On Thursday, April 27, five local realtors from Century 21 M&M and Associates teamed up with CAM and the City of Turlock to put on a home buyers seminar. The first effort was so successful that they intend to do similar seminars on the last Thursday of every month.

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by Ken Rivera

Reverse mortgages are probably the most misunderstood product of all of the types of mortgages. Many people have overheard things about them; some of it good, some of it bad, but most of it incorrect.

So how do they work? Think of reverse mortgages like regular mortgages. In a typical mortgage loan, you borrow money and you make payments on that money. If you add up all the payments you make over the life of the loan, you end up paying several times the amount you originally borrowed because you paid interest on the money you borrowed. You also give the lender a lien on your home. Should you ever default on the payments, this allows them to foreclose if necessary.

With a reverse mortgage, all the same attributes exist except for the payment. You are paid the equity in your home (within limits) and you are charged interest for the money used. You never make payments. The balance of the money you owe actually rises because interest is added to the balance over time.

There are several types of reverse mortgages available but, by far, the best program for most people is the Federal Housing Administration (FHA) insured reverse mortgage. The FHA mortgage insurance is important because there could be a time when property values fall. If you owe more at the end of the loan than the property is worth, then the mortgage insurance will pay the difference to the lender. Because of this, a lender is willing to lend more money to you because there is less of a risk of loss for them.

So how much can you borrow? In the case of the FHA insured mortgage, the amount you borrow depends on the FHA lending limit in your county. In Merced and Stanislaus counties this limit is $332,500 and $346,750 respectively. The amount you can borrow is based on this limit or the appraised value, whichever is lower. Starting at age 62, you can borrow 50% of this amount and this percentage rises to 100% as you move toward age 95. If you own your property without a mortgage, the amount you are able to borrow (less the transaction expenses), is the value of your home, or the borrowing limit times the percentage based on your age. If you have a mortgage to pay off, that is also subtracted from this amount. One side note: Generally, the FHA mortgage limit is increased with the changing market. Merced’s most recent change came in January 2006 and Stanislaus’ came earlier this month.

When you get a reverse mortgage, any other liens on the property must be paid off (mortgages, tax liens, etc.). This amount becomes the initial balance of the new mortgage. Remember, there is no payment to be made on this money so you have just eliminated your mortgage payment. You now have a choice. The rest of the equity for which your property has qualified is now available for you to withdraw. As you withdraw money, it is added to the balance on which interest is being charged. You can withdraw the rest of the money in one lump sum, in monthly payments or have it as a credit line that you can withdraw from only what you need, whenever you need it. Again, there are no payments on this money. Some seniors would be fine if they just didn’t have a mortgage payment any longer.

So how does the lender make any money on this? First, remember there will be fees to get this whole thing started, just as there would on a regular mortgage. All of these fees can be financed so there is nothing out of your pocket. Next, remember that the lender will eventually be paid back when you sell the home, refinance the home or you die. At that point, however much money has been paid to you will be owed plus interest. All of the equity that is left belongs to you or your estate. This is especially important with today’s rising property prices.

The reverse mortgage can be the answer for today’s equity rich and cash poor seniors. FHA insurance makes it a very safe product. It can be a difficult concept to understand so please feel free to call me, Ken Rivera, at American Pacific Mortgage. I will answer all of your questions so that you can become comfortable with this type of loan. I can also let you know how much of your equity you may be able to borrow.

At American Pacific Mortgage, we pride ourselves on our honesty, integrity and service!

For more information on Reverse Mortgages or other mortgage options, call Ken Rivera at American Pacific Mortgage (209) 668-7000.

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