The Reverse Mortgage Cross-Over

Regardless of what you think about a reverse mortgage, there is one thing you should consider if you’re weighing that option. I’ve never seen it discussed, but for this article I’ll call it the “cross-over point.” That’s the date on which the amount you owe on your mortgage will equal the value of your house.

Put in real numbers, if you own a home worth $200,000 and you put a $150,000 reverse mortgage on that home, and then you make no payments, how long will it be before the amount owed on your house will exceed the value of the house? Or perhaps as critically, how long will you expect to live in the house while the debt on the house exceeds, by a continually swelling margin, the value of the house?

The answer depends, as you can imagine, on the interest rate charged and the insurance and other charges added to the balance. The last one I priced was about 11 years.

That tells you that in 11 years, unless it appreciates in value, there will be no equity left in your house. If you live in the house longer than that after you make the mortgage, the federal government insures that the mortgage company has no loss when your house is sold to satisfy the mortgage. I’ve seen no studies, yet, on what that may cost the federal government’s insurance fund. Hopefully somebody is watching the treasury.

But locally, and to the borrower, the cross-over point is important. If the homeowner takes the proceeds of his loan and puts it in a savings account and over years pays the cost of a new roof, taxes (soon not deductible from federal income taxes), new HVAC, water heater, and the myriad other expenses of owning a home, then the value of the home may hold up as long as the borrower will predictably live in the home. On the other hand, if he or they have spent the money, I’m betting it’s unlikely that he or his children will come out of pocket to spend real maintenance money on a house with no equity. The only possible result would be to keep the government from losing more money when the owner dies or moves from the home. Ten or fifteen years beyond the cross-over date can be a very long time to live in a house with no maintenance.

Understand, I cannot use this space to discourage a reverse mortgage; every person’s circumstances will be different. But if you do one, please know its potential if you plan to live in the house beyond the cross-over point of the mortgage. That result will affect not only someone trying to live in the house, but just like a prolonged short sale or foreclosure, the neighbors as well.

I understand the motives and the need of those who seek to supplement retirement or Social Security income. If the owner understands all other options and has discussed this with very trusted, unbiased advisors, a reverse mortgage exists as an option. Last week, however, I was in an audience in which a condominium unit owner floated the possibility to reverse mortgage his unit. His purpose was to take the money to invest in other property in which he saw profit in excess of the cost of the reverse mortgage. His rationale was that the mortgage takes priority, by law, over a condominium (or HOA) assessment; therefore, the association is not likely to foreclose a reverse mortgage, and he could avoid both mortgage payments and assessments. He would have free money to invest until he died or moved from the unit. This guy was clearly planning to ride the federal government’s reverse mortgage train, and unabashedly, his neighbors as well. Obviously, a reverse mortgage can be abused.

Associations might consider amending their documents to prevent reverse mortgages.

Some wonderful people over the years have contributed to these articles by their comments and corrections, and by helpful suggestions for future articles. I hope it’s apparent that I’ve intended these articles not to be a waste of your time or mine. Your comments are appreciated.

Mike Chesser

President, Chesser & Barr, P.A.

President, Old South Land Title, Inc.

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