Reverse mortgage vs. HELOC's. Anyone have experience?

If you do a RM there are main 4 things that can be a problem for compliance and cause the RM to be in default & due:

- FAILURE TO PAY - property taxes, insurance. For many who have had their home a long time, they are underinsured for the new debt. Or find they now need flood or wind policies. Premiums for new insurance can be lots more and can significantly increase the fees added to the RM each year.
- MOVING TO A NEW RESIDENCE- if RM property stops being your primary, you are out of compliance with loan. If you move into IL or AL or NH, your loan is due.

- BEING OUT OF THE HOME FOR MORE THAN 1 YR - the loan will come due. A cruise or long vacation is OK, but you have to continue to live in the home. Most policies have this.

- ALLOWING THE PROPERTY TO DETERIORATE - you are expected to pay for all repairs & maintenance on the home. The house has to be habitable with no code issues.

Two of the big RM players, Bank of America & Wells Fargo, got out of the new reverse business in 2012. They were like 50% of the market too - they still service & honor the old loans but do not write any new ones. MetLife in 2013. I would image they did it because many RM homes now are negative-equity so they were taking losses on those RM's. What is left in are smaller lenders and brokers. Some are good but some did subprime mortgage lending.


There was a great NYT article Octobe, 2012 by Jessica Silver Greenberg: “R M's Costing Americans Their Homes”. It reads, “The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes and not pay it back until they move out or die, have long been fraught with problems. But federal and state regulators are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates.” “Reverse mortgages also have troublesome incentive structures that might encourage brokers to steer seniors toward lump-sum loans, which carry a fixed interest rate, rather than a line of credit with a variable interest rate, the bureau found. In a lump sum arrangement, the interest charges are added each month, and over time the total debt owed can far surpass the original loan.Brokers earn higher fees on these loans and even more money when they sell the loans into the secondary market, where they can get rates nearly double those for variable loans, according to rate sheets obtained by the consumer bureau.” There are over 400 comments with lots of personal RM stories. It is a pretty sobering read.

Another article on RM and subprime is from the National Consumer Law Center, called “Subprime Revisted: How RM Lenders Put Older Homeovers” Equity at Risk” www.nclc.org/images/pdf/pr.../report-reverse-mortgages-2009.pdf

On HELOC's, gladimhere pretty well nailed it on what they are about!

For RM's, I think one needs to be VERY careful with RM.
RM is debt that HAS TO BE REPAID. If homeowners, their kids or heirs want the house (or worst case scenario - have been unpaid caregivers for their parents and have no other home), then the RM, it’s fees, interest and other expenses within the RM has to be repaid once the homeowner dies (or does something to cause RM come due). Under fed rules, lenders allow heirs up to 30 days to let them know what they plan to do and up to 6 mo to arrange financing for 95% of FMV of RM’d house. If not, property can be foreclosed on &/or sold on the open market. There is no gray area, the RM has to be repaid. If it’s an FHA/HUD backed RM & house sells for less than owed, feds pay the difference to the mortgage holder. Family doesn’t have to make up the difference. But if you want to keep the house, you have to pay the RM.

RM’s can work for some….like a healthy couple 63 & 65 which own 400K appraised home outright & plan 10 - 20 years there; home in an area of increasing value; & have guaranteed income to pay taxes, insurance, maintenance for 10 - 20 years; & they do line of credit RM. So when they move, home is 600K which repays RM & leaves $$ for downsized home or CCRC buy-in. But if that’s you, really you don’t need an RM as you can get HELOC or personal loan.

Too often, RM is done by those in financial or health crisis who don’t understand what an RM involves. If RM’d home is lower value, the $ (may be less than 50% of value) is just a band-aid on a bigger $$ problem. They can’t pay for what is required for the RM; or end up moving to a NH. Either way RM default & property foreclosures on or sold on open market.

As of 2013 significant changes happened to FHA backed RM. Now you have to show ability to pay the “required” on the house, like insurance, taxes, etc for years. If not, then have an escrow-like account to cover these costs. If you are low income and struggling, you just can’t do this. No federally backed RM for you. Also now value & condition on house has to be verifiable.

Also RM require things of the property owner. Will do another post on those.

If you notify reverse mtg co they will make any required repairs-charge to any profit from future sale. One other note if the house sells for under the $$ lent for mtg-bank takes the loss(family/estate doesn't make up difference)-generally things break even. Dad's was valued lower when market was down,so if there is sale in not too distant future there might be a small profit for the estate.

My in-laws went the reverse mortgage route. They zipped through slightly more than the supposed maximum reverse mortgage in the five years before father-in-law died. After his death in 2009, his widow (not my husband's mother) zipped through everything else she could cash in. Now she is living on income from his pension alone (more than some young couples bring up families on). She takes money out of the checking account without any concern for whether or not debits may be forthcoming. Each year, she forgets to pay for insurance and taxes. Should she need to move to a nursing home (and I think she does need that), she will have no money to move on and no money to fix her house up for sale. She had a senior care professional until about 15 months ago but got rid of her when the professional advised her to fix the house up for sale before all other assets were depleted after moving out -- she turned against this woman, a family friend for 30 years. Now she has a lawyer who has promised her that she will never have to leave! She, or more likely her creditors, eventually will benefit from the incredible recovery that the housing market has had in her town, so maybe selling earlier would have been a mistake. The house is supposedly worth above $2,000,000. An actual appraisal might show it worth less because there have been no improvements to the house but a lot of deferred maintenance, e.g., same kitchen and bath since 1953, cat damage, water damage from backed up sewers. The Reverse Mortgage folk insisted on a new roof about ten years ago, so there are no leaks at least. What the place is worth as a tear-down is hard to say. The reverse mortgage increases by about $10,000 per month. In retrospect, what would have been the right approach? It depends on what point one uses to work out a new future. But here's a general rule: keep enough available in the Reverse Mortgage or elsewhere so that you can move and prepare for sale in other than an emergency. If you don't have enough money to move, then you're trapped in the mortgaged house with no money for the extra expenses of aging. If the reverse mortgagee sells the house after death, equity beyond the amount of the first mortgage does the deceased owner no good. For all practical purposes, the mortgagors have sold the house for the amount of the reverse mortgage unless they can afford to move and sell as needs increase. I hope I have made myself clear but this is a complex issue and I am only lately realizing how bad a corner my husband's stepmother has painted herself into.

My in-laws went the reverse mortgage route. They zipped through slightly more than the supposed maximum reverse mortgage in the five years before father-in-law died. After his death in 2009, his widow (not my husband's mother) zipped through everything else she could cash in. Now she is living on income from his pension alone (more than some young couples bring up families on). She takes money out of the checking account without any concern for whether or not debits may be forthcoming. Each year, she forgets to pay for insurance and taxes. Should she need to move to a nursing home (and I think she does need that), she will have no money to move on and no money to fix her house up for sale. She had a senior care professional until about 15 months ago but got rid of her when the professional advised her to fix the house up for sale before all other assets were depleted after moving out -- she turned against this woman, a family friend for 30 years. Now she has a lawyer who has promised her that she will never have to leave! She, or more likely her creditors, eventually will benefit from the incredible recovery that the housing market has had in her town, so maybe selling earlier would have been a mistake. The house is supposedly worth above $2,000,000. An actual appraisal might show it worth less because there have been no improvements to the house but a lot of deferred maintenance, e.g., same kitchen and bath since 1953, cat damage, water damage from backed up sewers. The Reverse Mortgage folk insisted on a new roof about ten years ago, so there are no leaks at least. What the place is worth as a tear-down is hard to say. The reverse mortgage increases by about $10,000 per month. In retrospect, what would have been the right approach? It depends on what point one uses to work out a new future. But here's a general rule: keep enough available in the Reverse Mortgage or elsewhere so that you can move and prepare for sale in other than an emergency. If you don't have enough money to move, then you're trapped in the mortgaged house with no money for the extra expenses of aging. If the reverse mortgagee sells the house after death, equity beyond the amount of the first mortgage does the deceased owner no good. For all practical purposes, the mortgagors have sold the house for the amount of the reverse mortgage unless they can afford to move and sell as needs increase. I hope I have made myself clear but this is a complex issue and I am only lately realizing how bad a corner my husband's stepmother has painted herself into.

I know about trust,but Bro caused a scene at lawyers when it was discussed(he makes sure he is in presence when anything discussed-afraid he will miss something ) he demanded that it should be in both our names . Problem is we need the cash to pay the caregiver(who has been with us 5yrs) Bro kept telling Dad he had plenty of cash and he'd get a mtg before we were at a dead end financially- guess where we are, even with my notifying BOTH what the balances are monthly. One other pc of info i live 285mi away(bro 1 hr away) and have been going back and forth since 2008-used to take off work every other weekend to give CG her time off- after 4 yrs it took it's tole and we hired a respite care person.My son used to give me a break for awhile and Bro just finally has taken him this last month-But that hse is unsafe for dad because he loose his balance all the time-it's 2 floor hse.He doesn't even help dad in dressing says he needs to do it himself to keep muscles and so on workin. jerk- ok done with rant- off to NJ.

Ramblin Rosey

The 2nd home shud have been (ideally) ; transferred into a irrevocanle trust, with you as Trustee, 1. establishing a valid Medicaid asset transfer date, a 2. not having the proceeds count as Dad's assets for VA purposes.

There are procedures to handle assets for VA purposes, so as to preserve $$ for his care,

Excuse typo's packing to go back down for Bank visit tomorrow.I will add selling 2nd home was always "plan B" and we do have an Eldercare Lawyer and his hands are also tied unless dad says "go"

Spite

No my live-in isn't the person who refuses to move ,it is my lazt tailed Bro who has a good job etc and is living rent free at Dad's 2nd home. He is not co-operating with the realtor Dad will not make the decision to throw him out since bro keeps telling him next time I try for my mtg to buy 2nd home i will get it-he's been turned down 4 times so far. Dad is still considered competant to make own decisions and chooses to believe my brother because He doesn't want to sell his 2nd home(his taj majal since he built it himself)-figured he'd be dead before that had to be done. Dad is 94-my brother is focusing on his hatred/sprte for me and ignores Dad's need. Started when I used the phrase after a heated discussion that siad he was finally loosing his free ride. If you ever look up sociopath that would be my bro with anger management issue's included. I have POA but cannot do anything as Dad is still compatant.

Personally, I think of Medicaid as a no-interest lien on the property. Plus, they are willing to let the spouse or caregiver stay in the residence after the borrower dies.

Anybody catch RamblinRosey's post that her live-in caretaker refused to move? That's another reason to go through a service. Horrible. Laws to protect seniors and their families need to change. Shame on our government. Two changes I know of . . .

#1 This live-in caretaker/squatter problem. Who needs that???
#2 Being unable to pay family a reasonable sum to care take (Medicaid rules).
#3 What do we need AARP for??

I have advised several on Reverse Mortgages. Some were very good, some were not and they were advised against one at least for the time being. If the person or persons will need any type of Government assistance, don't get a Reverse Mortgage, the Residence usually does not count, but the money will. If the person or couple has mortgage payments, it may be a good plan to get a reverse mortgage to eliminate the payments and increase their spendable income. Best to contact a Elder Care Attorney and review all the options, pros & cons. There is no one answer.

Let me clarify one statement- as long as the Dad is alive he continues to live there and is only required to pay upkeep and taxes and of course his personal expenses- our problem is the $$ to pay for the live-in caregiver(he refuses to move in with family expects us to relocate to him.

We did a reverse with my Dad and it worked out well-here are a few points-His Appraiser did value it different than tax and Real Estate fair market value- all 3 of those factors have different value criteria. After the home owner dies or is no longer residing in their home for 12 mo then you have to sell home or start paying that borrowed mtg back. If you sell the house any $$$ over the loan amount is the survivors to keep.
If all the funds are used up by original borrower-they can continue to live in the home but are required to keep paying upkeep and taxes.
All reverse Mtg are standard gov backed(Reagan actually signed that into law to keep Sr's into their homes longer) The interest rate was never above 3% for Dad's so interest is lower than people think -they do take that out upfront. If you take lumpsome payment that may be different- we took monthly disbursement and his cash flow stopped last Feb.We are now looking to sell his 2nd home that has it's own problems(my brother who has been squatting there rent free for 6 yrs),it is finally on the market and will sell when brother dear co-operates(he's also apple of Dad's eye so Dad has no backbone with him-)Brother dear has postponed sale for a yr with promises of "I'll get a Mtg" but he has not good credit- so we will try tomorrow to borrow against equity in that house so he does not have to go to NH as his cash is below $40,000 and his 2 pensions make him inelliagble for medicaid. Can't get the vet's pension either till that 2nd home out of name.
So hope this helps explain reverse mtg's-as i said they are a federal backed program so the interest rates are standard across the board.

We went with the HELOC because it has a 10 year draw and only interest payments are due monthly on only the amount you borrow. If the parents are still alive and able to live alone in 10 years (not likely) we will sell to pay it off. We didn't care for the interest on interest accrued on the reverse mortgage we checked into.

sorry about the typographical errors here.

we did a reverse mortgage with my parents. The bank sent an appraiser who lowered the value of the house too much, we could have cancelled the whole deal, but we did not because we just wanted to " breath " from the payments a little and lower the interest rate ( They went down to 50% less ) until we sell some of other property that we own and when we do we will of course close on the mortgage plus with my job we will be able to take care of this faster. If we only had the house then that gets a little tricky because then interest builds on the loan and if the owner dies or whatever the children take over, but if the children dont have credit or a job or cannot come up with all the money at once after this owner dies then you could lose the house. Basically from what the bank explained to me I have three choices. the loan on the house becomes due if the owner dies or decides to sell. It becomes due in six months. If the owner dies the bank will approach me and give me three options; 1, Do I have all the money to give to the bank? 2. They all allow me to " refinance " the house under my name, but I have to have good credit and if I dont I will be stuck. I am still trying to improve my credit after returning to work a few months ago. 3. This last option will allow me to apply for another reverse mortgage if and only if I am 65 years or older which I am not yet. So, my only option right now if something was to happen to the owner of the house would be to apply for refinancing under my name depending on my credit, if my credit is not acceptable to the bank then they will reject the application for refinancing and the bank that owns the bank will give me a few months ( 6 months ? ) to get them the money on the loan if I dont give them the money then we or I would lose the house. This I think is the tricky part. If the owner of the house is alone with no children then obvioulsy it means that if that person dies the bank will automatically win the house. This is the only bad thing about it, but of course most people have families and descendants. I am only describing the extreme. In addition in our case we have other real estate so we really do no want to depend on the reverse mortgage forever and ever because the interest will make it very big. We plan to start taking it back from the house in may be 4 years. I hope my information helped you a little. Every situation is different as you can see.

If you can't make the monthly payments on a HELOC, it will lead to eventual foreclosure.

On a Reverse Mortgage, there are no outgoing payments, however it may leave no equity when there is a need to sell. Interest builds on top of the 'loan', you may be "entitled " to approx 60% of the existing value
But you can't be thrown out of the house..

HELOC -home equity line of credit requires monthly payments. It will be based on the home value which will be determined by an appraisal.

Reverse mortgage does not require monthly payments from you, instead monthly payments are made to you. It is based on equity in the home and when the owner passes the loan becomes due. I do not have experience with these but i would assume that there are many other factors if using it to finance elder care.

You should see an elder law attorney to explain the differences and help determine what would be the best option for your situation.

I've never done my homework. The advice I would give you is to shop/shop/shop. And COMPLETELY understand exactly what you/your loved one would be committing to. I think the field is rife with unethical practitioners. Use caution.