Reverse Mortgage tutorial
WHAT IS REVERSE MORTGAGE?
Hi, I am Michael Parsi, Mortgage Loan Originator, NMLS ID # 1372662.
I want to talk about reverse mortgage, one of the financing products I am offering.
I notice there are lot of misconceptions about reverse mortgage and its vast advantages. Because of this, I want to introduce you to reverse mortgage and its benefits. Since everybody’s cases and circumstances are different, this information is quite broad, but informative.
Reverse Mortgage has advantages that other mortgages do not have.
The most favorable is the borrower does not need to pay mortgage payments (principal and interest).
But if you decide to pay, it will reduce the balance and increase the Line of Credit for future withdrawal.
Reverse Mortgage is a simple loan based on equity of your house and would finance all other liens such as the first or second mortgage.
To be eligible to apply for a reverse mortgage this condition must be met:
- House ought to be the borrower’s primary residence.
- For Jumbo Reverse Mortgage you or your spouse must be fifty-five years or older. Or, sixty-two or older for FHA approved HECM.
- Borrowers must be able to pay property tax, property insurance, and any other charges such as HOA.
One of the misconceptions is Homeowner with reverse mortgage does not own the house, this is WRONG. The homeowner owns and holds the title of the property, not the lender. Whenever the homeowner or the heir decides to sell the house or pay off the loan, he/she can always do it.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
2- Common use of Reverse Mortgage and When the Reverse Mortgage is NOT a good option.
Common use of Reverse Mortgage:
- For immediate Needs,
- To enhance lifestyle (Line of Credit),
- As a financial plan.
When is not a good option to apply for a Reverse Mortgage?
- If The home does not fit the homeowner’s long-term needs.
- IF The Reverse Mortgage does not provide tangible benefits.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
3- What are the procedures of getting Reverse Mortgage?
- Watch all videos on my site that explain reverse mortgage.
- Set up a phone/zoom call meeting to answer any questions you might have.
- To give you a precise and tailored proposal, I will ask you to fill in a short questionnaire. Remember, there are no sensitive questions, and you have no obligation to sign any contract.
- After I receive your answers to the questionnaire, I will send you the proposal. The proposal is tailored to your unique status and requirements with interest rate, comparison of different options, how conservatively your property appreciates to your benefit, and other pertinent information.
- Next step is mandatory by law; you must have counseling with a HUD-approved (Department of Housing Urban Development) I suggest you invite along family members or other interested parties.
- When everything is to your satisfaction, complete the application.
- The next step is to Appraise your property.
- Processing: The processor will contact you if there is a need for additional information.
- Underwriting.
- Closing; when the loan is approved, it may be cleared to close.
- Servicing the loan.
- Last, please recommend me to your friends, family, and neighbors.
The whole procedure to get the loan usually takes about 2 to 3 weeks.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
4- HOW MUCH A HOMEOWNER CAN BORROW: “Principal limit.”
The principal limit is how much a homeowner can borrow. This number is the same from lender to lender.
The principal limit is calculated based on three critical numbers—age, “expected rates,” and home value.
By having age and expected rate, in the chart we know the “principal limit factor.” We multiply the principal limit factor to the value of the house to find how much the homeowner can borrow. Look at the example:
Expected Interest Rates
Age | 5% | 5.125% | 5.25% | 5.375% | 5.5% | 5.625% | 5.75% |
62 | 41.0% | 40.3% | 39.6% | 38.9% | 38.2% | 37.6% | 37.0% |
63 | 41.6% | 40.9% | 40.3% | 39.6% | 38.9% | 38.3% | 37.6% |
64 | 42.3% | 41.6% | 41.0% | 40.3% | 39.6% | 39.0% | 38.4% |
65 | 43.0% | 42.3% | 41.7% | 41.0% | 40.3% | 39.7% | 39.1% |
If the borrower is 65 years old with an expected rate of 5.0%, the “principal limit factor” would be 43.0%.
And if the homeowner’s house is appraised $800,000,
$800,000 x 43.0% = $344,000 is the maximum amount a borrower can borrow.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
5-What must be addressed first?
“Mandatory Obligations” are expenses such as mortgages, closing cost, mortgage insurance, liens and judgements that affect the owner’s title, and other expenses.
When we find out how much of available equity (“principal limit”) you can get, first “mandatory obligations” must be paid upfront.
So, after subtracting “Mandatory Obligations” from “Principal Limit,” you will come with “Net Principals Limits;” the amount to which you would access.
This regulation is to protect homeowners.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
6- LASA, when you apply for the Reverse Mortgage Loan underwriter…
Underwriter will look at the ability of the borrower to pay her/his taxes, insurance, and other charges.
The Underwriter finishes the assessments by examining credit history, and property payment history (tax and insurance). If the underwriter’s assessment finds the borrower cannot meet the requirements, then the lender may set aside funds to pay property charges. The name of this practice is Life Expectancy Set-Aside (LASA).
LASA is a portion of the borrower’s “principal limit” put aside for paying the charges for a calculated time.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
7-Non-recourse Loan, what does it mean?
When you get your reverse mortgage, you are NOT responsible for mortgage debt that is more than the home’s value. You are guaranteed you will not leave your heirs with bills.
In good or bad economic times, you and your heirs are protected.
But there are conditions that you must follow when you get your reverse mortgage:
- The property ought to be your principal residence of at least one of the borrowers.
- The last borrower must occupy the property for twelve consecutive months.
- Borrowers must keep the house in good condition and pay property tax, property insurance, and other charges such as HOA.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
8- Reverse Mortgage product options
After you complete the questionnaire, I will send you the Proposal within a day that explains different quotes, interest rate side by side and other information that you need to study, and we talk over phone or zoom.
There are two different fundamental products:
- HECM (HOME EQUITY CONVERSION MORTGAGE):
This product is an FHA approved and obviously like a regular(forward) mortgage the closing cost because of MIP (mortgage insurance premium) is higher and monthly mortgage insurance would be charged, but the interest rate is lower.
“Fixed rate” HECM which is a “closed-end” mortgage; you cannot request more funds.
The other option is HECM ARM (adjustable-rate-mortgage):
- Monthly HECM ARM that rate will adjust monthly.
- Annual HECM ARM with rate that adjusts annually.
Nevertheless, ARM is immensely popular because of its advantages and benefits.
- PROPRIETARY REVERSE MORTGAGE
- For all jumbo loans.
- For condominiums that are not FHA-approved.
- Proprietary reverse mortgages do not have restrictions on upfront cash out.
- Proprietary loans allow the reverse mortgage to be second lien position.
- Proprietary loans may allow the payoff of personal debt and other items at closing.
- HECM requires most liens to be seasoned. Proprietary loans may have relaxed requirements.
- Proprietary Reverse mortgage may offer financing for younger age (55 years old and older).
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
9-Payout options of Reverse Mortgage, how do you get paid?
As we discussed Fixed, and ARM reverse mortgages have different payout options.
As you can see, the fixed-rate reverse mortgage is a closed-end loan and only offers a single-payment, or lump-sum.
But the ARM reverse mortgage is more popular because it has more payout options:
- INITIAL PAYOUT DRAW: It means cash withdrawals at the time of closing.
- LINE OF CREDIT (LOC): Lot of applicants prefer LOC for multiple reasons. An open line of credit allows a borrower to take what they need when they need it. In addition, in this method you can repay a portion of your loan balance and borrow it back. The amount left in the LOC does not accrue interest and mortgage insurance charges.
- TENURE PAYMENT (LIFETIME PAYMENT) In this method the net principal limit would be paid to the borrower in monthly regular payments.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
10-What does Reverse Mortgage cost?
The costs are clearly written and itemized at application by law and the lender must give (provide) “good faith estimate” (GFE)of all charges.
Simply we can categorize the costs into three: out-of-pocket, closing, and ongoing costs.
- OUT-OF-POCKET COSTS: there are two of them that by law lenders must not direct the borrowers how to deal with it: the appraisal fee and counseling fee. I can give you lists of HUD(Department of Housing and Urban Development) certified companies and agencies, and you must decide which one to do business with.
- CLOSING COSTS: these are up-front costs that are rolled into loans at closing.
- Origination fee.
- Initial mortgage insurance: it depends on the loan products you decide on.
- Closing costs and third-party fees: such as tax, title insurance, and recording fees.
- ONGOING COSTS
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
11- LINE OF CREDIT (LOC) IN REVERSE MORTGAGE IS SO SPECIAL…
The most amazing feature of ARM Reverse Mortgage is the Line of Credit. The LOC in reverse mortgage is especially useful for financial planning. Let us look at most important advantages of LOC in reverse mortgage:
- IT IS OPEN-ENDED CREDIT: this means you can borrow from it, pay it down, and borrow from it again without restriction. In fact, many use the LOC as a cash flow management for either personal or business use.
- IT IS NOT TAXED WHEN IT IS DRAWN: Contrary to most retirement cash flows that are taxed, drawing funds from reverse mortgage LOC is not taxable. Strategic draws may permit homeowners to stay in a lower tax bracket and reduce their tax liability.
- IT IS QUITE SECURE: The LOC is not capped, reduced, frozen, or eliminated because of market conditions or property value declines. LOC is perfect to use for long-term financial planning.
- IT GROWS! The most irresistible and interesting feature of reverse mortgage LOC is the capability of the fund to grow. Usually, it grows at the same compounding rate as the loan balance and grows when payments are made.
- FUNDS LEFT IN LOC DON’T ACCRUE INTEREST OR MORTGAGE INSURANCE. Drawing from LOC would naturally increase the loan balance, and only charge interest on what you borrowed.
- IT IS LIQUID HOME EQUITY. Regular home equity cannot be accessed so quickly. People usually sell their house or go through stringent requirements plus fees to get home equity line of credit. But with LOC access to your equity funds takes only few days.
- LOC IS A PLEDGED FUNDS. The LOC is not considered an asset. These funds are “pledged” to the borrower. This means the growth is not taxable and the LOC cannot be willed or given away.
12- HOW DOES LINE OF CREDIT (LOC) GROW?
The line of credit is one of the best reasons a homeowner should get a reverse mortgage. LOC growth means the funds will not only be liquid and secure, but they will also grow to be much larger. There are two factors that cause LOC to grow:
- Growth Rate. For example, if your interest rate is 5.5% (lender’s margin of 2.5% + current LIBOR index rate of 3%=5.5%), add 0.5% it will come with your compounding growth interest (5.5%+.05%) of 6.0%
- Making payments. By making payment (it is not mandatory but) you reduce the balance and increase the LOC (line of credit).
REASONS THAT REVERSE MORTGAGE IS BENEFICIAL FOR ALNOST EVERYBODY IN FAINANCIAL PLANNING:
Financial planners, advisors, CPAs, tax planners, estate planners, insurance agents, and anybody in the field of financial industry are discovering that getting reverse mortgage early can increase retirement assets.
- NON-TAXABLE DRAWS. Draws from growing LOC contrary to Social Security, and pension distribution are not considered as income and not taxable.
- HEDGE AND INSURANCE. Using Reverse Mortgage LOC as portion of comprehensive financial planning strategy, borrower is protected against declining home values. Even if the home value declines, the LOC will continue to grow.
- LONGEVITY RISK FACTOR. One of the major concerns in retirement is running out of money. By having LOC, you would have cash flow.
As you can see, this program would open lots of opportunities.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
13- PURCHASING A HOUSE WITH REVERSE MORTGAGE!
Retirees, realtors, and most of the homeowners are not aware of how to buy a house with reverse mortgage and not to pay monthly mortgage anymore! Now, homebuyers can purchase their home with one closing and no waiting time.
Down payment investment is needed to satisfy the rest of the sales price and closing cost.
If borrower sells the existing residence, Reverse mortgage for purchase is ideal for upsizing or downsizing; let me give you two examples:
FOR UPSIZING: let us say you sell your property for $300,000 and want to buy a $400,000 house. The borrower would pay $200k down payment and would not need to pay mortgage and use the $100k leftover as investment or for other purposes.
FOR DOWNSIZING: Now, let us say you are selling your property for $300,000 and want to buy a $200,000 house. You use $100,000 down payment and you would not need to pay any monthly mortgage. What you would do with rest of money (the residual) can provide better quality for your lifestyle.
These are the caveats:
- Occupancy: what you purchase ought to be your primary residence.
- Charges: property tax, property insurance, HOA are your responsibilities.
- Sales Contract: The sales contract ought to be fully executed before reverse mortgage for purchase application.
- Reverse Mortgage Counseling like regular application for regular reverse mortgage ought to be conducted.
As you can see, this program would open lots of opportunities.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
14- Several reasons to re-finance reverse mortgage to reverse mortgage
- Real estate is the only investment that grows annually even with the most conservative expectation of about 5%. Let me give you an example. One of my clients applied for a reverse mortgage about 2 years ago. His property when he applies for reverse mortgage worth $4million and rate of appreciation for his neighborhood is about 22%. So, his property’s value grows about $1.76million, or he has lot more equity in his property that he can get to either purchase more property or invest in more passive incomes.
- Another reason is that unfortunately in “silver divorce” one spouse needs to forfeit the property or need to split their assets and the other needs another property. They simply can use the proceeds to purchase another property with a reverse mortgage.
- Lot of homeowners with either fixed-rate reverse mortgage wants to enjoy the benefits of LOC.
I am always available to answer any questions by email, message, or phone calls
Again, I suggest going to my site and watching all the segments so you would have a better grasp of how you can benefit from reverse mortgage.
You Tube
You can watch all these segments from You Tube.
All you need to do is to click on each video.