If you are considering the possibility of getting into a reverse mortgage deal to be able to buy a little beachfront property or a country cottage where to spend your golden years, you better start considering a plan B.
To have a reverse mortgage on a property, it must be your principal residence, meaning you spend the majority of the year there. That’s why you can’t take out a reverse mortgage to buy a vacation home to live in full-time.
There are three types of reverse mortgages, with the Home Equity Conversion Mortgage (HECM) being the most common for homes valued below $970,800. HECMs are insured by the Federal Housing Administration (FHA), which is a part of the U.S. Department of Housing and Urban Development (HUD).
In the past 15 years, however, HUD has made numerous changes to their reverse mortgage programs.
“Some time ago, a regular borrower used to be able to take out 65-80% of the value of their home. Now, depending on their age, they can take 40-45%, and that has to be divided. They will get half at closing, then wait for 12 months to get the other half,” said David Levis, President and CEO of Moneyhouse Puerto Rico, a full-service mortgage company based in San Juan.
“We’re seeing an increase in reverse mortgage production in the U.S., probably twice what we saw before the pandemic, a little more even with interest rates going up. [High-interest rates] don’t really affect the reverse mortgage program,” Levis continued.
Homeowners who have a lot of money in the equity of their home may opt into a reverse mortgage – although it isn’t the only option – for various reasons, such as purchasing an investment property, financing a better quality of life, or paying for medical expenses.
Reverse mortgages are available in Puerto Rico and work in an almost identical way as in the U.S. HUD reported, however, that over the past five years many seniors lost their homes as a result of taking out reverse mortgages.
Prior to the HUD’s modifications, borrowers didn’t have to be employed nor verify their credit to qualify for a reverse mortgage. “In the last five years, we’ve gone from about 150 reverse mortgage loans monthly to about two to three. Before, you could have a borrower be in foreclosure, and they would close a reverse mortgage loan,” Levis described.
That was sometime around 2007. In 2010 they began making little changes until it became a completely different program. In Puerto Rico, the changes haven’t really worked to fulfill the borrower’s needs.
Reverse Mortgages as a Last Resource
“We’re the only reverse mortgage lender in Puerto Rico currently, but we’re not seeing the volume that we’re seeing in the U.S., [where we’re] the #15 top U.S. reverse mortgage lender,” Levis said.
Despite decreasing in popularity, Moneyhouse still offers reverse mortgages, but they make sure everyone – the entire family – is involved. The executive mentioned that sometimes at a reverse mortgage closing, the elderly person’s children will offer to give their parent the money to avoid taking out the loan.
“At the closing, we require the family to be there, so everyone knows what’s going on. After the passing of the parents, we want to make sure everyone knows what’s happening. One of the different things about the Puerto Rican culture is that we help each other out,” Levis said.
Levis advises that if you don’t need to do it – take out a reverse mortgage loan – you shouldn’t. After all, it’s a transaction with fees and expenses. As a lender, Moneyhouse’s goal is to make sure everyone is informed.
“Because of our culture, parents want to leave their home to their children. If you do a reverse mortgage, and you live for a long time, [when] you pass away, you leave the reverse mortgage, and it goes up every month. The payments you don’t make go into the mortgage. When you pass away, you could owe more than you own. Then the children won’t receive anything as part of their inheritance. So, that’s one of the issues we always like to talk about with the parents,” Levis cautioned.
Oftentimes, people use a reverse mortgage loan to take care of their medical expenses and food. If there are other options, Levis recommends looking into those first before choosing a reverse mortgage loan.
“We first send them to one of the not-for-profit budgeting agencies that basically check everything. They do an analysis of everything you need before you even do a reverse mortgage. We send them there to see if there is no other financial program available other than the reverse mortgage. At the end of the day, it’s really a last resort program. If you can afford a low mortgage payment, you should do regular refinancing. There’s a ton of federal help and programs available for seniors and there are local programs that are pretty good too,” he explained.
Improvements To The Island’s Economy
“The last two years, at the beginning of the pandemic, interest rates had gone down to 2.75%. Mortgages in Puerto Rico were at record-breaking numbers. We probably closed twice what we did the year before the COVID-19 pandemic,” said Levis.
Because of the pandemic, many clients went into moratoriums that were imposed by the federal government, so they wouldn’t lose their homes.
“During that time, there was a moratorium on foreclosures, so there were basically no foreclosures. We worked with all those borrowers who couldn’t pay their mortgages and offered them what the federal government was offering. [In] terms of delinquency, [the situation] is a lot better than it was before the pandemic,” said Levis.
Although the pandemic brought its fair share of grievances, it was a ‘godsend’ in other ways. With interest rates at all-time lows, many Puerto Ricans, who previously didn’t qualify for a mortgage before the pandemic, could qualify. Unfortunately, with interest rates back up at 5.5%, it’ll be more difficult for them to qualify again.
Federal funding granted to Puerto Rico as a result of the pandemic has been very helpful for the island’s residents, but pandemic relief wasn’t just a federal handout, it was more. Because interest rates were so low, it helped mortgage borrowers who really needed financial assistance.
“Right before the pandemic, you were almost about to not be able to pay your mortgage payment. Then you refinance and get a mortgage payment that is half of what you paid before,” Levis described a scenario that played out for many people.
Levis also mentioned the increase in the minimum wage, which increased from $7.25 to $8.50 last January, and will increase annually until it reaches $10.50.
“Most of our mortgages here are with couples that make minimum wage. A 20% increase in wages and a 50% decrease in their mortgage is a dramatic improvement. A lot of good things are happening in Puerto Rico, which is why I think our industry is solid. Delinquencies are down because people can pay,” Levis said optimistically about the island’s economy.