If you are a TV watcher, you must have seen the TV ads for reverse mortgages, particularly the one done by the former U.S. senator and movie actor, Fred Thompson, for the American Advisors Group. So what’s all the excitement about?
For starters, why is it called a “reverse” mortgage? I’m not quite sure. It’s not like you’re loaning money to the bank, although the bank may look at the transaction that way.
I look at a reverse mortgage as just another way to borrow money using real estate as collateral.
There are, however, some requirements: First, you must be 62 years old to apply. Second, you are using the equity in your home to get cash from the lender. The lender will have your property appraised to determine the equity. The lender will loan you some money based on your equity, but not on 100 percent of it.
The reason you won’t get 100 percent is that the lender won’t ask for or get any mortgage payments until you move away from the house or die. However, this “loan” will collect interest on its books even if it isn’t receiving any payments. The amount which will ultimately become due is going to be much more than you “borrowed” because of the accumulated interest.
Let’s assume Mom and Pop own a house they believe to be worth $100,000. They are both 65 years old. They have a small mortgage on the property that has a $20,000 balance. Their equity is $80,000. The lender might loan them $30,000, but $20,000 of that is going to have to be used to pay off their present mortgage. The lender must be in first place on the records in the courthouse. Remember, the lender may have determined that Mom or Pop will live to be 85 years old, and so long as one of them is alive, and living in the house, the mortgage won’t come due. Upon the death of the survivor, the balance on the loan might be $60,000, the original amount of $30,000 plus 20 years of interest. The kids sell the house for $100,000, and the $40,000 left goes into the survivor’s estate. The $60,000 goes to the lender, of course.
Remember, the owners must live in the house being mortgaged, so don’t transfer the house to your children – they won’t qualify for a reverse mortgage. As owners, you must keep the taxes paid, insure the property and keep it well maintained.
There are a lot of charges that the lender’s representative must go over with the owners.
An origination fee of $2,500, monthly servicing fee of up to $30, which will be added to your loan balance, closing costs such as title search, recording fees, etc. and mortgage insurance purchased from the FHA.
Make sure your income can support all these items.
Thomas Young, a graduate of Pitt and Harvard Law School, has been a lawyer in Johnstown since 1958. He is a former professor of business law at Pitt-Johnstown. Readers may send questions to Young in care of The Tribune-Democrat. The opinions expressed in this column are general in nature and may not apply to your situation. Consult your attorney for advice on specific legal matters.