The answer is yes. This reverse mortgage program is one of the most commonly known. Not very complex: whatever remains after paying off mandatory obligations (i.e. current mortgage, liens etc.) is the borrower’s, right?
Surprisingly, it is not that simple. Although it is partially true, it’s not completely accurate. What makes this specific program option unique is the impact of the FHA disbursement limit. This disbursement limit, set by the FHA, is one that all lenders must abide by. We will review a few scenarios to learn how this can impact your decision making.
*Disclaimer*- All examples are hypothetical. If you’d like to receive an accurate quote, seek the consult of a licensed loan officer. Click here to request a brief consultation.
Here are some examples of couples considering a lump sum reverse mortgage who own their house "free and clear".
Property Value: $200,000
Current Mortgage Balance: $0
Assumed Principal Limit: (.524 x $200,000) = $104,800
Given this criteria, a borrower will be eligible for $104,800. Assuming the closing costs total around $4,880*, the borrower is left with $99,920. The common misconception is that they will have the ability to access the entire $99,920 in a lump sum. The FHA disbursement regulation will only give you the ability to access roughly 60% of your proceeds in this scenario. This is why many seniors choose to seriously consider other reverse mortgage options.
Here is the breakdown of this scenario. These figures are all for demonstrative purposes. For accurate pricing and quotes, please seek the consult of a licensed loan officer.
Breakdown: Principal Limit = $104,800
60% of principal limit: (.60 x $104,800) = $62,880
Deduct financing fees: $62,880 - $4,880* = $58,000 accessible at closing
40% of principle limit inaccessible: (.40 x $104,800) = $41,920
The 40% unavailable proceeds are not accessible with this option. Ultimately, that $41,920 is left on the table with the lump sum program for a borrower in this position. The lump sum reverse mortgage program is the ONLY way to obtain a fixed rate of interest.
Let’s look at the same example in which the borrower is now 15 years older.
Home value: $200,000
Current Mortgage Balance: $0
Principal Limit: (.631 x $200,000) = $126,200
Given this criteria, the borrower will be eligible for $126,200. Assuming financing fees total roughly $4,880*, they are left with $121,320. Knowing this is the fixed rate lump sum option, the borrower will be able to access roughly 60% of $121,320 at closing. This translates to a value of $70,840 accessible. Here is the drawn-out breakdown of this scenario. These figures are all for demonstrative purposes. For accurate pricing and quotes, please seek the consult of a licensed loan officer.
Breakdown: Principal Limit = $126,200
60% of principal limit: (.60 x $126,200) = $75,720
Deduct financing fees: $75,720 - $4,880* = $70,840 accessible at closing
40% of principal limit inaccessible: (.40 x $126,200) = $50,480
Waiting a period of 15 years resulted in getting access to quite a bit more.
So what might happen if we were looking to pay off an existing mortgage with this option?
Property Value: $200,000
Current Mortgage Balance: $95,000
Principal Limit: (.524 x $200,000) = $104,800
Given this criteria, a borrower will be eligible for $104,800. Assuming the financing fees total around $8,880*, this now translates to $95,920 in proceeds. A mortgage balance of $95,000 must be paid off. Once the lender pays off the current balance, the borrower is left with the difference in accessible proceeds. This is why after paying off what is currently owed; they are only left with a small sum of cash available at closing.
If anything is to be gained from reviewing these hypothetical examples, please know this; It is imperative you seek the consult of a licensed professional. Once they know your goals, and objectives, they can properly advise you on the most appropriate solution. Although most borrowers prefer fixed interest rate loans, they are not always the best fit.
We have listed some of the pros and cons of the reverse mortgage lump sum program below.
Home Equity Conversion Mortgage (HECM) Lump Sum Program Advantages:
This is the only program that has a fixed interest rate
Most consumers are tentative to do home loans that are adjustable rate. Although many do not plan to pay the loan off during their lives, they prefer the stability of a fixed rate loan. There is no uncertainty about your future. An amortization schedule will show you exactly how much will be owed as time progresses.
Great for achieving specific goals
If you had a very specific need or goal you may be looking to accomplish (i.e eliminating the mortgage, home improvement, debt consolidation, medical bills, etc.), this option might make the most sense. Some folks look into this program and do not need access to as much as what can be provided with other programs. The less that is used today, the more that is left behind for tomorrow. This is ideal for borrowers who may decide to move a few years down the road.
Home Equity Conversion Mortgage (HECM) Lump Sum Program Disadvantages:
Not all proceeds are accessible*
One of the most frustrating aspects of this option is the fact borrowers do not get access to the total amount of proceeds available with the reverse mortgage. Some borrowers would like to have the ability to access more than 60% limit. The silver lining in this is that whatever is not touched remains as equity in the home.
*If the current mortgage/lien balance surpasses 60% of initial proceeds, borrowers can access the remaining available proceeds at closing.
All accessible funds must be withdrawn at closing
With the lump sum program, you are required to take all available funds. If you qualify for $50,000 at closing but only need $25,000 to accomplish your immediate goals, you must take all $50,000. This is an annoyance for some, because as we know, interest accumulates over time on the loan’s balance. The more that is utilized, the quicker the loan balance grows.