Mr. and Mrs. Jones Scenario

Mr. and Mrs. Jim Jones called me recently to find out the pros and cons of reverse mortgages. When I sat down with them, the first thing I asked them was “what are your reasons for considering a reverse mortgage?” After some discussion about their reasons, I then asked them if they were planning on staying in their home for the foreseeable future. Although none of us has a crystal ball to predict what will happen tomorrow, their answer lets me know whether they are planning on aging in their home and consequently whether a reverse mortgage may be something for them to consider. If they said, “No, we want to move into an assisted living apartment next year”, I would tell them that a reverse mortgage probably wouldn’t be the most cost efficient way for them to reach that goal.

Once I had an idea of their goals and found out that Mr. Jones and Mrs. Jones are both still working at age 71 and 75 not because they want to but because they need to, I was able to tell them the basic overview of an FHA (Federal Housing Authority) reverse mortgage. Strictly regulated by the FHA and incorporating many consumer safeguards, the loan will not become due until the Jones both move out of the home permanently, and they will never owe more the fair market value of the house. If something happens to the bank that their loan is with, the FHA will step in and ensure the continuity of their loan without skipping a beat.

The first question that Mrs. Jones asked me about was the bank owning her home, and I assured her that the bank will never own her home, that she and her husband will always be the owners, and there will be a lien on her home for the amount of money that she has borrowed, just as there is with a regular mortgage. This brought us to a comparison of all available reverse mortgage programs that I used to show the Jones how much money they will qualify for. Since Mrs. Jones is the youngest borrower the amount is based on her age, the appraised value of the home or the lending limit set by FHA in their county (whichever is less) and the current interest rate. Their house is worth $370,000 and the lending limit in their county is $362,790, so with the current interest rate they qualified for a reverse mortgage amount of $233,452. They have a home equity line of $25,000 which will be paid off with the proceeds from the reverse mortgage and a credit card with a balance of $7,000 that they would like to pay off to avoid paying the interest rate of close to 18%. The current interest rate for the FHA Home Equity Conversion Mortgage (reverse mortgage) is only 4.15%.

Mr. and Mrs. Jones asked me if the closing costs could be rolled into the loan, and I told them yes - there are no out of pocket costs to the borrower. I told them that the next step before we could move forward to the application submission was the fulfillment of the counseling requirement. I gave them a list of counselors and told them to pick whichever one they wanted and set up either a face-to-face or telephone interview with a government appointed Housing and Urban Development (HUD) counselor. There is no charge for this session and it is a requirement put in place by the FHA to make sure that I am doing my job in explaining reverse mortgages well, and also to make sure that the client isn’t being taken advantage of by an individual or organization.

Mr. and Mrs. Jones were enthusiastic about getting rid of their mortgage payment and their credit card payments, which will allow them to increase their monthly income by that amount every month. They will have no payments on the reverse mortgage until they both move out of the home permanently. The remainder available to them - $201,452 - they decide to put into a credit line that will not accrue interest until it is used. Instead, that amount will grow for them at approximately 4.15% a month. $201,452 growing at that rate generates $683.25 per month. What does this mean to the Jones? Well, it means that they can use $683.25 per month for years and their credit line will always remain at $201,452. Of course, if they use more per month then the balance will adjust accordingly. The cash they use is tax free because it is not considered income by the IRS, nor does it affect their Social Security or Medicare benefits. They are responsible for their taxes and insurance and for maintaining their home, just as they always have. They will be able to use the money any way they want: they can now make contributions to their church that they were previously unable to afford, go on a vacation, buy a new car, pay for rising health care costs or help their grandchildren pay for college.

For myself, the best part of my job was that I was able to spend an afternoon with two people that I would not have had a chance to meet otherwise, and they welcomed me into their home and shared the story of how they met and told me about their children and their grandchildren. They found out that a reverse mortgage could help Mr. Jones finally retire and worry a little less about how Mrs. Jones will make ends meet and be able to stay in their home if something should happen to him. The Jones had spent most of their adult lives caring for others and never quite being "comfortable" financially - now, finally, that was going to change.

Reverse Mortgage Man
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