How Do

Reverse Mortgages Work?

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The Problem

• Few seniors have enough savings for retirement• 40% of Baby Boomers have no

retirement savings at all (CNBC)• On average, people age 55-64 expect

to make $45k annually during retirement, but only have the savings to generate ~$10k annually. They face a $35k+ annual income gap (WSJ)

• Consistent across generational groups, race, and political affiliation.

• Seniors face rising health care costs, longer life span

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Baby Boomers are not prepared for retirement.

*See final page for citations

The Problem

• 65% of senior homeowners own their house outright.

• $130,000 in home equity on average

• Housing costs for people age 55+ account for 36-38% of total spending (US Customer Expenditure Survey)

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Baby Boomers Have Home Equity

Saving Grace?

• Lump sum disbursements can help cover large expenses, like medical bills

• Monthly distributions can help cover income gap

• Lack of monthly mortgage payment secures housing arrangement while reducing monthly expenses

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Reverse Mortgages have potential to solve the issue

This Risks

• Complex product, borrowers need to be educated prior to closing

• Negative amortization can severely reduce or eliminate any home equity

• Adjustable interest rates when borrowers receive monthly disbursements, which create volatility.

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If used improperly, reverse mortgages can be dangerous!

To reduce the risks associated with these loans, it’s important to understand how they work.

Test CaseTo show how reverse mortgages work, we will work through a sample loan

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Principal Limit

• Principal limits are based on an “interest rate factor.”

• FHA determines the interest rate factor based on the interest rate of the loan & the age of the youngest borrowers

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The maximum loan amount is called a Principal Limit

Gert & Bernie’s Principal Limit is $222,400

Equity Blocks

• Part of the home is reserved for the homeowner’s use

• The remaining equity is reserved for the interest on cash used by the borrower

• Dividing the home helps protect it from going underwater, which would be bad for both the lender and the homeowner

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The principal limit divides the home equity

Equity Blocks

• Homeowner’s equity is used for cash disbursements, paying off existing mortgage debt, and loan costs & Fees• Couple uses Lump Sum payment to

cover medical bills & other costs• Reverse mortgage used to

refinance previous mortgage debt• Loan costs are rolled into the loan

• Lender’s reserves are used to cover accrued interest for the above costs

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At the close of the loan, some equity is used…

Long Term Consequences

• View our Reverse Mortgage Guide

• Finish reading ”How Does A Reverse Mortgage Work” to follow Gert & Bernie through the rest of the process

• Learn about the Long Term Effects of a Reverse Mortgage, including:• How long does a reverse mortgage last?• Can you pay off a reverse mortgage?• What happens when you sell the home?

• Read our article Pros & Cons: 29 Things To Know About Reverse Mortgages

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To see what happens to Gert & Bernie…

Citations• CNBC - http://www.cnbc.com/2015/04/13/retiring-well-not-most-

baby-boomers.html

• WSJ - http://blogs.wsj.com/economics/2015/10/26/baby-boomers-hugely-underestimate-what-they-need-for-retirement/

• Consumer Expenditure Report -https://www.bogleheads.org/wiki/Surveys_of_retirement_spending#Average_spending_by_age_ranges_-_CE

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