San Diego Housing Bubble News and Analysis

Reverse mortgages are a great option as long as she plans to stay in the home for at least another 5 years.

Fees are 2% origination, roughly another $2k for other closing costs, some amount for MIP insurance (I think 2%), and there will be a servicing fee set-aside that most people interpret as a direct "cost" but is merely put into an escrow account to pay monthly sevicing fees of around $35, and won't be exhausted unless she lives to 110 or something).

She can take a lump sum, line of credit or a monthly income from the home. The amount taken will accrue interest at a rate of around 3-4% - but that's an adjustable rate based on the 1-year treasury. There is a fixed option as well, I believe the rate is around 6%.

With a $200k home she can probably "liberate" around $125k. She doesn't have to pay back the loan unless she dies or moves out of the house - ultimately the heirs end up selling the house or taking out a mortgage and keeping it. The house stands for the debt so the heirs can never owe more than the house is worth.

If you have any more questions, feel free to ask. I am not a reverse mortgage lender but have been involved in the reverse mortgage industry for the past 6 years.

One thing I do see in the industry to be extremely wary of - a lot of slimeballs are out running around telling people to put the cash from the reverse mortgage into an annuity or some other insurance product. Every modeling scenario I have ever ran shows that this is a BAD idea, and if someone suggests it to you or your relative you know not to do business with them.

Great summary - thanks Mish.

One question. What kind of restrictions can be placed on the rev mtg with regard to purchase of the home by the heirs? Is there something that the lender can do to make it difficult to keep the house in the family?

Does she have a life insurance policy that she no longer needs? In a similar fashion to a reverse mortgage, she could potentially sell the life insurance policy for more than it's cashout value and raise the cash she needs.

>"What kind of restrictions can be placed on the rev mtg with regard to purchase of the home by the heirs? Is there something that the lender can do to make it difficult to keep the house in the family?"

Absolutely none. When the owner passes, the debt becomes "due" and the heirs have 12 months to decide if they want to purchase the home or let it go back to the lender.

Reverse mortgages are very strictly regulated as they are a government loan. One last thing to be careful of. Reverse mortgage counseling is a requirement - but most of these counselors receive very little training, and not all, but most, are complete idiots and can scare seniors right out of doing the loan with their misinformation!

Does a reverse have to be a first or can it be a second with equity?

Any liens against the property have to be taken out with the reverse - so if someone owes $30,000 on the property prior to taking the reverse, $30,000 of the proceeds must be used to satisfy those liens.