Attorneys Jack Tapper and George McCoin were joined by Kim Casteel, president of USA Mortgage Inc., to make up the Legal Forum panel.
The 90-minute meeting opened with a presentation on deed transfers by Tapper and McCoin. Both attorneys warned homeowners are often unaware of the side effects of deeding their homes.
Several of these effects include:
— If a parent changes his or her mind after deeding their home to their children, then their children can refuse to make another transfer.
— Sometimes a deed is transferred without consultation. Important details are often overlooked. For example, the original homeowner’s insurance does not transfer.
— Homeowners may be placed in default if they transfer a deed to a home with a mortgage without telling the mortgage company.
— If parents are still living in the home they have deeded to their children, then their child filing for bankruptcy will mean they lose the home.
Discussion then shifted to reverse mortgages. Casteel took the microphone and urged members of the audience to interrupt with questions when needed. She said many misconceptions exist concerning reverse mortgages.
“A reverse mortgage is a mortgage against a [portion] of equity in your home, which allows the equity to turn into some type of income stream for you and for your future,” Casteel said.
Tapper said individuals using equity as an income stream is like drawing money from their savings account.
“The money you are getting is the money you already owned in the value of your house. It is not really an income stream, per se,” Tapper said.
According to Casteel, the most popular reverse mortgage is a Home Equity Conversion Mortgage. She said 95 percent of homeowners signing for a reverse mortgage choose this type.
Most of the 95 percent then choose a Standard HECM, said Casteel. This contract gets the most equity out of a home. A Savers HECM is also available. This reverse mortgage is used by individuals who do not need as much equity. Casteel said the closing cost on a Savers HECM is significantly smaller.
Several reasons were given by Casteel and Tapper for a reverse mortgage.
“It may keep you from having to tap into your retirement account. That is sometimes why someone chooses a reverse mortgage,” Casteel said.
She said one gentleman ended up filing for income taxes every year he had not planned for because they were based off of investments. He applied for a reverse mortgage and used the income stream to pay off the yearly taxes.
Casteel said no repayment is required until one of three things occur:
- The homeowner(s) decides to sell their home. Homeowners retain the title of their home in reverse mortgages. They can sell at any time and use the money to pay off the reverse mortgage.
- The homeowner(s) move out of the home permanently or if it is no longer the primary residence. Primary residence is considered living in a home for six months and one day out of the year. A reverse mortgage will be due if a homeowner stays in a nursing home for a year.
- All borrowers on the title pass away.
“If a husband and wife sign for a reverse mortgage together and the husband passes away, then the reverse mortgage is still the wife’s reverse mortgage. Everything carries on as usual until she passes away,” Casteel said. “The heirs will then get the home to either refinance or sell.”
A reverse mortgage home will not affect the credit of the heirs. A year is given for heirs to either refinance or sell the home.
“The loan balance will continue to increase each month of the year,” Casteel said. “...If the heirs do not want the property then they have the opportunity to walk away.”
Reverse mortgages differ from conventional loans in several key ways.
“There are no income qualifications for a reverse mortgage,” Casteel said. “There are minimal credit qualifications. A credit check will be done to see if there are any liens already placed agains the property. There are also no mortgage payments.”
Tapper said traditional mortgage payments build equity in the home. A reverse mortgage loses equity in the home. The amount of money owed to refinance the home grows with the continued income stream.
A homeowner(s) must be 62 years of age to qualify for a HECM. A member of the audience asked if spouses could apply for a mortgage if one spouse is younger than 62. Casteel said entering into a reverse mortgage where one spouse signs and the other does not is not the best situation.
“If the spouse who got the reverse mortgage died, then the living spouse would have to find a way to pay off the reverse mortgage by either refinancing or selling the home,” Casteel said.
There are four different ways to receive money out of a reverse mortgage. These include: a lump sum, tenure or term payments, monthly payments, or a line of credit. According to Casteel, tenure payments are set up to last the rest of the homeowners’ lives.
“Maybe you have a car payment where you need to get at least that much or more out for the next five years, then you can set up a term payment,” Casteel said.
A line of credit is much different than the first three methods.
“A line of credit is similar to a home equity line. It is like having a revolving balance on your home. You can draw money out and pay it back,” Casteel said. “You can pay anything back on a reverse mortgage. There is no prepayment penalty. ... Your only charged interest is the amount you have drawn when it is a line of credit.”
Casteel said an individual may be charged less interest on a line of credit than money taken through a lump sum.
Both Tapper and Casteel said homeowners may receive consultation before signing for a reverse mortgage. These counselors are not paid on commissions. Their job security is independent of whether their client chooses a reverse mortgage or not. Consultation can reveal to homeowners how various aspects of their finances and insurance will be affected. A reverse mortgage may affect Medicaid or public assistance received by a homeowner.
The point of the meeting was to make sure homeowners knew about the good, bad, and ugly of reverse mortgages.
“I wanted to be sure the public knew about the pros and cons of entering into a reverse mortage. Specifically, I wanted them to know the adverse consequences as well as the benefits, so they can make an informed decision on what to do if they were in need of money,” Tapper said.
Tapper said he thought the meeting was a success.
“I think we definitely got the message across,” Tapper said. “I think everyone is satisfied they now know about what they need to know.”
Added Casteel, “Reverse mortgages have been helpful to so many people who are 62 years of age of years and older; I am so glad we had this opportunity to discuss this program openly tonight with the public,” Casteel said. “Reverse mortgages are gaining popularity quickly as more seniors discover they are able to convert a portion of their home’s equity to improve their lifestyle and help them stay in their home as long as possible.”