Reverse
Mortgages
Simply Put
Most people have heard about reverse mortgages but the
product, to some, remains a mystery. This type of mortgage has evolved over the
years. Today most reverse mortgages are
underwritten by the Federal Housing Administration (FHA) under very strict
guidelines.
These stricter guidelines have created a product that gives
senior citizens protected options for financial security in their retirement. Using
the equity in your home can be a viable way to achieve a number of goals. These
goals can range from paying off a current mortgage, having extra monthly income
or just the ability to have a line of credit to draw from in case of emergencies.
Simply put; a reverse mortgage today is like any other
mortgage. The one exception is that unlike a traditional "forward"
mortgage there are no monthly payments to the bank. You continue
to own your house and can live in it for the rest of your
life without worry.
Scroll down or click a topic.
Some of the reasons
for getting a Reverse Mortgage
HUD/FHA Home Equity Conversion Mortgage (HECM)
How many ways can I
receive my money?
Interest - Fixed Rate
vs. Adjustable Rate
What will a Reverse
Mortgage cost me?
What Do I Need to
Bring When I Apply
What Happens After I
Get My Reverse Mortgage?
The Effect of a Reverse Mortgage on your Estate
Questions from
Children and Heirs
Glossary of Phrases You May Hear
A reverse mortgage is a lending
product that allows people 62 or older to convert their home equity into cash.
This money is tax-free with no repayment required until
your home is no longer your principal place of residence. A reverse mortgage is
just that; a mortgage. You still own your home and hold title to it. If your
home increases in value, your estate continues to grow. You cannot be forced out of your home even if the
balance exceeds the value of your home. You or your estate will never owe more than the value of
the property. Additionally, your heirs
will never be responsible for repayment of your reverse mortgage as the loan is
a non-recourse loan. When it comes time to repay the loan, the amount owed will
be the current loan amount or the value of the property whichever is
lower.
·
Pay
off your existing mortgage (no monthly payments)
·
Extra
monthly income
·
Paying
for long term care or medical care
·
Investing
the money
·
Lower
estate taxes
·
Freedom
of choices (travel, gifts, creating
memories)
·
Remaining
in your home with in home care
·
CASH
or Line of Credit
·
Purchase;
Sell your current residence and downsize to a smaller residence
The HUD/FHA Home Equity
Conversion Mortgage (HECM) loan products are FHA insured reverse mortgages
designed by the U.S. Department of Housing and Urban Development (HUD). A
significant feature of HECM loans is that they are insured under the
government’s Federal Housing Administration (FHA) insurance program. These
programs ensure that you will receive all payments due to you as long as you live
in your home. It also ensures that your lender will receive full repayment of
your loan balance, even if the loan balance is greater than the value of your
property. The FHA insurance premiums that you pay as a HECM borrower create a
reserve fund to cover any losses that occur.
1. Term - monthly payments / specified time-period
2. Tenure - monthly payments as long as you live in
the home
3. Line of credit - (No interest charged
until used)
4. Modified term - a term plan combined
with a line of credit
5. Modified tenure - a tenure plan with a
line of credit
6. Lump sum payment
7. Any
combination of the above - HECM is flexible! You can pay off your
mortgage, leave a little in a credit line or be paid in monthly installments. You
can change these financing options at any time.
You have options
based upon whether your interest rate is fixed or adjustable. In the case of a
fixed rate, your rate stays the same throughout the life of the loan. However
you only have the choice of a lump sum payment. The other options listed above
are available with an adjustable rate. The rates are determined by the amount
of an index (LIBOR or One Year US Treasury) with a fixed margin of 2.5% - 3.5%.
While the index changes the margin is set. The interest rates on an adjustable
program are capped at 10% above the initial rate. If you decide to look into
getting a reverse mortgage your consultant will provide you with a printout
which outlines the differences of a fixed vs. variable rate and the benefits of
each.
There are advantages
to both options. Taking all available cash at the beginning gives you a fixed
rate but interest is charged on the entire amount from the date of funding. A
line of credit can be beneficial even though the rate is variable. No interest
is charged on any money left in the line of credit until an advance is
requested. In addition the line of credit amount increases 1/2 percent per year
so you will have additional funds available to you the longer the line remains
unused.
You may have heard
that a reverse mortgage is expensive. While the costs may be $15,000 or more
here is a breakdown of what those costs entail. In most cases the cost is
comparable with a regular mortgage.
The basic fees
(other than interest) on a Reverse Mortgage include the following:
Mutual Mortgage
Insurance (MMI) from FHA will be your largest closing cost and the most
valuable. FHA charges 2% of the
qualifying loan amount or appraised value whichever is smaller. Using the FHA loan limits of $625,500
Mortgage Insurance could be as much as $12,510 or 2% of the appraisal if the
home were less than that amount. That is
more than half of the costs. What you
receive for your money is the confidence and security in knowing that, whatever
kind of reverse mortgage you choose, your loan, loan’s monthly income or line
of credit will not go away. Furthermore,
if, over time, you end up owing more than your home is worth, FHA, not your
estate, will cover the difference.
This covers lenders
costs, processing the application and the loan. HUD has set origination fees to
2% on the initial $200,000 of the maximum claim amount, (the lesser of the home
value or the $625,000 lending limit) and 1% on the balance thereafter with a
cap of $6,000.
Other closing costs
cover any services and charges – such as title search and insurance,
appraisals, surveys, credit reports, required inspections and repairs, taxes
and recording fees. These costs differ with each locality based on the property
itself and the costs involved in closing the loan.
TALC rate: on a reverse
mortgage is comparable to the Annual Percentage Rate (APR) on a regular
mortgage. On any home loan, you should receive a form called a “Truth-in
Lending” form. This form will give you the Total Annualized Loan Cost (TALC
rate) on your reverse mortgage loan. It is difficult to figure the Annualized
Percentage Rate on a reverse mortgage loan because this kind of loan offers so
many choices. Even though the actual interest rate may be 5% or 6%, your TALC
rate could be much higher as the TALC rates are figured on the actual amounts
received at time of close. If the loan you choose is a monthly payment option
loan, the TALC rate does not consider the total amount you may receive over
your time in the home; it only considers the small amount you receive at close
and all
the closing costs. The TALC rate would look out of
proportion to your actual loan’s interest rate when compared to the actual
reverse mortgage’s interest rate or to a regular mortgage’s Annual Percentage
Rate (APR). This is because an APR amortizes the cost over the term of the
loan; normally 30 years. Generally, the longer you keep a reverse mortgage, the
lower the Total Annual Loan Cost rate will be.
All HECM loan
principal limits are based on a maximum loan amount of $625,500 or appraised
value whichever is lower.
All of the
percentages below are net, that is closing costs have been subtracted. This is the amount
you would actually receive. Use these percentages times
the home value or maximum loan limit of $625,500 which ever is smaller.
|
|
Fixed |
Adjustable |
|
Fixed |
Adjustable |
|
Age |
% |
% |
Age |
% |
% |
|
62 |
53 |
49 |
80 |
65 |
64 |
|
65 |
55 |
51 |
85 |
71 |
69 |
|
70 |
59 |
55 |
90 |
74 |
73 |
|
75 |
63 |
60 |
95 |
77 |
76 |
*These
numbers are estimates only and can change slightly with variances in the
interest rate
The only way to get a clear and accurate number is to contact
your Reverse Mortgage Consultant and request a printout of the various programs
with both fixed and variable rates. The loan program you choose is customized
to fit your goals. You will need the following information to give to
your consultant:
1. Names of all borrowers on title
2. Address of the property
3. Telephone
4. Estimate of property value
5. Birthdates of all borrowers
6.
Total of all loans on the property
After going over the
various programs with your reverse mortgage consultant the next step is to
apply. Qualifications for a reverse mortgage are:
1.
All
borrowers on title must be at least 62 years old and occupy the property.
2.
The
property must be a single family and a regular private residence or condo
3.
All
borrowers must attend a reverse mortgage counseling session (this is done over
the phone) with a HUD approved counseling agency and have received a
certificate.
As you can see,
qualifying for a reverse mortgage is easy! There are no credit requirements or
income requirements to qualify. Along with your application, you will receive a
package of disclosures to be signed. In that package will be a Good Faith
Estimate of costs of the loan and a Truth in Lending or TALC as described
earlier. You should always be given a copy of everything you have signed along
with some extra information including a sample of the mortgage documents so
that you will have ample time to read it prior to signing your loan closing
documents. At this point, the only cost to you is what the HUD approved
counseling agency charged you for your counseling session. HUD limits this cost
to $125. Most other costs for the loan can be paid from the proceeds. The only
other out of pocket costs you will have to pay for is an appraisal to determine
the value of your home.
After receiving your
application paperwork and a copy of your counseling certificate your reverse
mortgage consultant will then do the following:
1.
Order
a title report to prove you are the owner of the property and there are no
other encumbrances that need to be dealt with.
2.
Order
a credit report to make sure there are no owing of past federal debt or other
debts secured by the property.
3.
Order
on your behalf an appraisal to determine the value of the property.
4.
If
your home is in a trust a copy of your trust would be forwarded to the lender’s
legal department for a legal review to make sure it’s compatible with a reverse
mortgage.
5.
If
the appraisal states that a roof or pest inspection would be needed then
inspections would be ordered on your behalf.
6.
Coordinate
all activities between the lender, escrow, title company and inspectors to make
sure the process flows properly.
7.
Be
with you at the loan closing to answer any questions you may have and make sure
you understand everything you will be signing.
When
you receive your counseling certificate you will need to bring that in along
with:
1.
Your
driver’s license or picture ID
2.
Social
Security card or verification of number
3.
Any
mortgage loan statements
4.
Copy
of property insurance declaration page
5.
Complete
trust papers (if applicable)
You have a few
responsibilities after you close your reverse mortgage. They are:
1.
Maintain
your home
2.
Pay
your property taxes
3.
Pay
your hazard insurance premiums
At regular intervals, the lender
will follow up with you by mail or in person to certify that the property
remains your principal residence. If you receive a verification request in the
mail be sure and return it promptly. You should also advise your lender if you
will be absent from your home for an extended period (more than two months).
On a HECM loan, you may request a
change of your reverse mortgage payment plan at any time*. The types of changes you may request
include:
·
receiving an unscheduled payment
·
suspending your payments for a period of
time
·
changing from one form of payment plan to
another
·
changing the size of your monthly payments
·
adding a line of credit to your loan
(which will also reduce the size of your monthly payments), and/or
·
changing the term of your payments
As your personal and financial circumstances change, you may
find that you are in a position to repay a portion of, or your entire, reverse
mortgage. You may repay a reverse mortgage loan completely or in part, at any
time, without penalty. If you choose to repay your loan in full, this will
terminate your loan. You can also repay a portion of your loan balance without
terminating your loan; for example, a partial repayment could be used to increase
your monthly payments or to set up a line of credit.
·
You hold title to your house during the
term of your reverse mortgage, not the lender, just like with a conventional
home mortgage.
·
You will never, under any circumstances
resulting from the reverse mortgage, be forced to leave your home. You can
remain in it for as long as you like, provided you pay your real estate
property taxes, insurance payments and keep your home in good condition.
·
Funds received from a reverse mortgage
are tax-free.
* If you make such a change, you will likely be charged a small
fee. This per-change fee is added to your loan balance when the change is made.
Q- If my home value goes way up can I get a
new reverse mortgage to pay off the first one and receive cash?
A- Yes! If your home increases in value, a new reverse mortgage could
improve your current financial position.
Q- How do monies from
a Reverse Mortgage affect Social Security or Medicare?
A- Proceeds from a Reverse Mortgage does not affect these benefits
(consult your advisor if you have a unique situation).
Q- Does the lender
take my house?
A- This is a misconception; a reverse mortgage is merely a loan against
the property. The title remains in the name of the borrower and the lender is
only repaid the loan balance.
Q- Can a reverse
mortgage be taken out if there is already a conventional mortgage on my home?
A- Yes, but the existing mortgage must be paid at closing.
This would eliminate any monthly mortgage payment.
Q- What about a home
in a living trust?
A- Yes, many people have taken out a reverse mortgage while their home
is in trust.
Q- Do I get taxed on
the money I receive from my reverse mortgage?
A- Currently the Internal Revenue Service treats monies received from a
reverse mortgage to be loan advances. The equity in your home is considered
your money and not additional income. All funds from the reverse mortgage are tax-free.
Please consult your tax advisor if you have a unique situation.
Q- What are the costs associated with a reverse mortgage? I
have heard they are very high.
A- The costs of a
“conventional forward” FHA loan are very similar to a reverse loan. For example
fees common to both types, such as an origination fee, mortgage insurance
premiums, an appraisal fee, a flood certification and title and escrow fees are
usually paid for by a borrower. All of these costs can be financed in the
initial loan advance.
Q- What if my home
drops in value after I receive my reverse mortgage? Will I have a problem if I
am getting monthly tenure checks? Will the checks stop?
A- The FHA Insurance guarantees that if you are receiving monthly
tenure payments they will not stop even though you have no equity left.
Q- What is due when
the loan is repaid?
A-The borrower pays back the cash advances they have received, plus accumulated
interest and any fees/costs that were financed. Repayment can be accomplished
by refinancing the existing reverse mortgage with a conventional loan or
another reverse mortgage if the owner qualifies.
Q- Will my mom and dad
use up my inheritance?
A- Not necessarily. Your parents’
home will usually be appreciating in value, which could allow for some equity
to be left at the end of the loan. They will also be able to live comfortably
without having to depend on family members to support them. Additionally the
reverse mortgage is a “nonrecourse” loan; they can never owe more than their
house is worth. None of their other assets can be touched.
Q- How much will they owe when the loan needs to be repaid?
A- Your parents will owe the total amount actually borrowed, accrued mortgage
insurance premiums and any other fees and costs financed through the loan.
Q- Will the bank take
my parents’ home?
A- No, the bank will not take their home. Throughout the life of the reverse
mortgage your parents will continue to own their home and retain title.
Q- What happens to my
mom and dad’s home if they have to move into a nursing home?
A- A reverse mortgage becomes due and payable when the last borrower moves
out of his or her home permanently. For instance, the loan is due if they move
into a nursing home, pass away, sell the home or move out. A temporary move to
a nursing home would not be considered a permanent move if it is going to be
less than a year.
Q- Are there any
restrictions in how my parents spend their money?
A- Your parents can spend their money any way they want.
Q- My mom has
dementia and I have power of attorney. She is in need of a caregiver. Can I get
a reverse mortgage for her to help pay the cost of this care?
A- Yes. You will need to get a letter from her doctor that she was
capable when she gave you the power of attorney and that she is currently not
able to make good financial decisions.
Q- Can my parents
add/remove persons from title after we close escrow on a reverse mortgage?
A- Changing title can make a reverse mortgage due and payable because
the loan amount is based on the borrowers’ age, life expectancy and value of
the home at the time of origination.
Adjustable Rate - an
interest rate which adjusts, based on changes in a published market-rate index
Annuity - an
insurance product providing a monthly cash advance for life
Cap - a
limit on the amount an adjustable interest rate may go up or down during a
specified time period
Closing Costs – are
usually financed into the loan and include, but are not limited to appraisal,
title insurance, FHA mortgage insurance premium, origination fee, recording
fees, and escrow/settlement fees
Counseling – required
from a third party for all borrowers. The counseling must be completed and
certificate received by the lender prior to processing the loan.
Credit Line - a
credit account which the borrower can access when needed. Also known as a
"line-of-credit."
Current Interest Rate - The
interest rate that is currently being charged on the outstanding loan balance. It
equals the one-year rate for U.S. Treasury Securities or LIBOR index, plus a
margin.
Default - a
nonperformance or breach of the terms of the loan, defaults on a reverse
mortgage can include, but not limited to, failure to maintain property, pay
property taxes and/or insurance.
Expected Rate - in
the HECM program, the rate used to determine a borrower's available loan amount;
it equals the 10-year rate for U.S. Treasury Securities, plus a margin.
Federal Housing
Administration (FHA) - the part of the U. S. Department of Housing and
Urban Development (HUD) that insures HECM loans
Fixed Monthly Loan Advances -
payments of the same amount which are made to a borrower each month
HECM Fixed Rate - a Home
Equity Conversion Mortgage insured by the FHA with a fixed rate set at closing
for the life of the loan.
Home Equity Conversion
Mortgage (HECM) - the reverse mortgage program insured by the Federal
Housing Administration, a federal government agency
Initial Interest Rate - in
the HECM program, the interest rate that is first charged on the loan balance
beginning at closing; it equals the one-year rate for U.S. Treasury Securities
or LIBOR index, plus a margin.
Lending/Loan Limit – a
portion of the home’s value that is used when calculating the Principal Limit,
varies by county for HECM products.
LIBOR – The London
Inter-Bank Offered Rate is a daily reference rate based on the interest
rates at which banks borrow unsecured funds from other banks. This is the most
common used index used for reverse mortgages at this time.
Modified Term - reverse
mortgage product that combines a Term loan with a Line of Credit
Modified Tenure - reverse
mortgage product that combines a Tenure loan with a Line of Credit
Margin - in
the HECM program, the amount added to the one-year Treasury or LIBOR rate to
determine the initial and current interest rates, and to the 10-year Treasury
or LIBOR rate to determine the expected rate
Maturity - when a
loan is due and payable
Maximum Claim Amount - (HECM)
the lesser of the home’s appraised value or the maximum FHA 203b county limit
for one-unit building in the county where the property is located.
Mortgage Insurance Premium
(MIP) - guarantees that you will receive the promised loan advances
and not have to repay the loan as long as you live in our home
Non-recourse Mortgage - as
relates to the reverse mortgage, when the loan becomes due and payable the
borrowers or their estate may not have to repay more than the property's value
and no other assets can be attached if the mortgage balance is more than the
property value
Origination - is
the process of setting up a mortgage, processing, underwriting, follow-up,
including preparing final loan documents.
Origination Fee - is the
fee charged the borrower for processing the loan. HUD regulates the maximum
amount of HECM loan origination fee.
Principal Limit - the
total borrowing power available to the borrower at origination. It is
calculated based on the borrower’s age, maximum claim amount, loan type, and
expected average interest rate
Repayment – a
reverse mortgage becomes due and payable at the time the last borrower
permanently leaves the home
Right Of Rescission - a
borrower's right to cancel a home loan within three business days of the
closing
Servicing -
administering a loan after closing, such as maintaining loan records, sending
statements and remitting funds to borrower
Servicing Fee Set-Aside - ensures
remaining equity in the home to cover the monthly servicing fee. It is not
retained by any entity – the amount is subtracted from the current Principal
Limit and remains as equity in the home to ensure payment of the monthly fee
over the life of the reverse mortgage loan
Tenure Advances - fixed
monthly loan advances for as long as a borrower lives in a home
Term Advances - fixed
monthly loan advances for a specific period of time
Total Annual Loan Cost
(TALC) rate - the projected annual average cost of a reverse mortgage
including all itemized costs.
Getting your
loan started
To get your loan started call
me at Pacific Home Lending. I will find the right mortgage product to match
your unique situation.
|
Glen Stransky Mortgage
Consultant DRE Lic# 01754329 Cell: 831.277.3118 Glen@PacificHomeLending.com |
Pacific Home Lending is located in Monterey on the
Central Coast of California.
|
Pacific Home Lending 536 Pearl
Street Monterey,
CA 93940 Phone: 831-648-8080 Toll Free: 866-648-8080 Fax: 831-648-8091 |