk because only a small percentage last that long and the fees are juicy.

A reverse mortgage is very wrong for someone in your mother's situation.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10691
  • Age: 61
  • Location: NorCal
Re: Reverse Mortgage Refinance - bad idea?
« Reply #11 on: December 30, 2014, 12:58:51 PM »
A common perception about reverse mortgages is that the bank gets the home when the borrower dies. Not so, but the outstanding balance does have to be repaid, including fees and interest. Most of these loans have a SHITload of fees. If one shops very carefully, there are banks that charge minimal fees for RM's.

Since her income stream is good, has she tried applying for a conventional mortgage? A CU or local lender might be more flexible and this would be way less expensive and less restrictive than a reverse mortgage.

Pixelshot

  • Stubble
  • **
  • Posts: 146
Re: Reverse Mortgage Refinance - bad idea?
« Reply #12 on: January 01, 2015, 07:55:23 AM »
Thanks to everyone for the replies. Great info!

FOLLOW UP:
On my mother's request, I called the man offering her the loan/refi. He was not nice to me on the phone - very defensive, which of course made me more suspicious. However, he did explain a couple of things that may be worth considering:
1 - the loan processing fee is $3k, which I assume is added to the loan somewhere
2 - reorganizing the loan with this program, in his explanation, will actually save her money in the short and long run. He said that the loan will enable her to focus her payments on paying down the principle faster (by lowering the monthly minimums) as long as she keeps her house payments at their current levels (assuming the APR is below 4%, which he said was likely). In other words, she'll make up the 3k of fees pretty quickly in the equity. He said that traditional mortgages are arranged so that most of your payment for the first half of the loan goes to interest, but this switches that around (this could be the catch - maybe the later value of the house is actually lower because of the interest accrued??)
3 - she doesn't have to use the cash that is loaned - it's more like a line of credit (I also assume that using the line of credit would bring finance charges, like a credit card, albeit at a low APR)

Could it be possible that it actually will SAVE her money?  It seems like these things could also be done by a traditional re-fi (except #2).

He did not give me specific numbers for things like APR and monthly payments, insisting that they will come once they get all of the paperwork drafted and ready to sign. I am very uncomfortable with that, of course, and I told my mother that we need at least some rough guesses before I would want her to proceed.

viper155

  • Bristles
  • ***
  • Posts: 258
Re: Reverse Mortgage Refinance - bad idea?
« Reply #13 on: January 01, 2015, 11:36:55 AM »
Think of it this way.......do people offering these reverse mortgages do it to benefit you, the consumer, or themselves? The answer is them. You initial inclination was correct....they are snake oil salesmen. It might be different if Mom were in a bad financial way. JMHO

Rezdent

  • Pencil Stache
  • ****
  • Posts: 813
  • Location: Central Texas
Re: Reverse Mortgage Refinance - bad idea?
« Reply #14 on: January 01, 2015, 12:06:35 PM »
Think of it this way.......do people offering these reverse mortgages do it to benefit you, the consumer, or themselves? The answer is them. You initial inclination was correct....they are snake oil salesmen. It might be different if Mom were in a bad financial way. JMHO
This.
And I would add that the tip off words in the OP are "cold call. .."

That's a red flag and a deal-killer in my eyes.
I have never seen a good outcome from a cold call.  IMHO, legitimate businesses shouldn't need to resort to cold calling elderly people.
I dont know a lot about reverse mortgages but it doesn't sound like your mom needs one.   If she does decide to do this then she should contact several reputable lenders.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10691
  • Age: 61
  • Location: NorCal
Re: Reverse Mortgage Refinance - bad idea?
« Reply #15 on: January 05, 2015, 01:20:18 PM »
I believe there is a place for reverse mortgages, and that they are not inherently evil. It's kind of like buying a car. There are smart ways to buy one and there are stupid ways to buy one. If your mom really really wants the money, I'd start contacting the major banks. They have programs that don't charge usurious rate, hence not a ton of advertising.

I have a friend whose husband sells these kinds of loans. He truly believes he is helping people stay in their homes. However, he makes an obscene amount of money ($300-$500k per year!), which comes in the form of commissions earned when he sells these loans. Every time the loan limits are increased, many of his customers pull even more money out and he gets a fat commission again.

The right loan could be of value for your mom, but you need to help her find one with the lowest costs possible. Clean used car from Craigslist vs. shiny new car from the most expensive dealer in town.

Mother Fussbudget

  • Pencil Stache
  • ****
  • Posts: 831
  • Age: 57
  • Location: Indianapolis, IN
Re: Reverse Mortgage Refinance - bad idea?
« Reply #16 on: January 05, 2015, 01:50:36 PM »
My instinct on reverse mortgages is the same as yours - it sounds too good to be true, and they're all Snake Oil / used car salesmen.

Instead, have her do a standard re-finance through someone reputable.  Others in the forums have suggested re-financing through the Pentagon Federal Credit Union. (penfed.org)

Look at their requirements (armed forced, work for the government, BE RELATED TO SOMEONE WHO DOES/DID), and sign up on-line.  In testing this, I signed up myself using my father (WWII vet) as my reference person.  I opened an account, and hope to refinance through them in April.