FHA Reverse Mortgage.. through the eyes of the heirs!

Here is a look at the FHA Reverse Mortgage through the eyes of the heirs. So many children or heirs get a bit nervous or flat out hostile when they found out their parents are looking into an FHA Reverse Mortgage loan. Their feelings are based in fear due to not understanding how the product works.

First let's look at the reality of most situations of people that are in need of an FHA Reverse Mortgage. Like most people their 401k's have been decimated over the last 6 years and most of their net worth is due to the equity they have in their home. They may have a small mortgage on their home or no mortgage at all, but they are getting by in SSI and whatever retirement they have in place. The fact is their overall portfolio of assets is heavily weighted in real estate. They are not diversified.

An FHA Reverse Mortgage can be used to help diversify their overall portfolio. Let's take a look at an example. Here are the parameters we will use:

Age = 65
Value of home = $450,000
Mortgage balance = $150, 000
Mortgage Payment = $800 Principal and Interest payment

This for this person they would qualify for an FHA Reverse Mortgage Loan amount = $271,748. Interest accrued at 6% over 10 years is @$214,000. I used a higher rate to account for Mortgage Insurance and to be conservative.  You can visit www.thefactsaboutFHAreversemortgage.com and use our Reverse Mortgage Calculator to find out what loan amount you or your parents will qualify for on an FHA reverse mortgage.

So what are the end results of this transaction:

1. Borrower gets @$121,000 to put into the bank to use for living expenses etc... or give to their financial planner. This is equity that has been locked in or converted to cash! Most good financial planners can do great things with money right now. Their are lots of good and safe investment vehicles in this market.

2. Borrower no longer has an $800 mortgage payment. Let's put this in perspective. Over 10 years they save $96,000 in payments!! This is a fact that people seem to forget about the FHA Reverse Mortgage. That is actual money in the pocket of the borrower.

3. Borrower now has a new loan for the amount of $271,748 that is accruing interest at 4.99% a year.

4. $96,000 + $121,000 (equity converted to cash) = $217,000.  Who knows what mom and dad did with the money. But here is my point. Although interest is accruing... the money saved and received from the transaction vs interest accrued is almost a wash. (See above the interest accrued at 6% compounded is @$214,000)



Here are the questions that heirs really want to know when you look at this equation. What is left for them when mom and dad pass away? Most children only see a $271,748 loan accruing interest every year and "eating away at their inheritance". But they do not factor in what happens to the equity that was converted into cash or how this will help their parents live the rest of their days.

I do not have a crystal ball and every situation is different. But here is what I do know.

1. Mom and Dad can never leave children with debt from an FHA reverse mortgage. It is a non-recourse loan. So if Mom and Dad use the money to go on cruises, travel the world and enjoy their last days and the housing market drops like an anchor.. Heirs are covered.
2. If Mom and Dad invest the money wisely and the real estate market appreciates at 4% a year over the next 10 years (which is what the experts say) the FHA Reverse mortgage can actually increase the heirs inheritance.

An FHA Reverse Mortgage is not for everyone. It should be used as a tool to fill a need or solve a problem for people that need it. It can also be used by more savvy individuals to actually increase net worth. Each situation is different. If you are considering an FHA Reverse mortgage please contact me and I can educate you on this product and see if it will be a benefit to your particular situation.