My mother has a reverse mortgage and I’ve been reading and trying to understand it all. Basics… her house was appraised at 390,000 back in 2007, she owed 113,000 on a previous loan. “Original principal limit” 234,000 minus the 113,000 leaves 121,000. Her payment plan was the line of credit which was 99,000. First question; where does or who the remaining 22,000 of that go?
She receives statements all the numbers (Loan Balance) go up every statement. Starting at 234,000 and now at 268,000. “Growth of principal limit” and “service fees set aside” What do those mean?
“Growth of line of credit” and “Line of credit loan balance” What are those because that is at 42,000 and rising each statement. She is 75 and health is not good and has went through the money. I live in the home and take care of her I have no job and no money coming in and don’t want to lose the house.
In her will she states that the house be sold and split between the 11 grandchildren (Will was set up before the reverse mortgage was taken out) I advised she might want to redo the will. When the time comes to repay the reverse it seems that all those monthly fees that they add on month by month by month are going to make it impossible. This is how they make money WTF.
As of this date the market has gone down and house is not worth what it was originally appraised at… so then in that case what happens if owed 268,000 and house sells for 250,000 who is responsible for the difference?
I can’t see the statement or the original paperwork so I’m guessing a little at some of this but most of it is easy enough to explain.
The Original Principal Lending Limit is the amount of money that your mom was eligible to borrow under the reverse mortgage loan.
Based on her age, the property value and rates at the time, she had up to $234,000 available to her to use and out of that amount the original fees would be paid as well as any outstanding balance on her existing mortgage(s).
If she owed $113,000 on her existing loan, that would be paid off and the costs of the loan would also be subtracted from the available balance.
In 2007 the loans were more expensive to obtain that then are today, but I don’t think the costs would have totaled $22,000.00 but without seeing all the paperwork I do not know that for certain what other things might have been included.
You mention servicing fee and servicing fee set aside but you don’t say if there are any amounts listed there so I don’t know if her loan has a servicing fee on it.
If it does, that would be $25 – $35 per month and the lender would set aside funds to pay this expense.
The month cost is the fee, the set aside is just money that is not available to your mom and is not a cost until the fee is paid.
The largest single cost is typically the HUD Insurance on this transaction would have been $7,800) and as you can see and I will explain later, it protects your mom and your family that the funds are always available and in just such a case as this from ever having to worry about a shortfall if the loan balance exceeds the property value.
If you find your mom’s original paperwork, you would be able to review her costs.
She had the line of credit option with a line of credit available of $99,000, but there is no way for me to know how much of the $99,000 she has drawn or when.
You said it started at $234,000 but you also mentioned a feature on the line of credit programs that is the line of credit growth.
Borrowers who do not use their entire line of credit available will see their line “grow” by a percentage that is equal to the interest rate plus the Mortgage Insurance Renewal factor on the unused portion.
I don’t know who is servicing your mom’s loan and each servicer is a little different on their statements, but it sounds to me like you mom has $42,000 still available to her in the line of credit and that amount will continue to grow as long as it is not used.
Once the line of credit is fully drawn, it no longer grows.
Your mom finds herself in the same position that many borrowers have that took reverse mortgages around 2007.
The property values dropped to 50% or less in many areas and while they are beginning to rise in most parts of the country, there are still many spots where the values are significantly below the 2007 highs.
However, this the reverse mortgage protected your mom!
Reverse Mortgages are Non Recourse
The reverse mortgage is a non-recourse loan. So, no one is responsible to ever pay the shortfall if the house does not sell for enough to cover the amount owed on the mortgage and the lender cannot go after any other assets belonging to your mother or other family members. The sole security for the loan is the home.
Again, some of the information I have just given you may not be 100% accurate without being able to see the statement (any amount available to her, growth, etc.) but if your mom was able to receive cash in the amount of $234,000, might still has $42,000 available to her and has been able to live in the home for the past 8 years without having to make a house payment then she is way ahead of the game.
Yes, the lender was scheduled to receive interest on the loan at the time the loan is repaid but all borrowers pay interest on loans. The reverse mortgage just allows you to defer the interest until such time as you are no longer living in the home.
If you look at the repayment schedule of a regular, forward 30-year loan, borrowers also pay back much more than they borrow with the interest included.
Your mom was able to have the use of the money, regardless of what property values did, she and the family will never have to use any other assets to pay the loan back and the reverse mortgage has allowed her to live in the home payment free for the entire time she has had the loan. No loan would stop the property value from dropping so that’s a different issue completely.
HUD will allow the heirs to also keep the home and pay off the reverse mortgage for the lesser of 95% of the current market value or the amount owed on the loan so if the value is lower, you can retain the home for 95% of the current value – that would be a payoff of $237,500 based on your scenario regardless of the loan balance being higher.
So based on these numbers, your family can keep the home and would have paid a total of just $25,500 in fees and interest for the loan over the entire time which comes out to an average of just $3,187.50 per year for fees, interest and all charges.
That’s less than 2% per year for the use of the funds including all loan costs and initial fees! I don’t know any other loan that would give you this same opportunity.
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