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We just learned about an FHA program for a reverse purchase mortgage where you put down 40% of the house price and you can live in it forever with no mortgage payments as long as you continue to pay your taxes, insurances, and HOA fees annually.
It seems too good to be true. I'm afraid they'll change their "rules" down the road (especially in this economy) and decide to take away the house after you've exceeded the interest on the loan. Has anyone heard experiences of the down-side of this?
I don't understand the "math" in this either. How does the lender make money on it? I've always been leary of something that sounds too good to be true and I didn't understand..
they make money via very high fees, compounding interest and insurance that protects the loan in case its sale falls short .they loan out only a fraction of the equity as well so they have a decent cushion built in too.
Last edited by mathjak107; 12-21-2012 at 03:14 PM..
We just learned about an FHA program for a reverse purchase mortgage where you put down 40% of the house price and you can live in it forever with no mortgage payments as long as you continue to pay your taxes, insurances, and HOA fees annually.
It seems too good to be true. I'm afraid they'll change their "rules" down the road (especially in this economy) and decide to take away the house after you've exceeded the interest on the loan. Has anyone heard experiences of the down-side of this?
I don't understand the "math" in this either. How does the lender make money on it? I've always been leary of something that sounds too good to be true and I didn't understand..
I am closer to 80 years old than 75 so I have seen a lot of government and I don't trust the USA Feds, State, County or City governments at all.
I value Mathjax's posts and opinions when not talking over my head, which is most of the time. However it seems to me that homeowner takes two hits up front, up front fees and a reduction of the homeowners appraisal. I have never seen an accurate home appraisal. It will always be less than you feel it should be. IMO
I have seen the government change the rules too much after your signature is on the dotted line. Maryjane, just apply the common sense you have demonstrated in your post. JMO
they make money via very high fees, compounding interest and insurance that protects the loan in case its sale falls short .they loan out only a fraction of the equity as well so they have a decent cushion built in too.
Much has most mortgage leanders do thru FHA and the perosn pays. Its like any fiancial instriment.Most require a certqainf amout of eqauity and are only useful for certai people with certai needs. much like interest only loanhs ornon-fixed interest rates loan where originally.
The only way reverse mortgages make sense to me, is if you have a very expensive house that's paid for, and a very low amount of retirement income.
The problem I've read about, is when a person runs out of money from the proceeds of the reverse mortgage, and can no longer pay the taxes and upkeep. At that point they are in breach of the terms of the contract, and the issuer forecloses on the home.
The only way reverse mortgages make sense to me, is if you have a very expensive house that's paid for, and a very low amount of retirement income.
The problem I've read about, is when a person runs out of money from the proceeds of the reverse mortgage, and can no longer pay the taxes and upkeep. At that point they are in breach of the terms of the contract, and the issuer forecloses on the home.
The reverse mortgage works a bit differently from the reverse purchase mortgage; Both have those critical stipulations that taxes, insurance, upkeep, etc HAS to be paid on time annually or they can foreclose.
In the reverse mortgage they pay you monthly from your equity. In a reverse purchase you pay up to 40% equity upfront and then have no monthly mortgage payments as long as you both live.
I agree that a reverse mortgage would be scary when you ran out of money and could no longer pay your taxes.
However, if you're home is paid for and you're moving to an area where costs are double or triple your hometown, the R/purchase would allow you to purchase something comparable that you couldn't afford by regular means.. plus, no mortgage. (provided you have the downpayment cash from the sale of your home).
they make money via very high fees, compounding interest and insurance that protects the loan in case its sale falls short .they loan out only a fraction of the equity as well so they have a decent cushion built in too.
Yes, the fees are very high and the interest on the balance is 4.75 compared to the aver 3.5 going rate. However, they do allow you to add those upfront fees onto the "borrowed" balance. The only upfront costs are the appraisal and the inspection fee.
They give you an amortization chart that shows in the first few years if you're not happy with the home, you can sell it and get back most your "equity" downpayment. But after 5-10yrs you've used up most of your downpayment "equity" paying for the interest accumulating on the balance and get nothing back. AND, if you do sell and it falls short of the purchase price you are not held accountable for the loss.
I was really hoping you'd comment on this Mathjak because you know finances... altho sometimes I don't understand some of it either. Do you think it's a good concept for a couple in their 60's with no heirs and a paid for home moving to a high priced area? We'll have the savings and 401 to be able to pay the upkeep and taxes, etc, while living on SS and pensions.
One should make sure they get this all in writing, right?
its a dangerous loan. whether the fees are rolled in or not. compound interest is a powerful force and unlike a regular mortgage with a declining balance, compound interest on a rising balance is killer over time. its compounding working against you not for you .
the problem is your betting against the house with the bank acting as the house. .
it really amounts to your taking a loan to live whether you want to live above your means or need it just to get by. its just the terms of the loan make it a balloon payment due when your not in the home anymore .
most who resort to reverse mortgages are doing so because they have little money of their own. they will have little choices in life with little money.
your equity in the home is used to both carry the compounding interest , the fees and the paying off of existing morgages .
the fact is they are loaning against only a portion of your available equity cutting it even further.
then we have the amortization of the payments. if you elect lifetime payments they take 100 less your age and divide the available amount over those years.
an amount being divided over 30-35 years can be a very small payment..
the other factor is if you have a spouse thats on the reverse mortgage the payments take another reduction . if two people are involved you dont get the same amount as one.
many banks try to get just one persons name on the reverse mortgage with the promise of higher payments but that 2nd to die is left out in the cold when the 1st to die craps out.
that reverse mortgage can turn out to be a very small payment for most folks, far less then they anticipated . there are so many factors that can make someone not want to stay as they age that there is a huge risk you will not be able to leave that home.
lack of public transportation, needing better medical facilities, family moving away and you want to go , rising taxes ,expenses and maintaince on the home being more then you can afford.
all of the above has you betting against the house and your odds are not good.
Last edited by mathjak107; 12-22-2012 at 05:45 AM..
The equity in your non reversed mortgage home can pay the entry fee and your SS and Pension payments may well be high enough to meet the monthly fee of a high quality continuing care facility to carry your from independent living through nursing home care if needed. Once you take a revevers mortgage you are giving up future options for using the equity.
There are more than a few threads about this subject. Below, I have posted two links that might be of interest. In the first, FloridaHappy (formerly Sheltie166?) and her DH used a reverse purchase mortgage to buy their home. I've included the second link, although not initially about a reverse purchase mortgage, because it appears to include updated info regarding origination and servicing fees as related to reverse mortgages.
Overall, I like the idea but it certainly depends on the individual's financial circumstances.
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