Use the equity in your home the way you want

Imagine never having to pay another mortgage bill again.  The savings can be dramatic! Protect the ones you love, pay off bills, take vacations, even buy another house, or do whatever your heart desires, because the work you have put in your home is your own money, and use it the way you want.

The Reverse Mortgage became a valuable and safe tool for Senior Americans when the United States Congress authorized the Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) in 1989. Another program became available in 1996 when the Federal National Mortgage Association (FannieMae) created the Home Keeper.

These three (3) Reverse Mortgages offer the opportunity for virtually all Senior Citizens to utilize the equity in their homes to provide needed financial security. Since 1989, more than 193,211 Seniors have obtained an FHA HECM.

What is a reverse mortgage?

A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment.

The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Eligible property types include single-family homes, manufactured homes (built after June 1976), qualified condominiums, and townhouses.

Use of Funds

The funds from a reverse mortgage can be used for anything. Common uses include supplementing retirement income to cover daily living expenses; repairing or modifying your home (i.e., widening halls or installing a ramp); covering health care expenses; paying off existing debts; taking a vacation; paying property taxes; and preventing foreclosure.

There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on an existing mortgage. However, you must qualify for a large enough reverse mortgage to pay off the existing loan entirely.

Payment Options

You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments (for up to life), as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time.

The amount of money you get from a reverse mortgage depends upon your age (or age of youngest borrower in the case of couples), appraised home value, current interest rates, and the lending limit in your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.

Impact on Government Assistance Programs

A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you receive a lump sum payment, any amount retained the month after would count as an asset and could impact Medicaid eligibility. For example, if you receive $4,000 for home repairs and spends it the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. To be safe, you should contact the local Area Agency on Aging or a Medicaid expert.

Mandatory Counseling

Before applying for a reverse mortgage, you must first meet with a counselor. The counselor’s job is to educate you about reverse mortgages, answer your questions, and offer alternative options depending on your situation.

A list of approved counseling agencies nationwide is posted online by the U.S. Department of Housing and Urban Development.

Paying Back Your Loan

No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out. The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.

Reverse Mortgage Programs

Home equity Conversion Mortgage-

The Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse mortgage product, accounting for 90-plus percent of the total market. Available since 1989, HECMs are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.

The amount of money you get from a HECM depends upon your age, appraised home value, and current interest rates. The older you are and the more valuable your home (and the less you owe on your home), the more money you get.  

The location of your home also affects the loan size. The size of a HECM depends on the maximum loan limit, which varies by county and is adjusted annually. Currently (for 2006), the FHA loan limit varies from $200,160 (for rural areas) to $362,790 (for high-cost areas).  

If the value of your home exceeds the FHA lending limit, the amount of money you are eligible to receive will be calculated as if the value of the home is the area limit. Practically speaking, if your home is worth $400,000, but the county lending limit is $312,896 (current maximum limit), the loan amount will be based on $312.896.

As part of the closing costs, you must pay a mortgage insurance premium (MIP), equal to 2 percent of the loan amount up-front, plus an annual premium thereafter equal to 0.5 percent of the loan amount. The insurance premium guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.  Headquartered in Washington, DC, Fannie Mae is the nation's largest investor of home mortgages and a major investor of reverse mortgages, including the federally insured Home Equity Conversion Mortgage (HECM).

Home Keeper Reverse Mortgage-

In 1996, Fannie Mae developed its own proprietary Home Keeper Reverse Mortgage as a conventional market alternative to the HECM. The Home Keeper was developed to address unmet needs that could not be served by the HECM program, such as individuals with higher property values, condominium owners, and seniors wishing to use a reverse mortgage to purchase a new home.

The Home Keeper is available in every state to homeowners 62 years of age and older. Eligible home types include owner-occupied single-family homes, condominium units, and units in qualified planned unit developments. Properties held in trust and qualified leasehold properties are also eligible. Cooperative units, however, are not an eligible property type for Home Keeper.

The amount of funds available to the borrower is determined by a formula and varies with: (1) the age and number of borrowers at the time of application; (2) the adjusted value of the home; and (3) current interest rates. Home Keeper loans can be larger than HECMs because Fannie Mae’s maximum mortgage limit – $333,700 for 2004 – is larger than the locally applied FHA maximum mortgage limit.

A consumer may choose to receive the funds from a Home Keeper as: (1) fixed monthly payments for life (i.e., for as long as the borrower occupies the home as his/her principal residence; (2) a line of credit; or (3) a combination of monthly payments and line of credit.

Home Keeper borrowers are charged an origination fee that may not exceed 2 percent of the adjusted value of the home, whichever is greater, a monthly servicing fee ($15-$30), and other closing costs. Many of these can be financed and included in the mortgage.

The interest rate charged on a Home Keeper mortgage adjusts monthly and is equal to a fixed spread above an index rate – the current weekly average of the one-month secondary market CD rate, which is published by the Federal Reserve. The rate may never rise by more than 12 percentage points above the initial rate; there is no cap on a monthly adjustment other than the lifetime cap.

The Home Keeper for Home Purchase program enables seniors to obtain a Home Keeper mortgage in connection with the purchase of a new home – in a single transaction. The transaction reduces the out-of-pocket cash needed by the consumer to buy a new home, eliminates any new monthly mortgage payment, and helps the consumer keep more of the sales proceeds from their old house – or a larger amount of savings – to use for other purposes.

To provide a better illustration, let’s say a 76-year-old woman sells her home for a $75,000 profit and wants to buy a new home in sunny Florida costing $115,000. To avoid a mortgage payment on the new house, she would need to pay $115,000 in cash. This means she would have to use the entire $75,000 from the sale of her first home, plus another $40,000 from her savings. If she doesn’t have the $40,000, she couldn’t buy the new house, unless she qualifies for a new home mortgage, which might be difficult and which in any event would require making monthly mortgage payments again.  Alternatively, the woman could purchase the new home outright, or nearly so, using money from a Home Keeper reverse mortgage, plus the sales proceeds from her old house.

This product might be used, for instance, by older homeowners who want to sell their old home and move closer to their children or to a warmer climate, or to move into a home that provides greater accessibility.

Cash Account Reverse Mortgage-

Financial Freedom Senior Funding Corporation, based in Irvine, CA, administers a "jumbo" proprietary reverse mortgage product called Cash Account to benefit homeowners living in higher-priced homes valued above the FHA and Fannie Mae lending limits. In addition to Financial Freedom, the program is offered by most reverse mortgage lenders.

The product may work well for unusual properties or situations, not typically allowed by FHA and or Fannie Mae. 

In 2004, Financial Freedom introduced the Simply Zero Cash Account, the first-ever reverse mortgage loan to eliminate all up-front costs. 

Simply Zero Cash Account-

With the Simply Zero Cash Account, borrowers are required to draw 100% of their maximum available benefit at loan closing, however Financial Freedom has kept the interest rate structure the same as its standard Cash Account, and remains the only "jumbo" reverse mortgage products available.

Both products provide homeowners age 62 and older with the ability to convert their home equity into cash without having to sell their home or assume monthly payments. In addition, both boast numerous consumer safeguards that have become standard in the industry, including third party counseling to ensure the borrower understands the terms of the loan and that the loan is appropriately matched to the borrower’s needs.

Currently, the program is offered in most states, but not all.

Costs of a Reverse Mortgage

Many of the same costs that someone pays to obtain a home purchase loan, or to refinance their existing mortgage, apply to reverse mortgages too. You can expect to be charged an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain other standard closing costs.

In most cases, these fees and costs are capped and may be financed as part of the reverse mortgage. Below is a more in-depth explanation of each type of fee.

Origination Fee
The origination fee covers a lender's operating expenses—including office overhead, marketing costs, etc.—for making the reverse mortgage.
Under the HECM program, which accounts for 90 percent of all reverse mortgages made in the U.S., the origination fee is equal to the greater of $2,000 or 2 percent of the maximum claim amount (i.e., county FHA loan limit). Currently, the FHA loan limit varies from a low of $172,632 (for rural areas) to a high of $312,896 (for high-cost metropolitan areas). Therefore, the 2 percent origination fee generally ranges between $3,453 (2 percent of $172,632) and $6,258 (2 percent of $312,896).

Home Keeper borrowers are charged an origination fee that may not exceed 2 percent of the value of the home. With either product, the entire amount of the origination fee may be financed as part of the mortgage.

Mortgage Insurance Premium
Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to 2 percent of the maximum claim amount, or home value, whichever is less, plus an annual premium thereafter equal to 0.5 percent of the loan balance.

The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.

 
Appraisal Fee
An appraiser is responsible for assigning a current market value to your home. Appraisal fees generally range between $300-$400.

In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety codes, in order for the reverse mortgage to be made.

If the appraiser uncovers property defects, you must hire a contractor to complete the repairs. Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repairs may be financed in the loan and completed after the reverse mortgage is made. Appraisers generally charge $50-$75 dollars for the follow-up examination.

Other Closing Costs
Other closing costs that are commonly charged to a reverse mortgage borrower, include:

• Credit report fee. Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: Generally under $20
  Flood certification fee. Determines whether the property is located on a federally designated flood plane. Cost: Generally under $20
  Escrow, Settlement or Closing fee. Generally includes a title search and various other required closing services. Cost: $150-$450
  Document preparation fee. Fee charged to prepare the final closing documents, including the mortgage note and other recordable items. Cost: $75-$150

• Recording fee. Fee charged to record the mortgage lien with the County Recorder's Office. Cost: $50-$100
  Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: Generally under $50

• Title insurance. Insurance that protects the lender (lender's policy) or the buyer (owner's policy) against any loss arising from disputes over ownership of a property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance.

• Pest Inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites. Cost: Generally under $100.

• Survey. Determines the official boundaries of the property. It's typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower's property. Cost: Generally under $250

 
Servicing Set-Aside.  The servicing set-aside is an amount of money deducted from the available loan limit at closing to cover the projected costs of servicing your account.

Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that ranges between $30-$35. The amount of money set-aside is largely determined by the borrower's age and life expectancy. Generally, the set-aside can amount to several thousand dollars.

(Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which ranges from $30-$35.
 

Reverse Mortgage Frequently Asked Questions

For many people, a reverse home mortgage is a good way to increase their income in retirement - positively affecting their quality of life.

Advantages of a Reverse Mortgage

The main advantage of reverse mortgages is that they are an extremely flexible financial planning product with very few - if any - restrictions on how you receive and use the money.

To many people, a reverse mortgage simply sounds too good to be true. But, there really are no catches - given the right set of circumstances, a reverse mortgage is an ideal way to increase your spending power in retirement.

Key advantages and benefits of reverse mortgages include:

·         No Risk of Default:

o        Unlike a home equity loan, with a reverse home mortgage your home can not be taken from you. If you default on a home equity loan, you could lose your home.

o        The Reverse Mortgage Lenders have no claim on your income or other assets.

·         No Downside: You will never owe more than your home's value at the time the loan is repaid, even if the reverse mortgage lenders have paid you more money than the value of the home.

·         Tax Free: The money is typically tax free, since it’s a loan when the homeowner receives the funds, as either additional fixed income or a lump sum.

·         No Restrictions: How you use the funds received is not restricted - go traveling, get a hearing aid, purchase long term care insurance, pay for your children’s college education - anything goes.

·         Flexible Payment Options: You can receive the loan money in the form of a lump sum, annuity, credit line or some combination of the above.

·         Easy Pre-qualifications: There are no income qualifications

·         Home Ownership: You retain home ownership and the ability to live in your home

·         Guaranteed Place to Live: You can live in your home for as long as you want

·         Federally Insured: Some reverse home mortgages are federally insured - these are known as HUD's HECM FHA insured Home Equity Conversion Mortgages (HECM) reverse mortgages. With these, even if the reverse mortgage lenders default, you'll still receive your payments.

·         No Maximum Loan Amount: For Seniors with a large amount of home equity, private reverse mortgage lenders offer products with no maximum loan amounts.

Disadvantages of a Reverse Mortgage

There are few disadvantages of Reverse Mortgages, but you will want to consider how the following factors might apply to your situation:

·         Beware if You are Eligible for Low-Income Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that income from a reverse mortgage does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a Reverse Mortgage.)

·         Reconsider if You Are Planning to Move in the Near Term: Since a reverse home mortgage loan is due if your home is no longer your primary residence and the up front closing costs are typically higher than other loans, it is not a good tool for those than plan to move soon to another residence.

·         Home Will Not Be Left to Heirs: Many people dismiss a reverse mortgage as a retirement option because they want to be sure their home goes to their heirs. And it is true, a Reverse Mortgage decreases your home equity - affecting your estate. However, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it. There are numerous potential Estate and Retirement Planning benefits to a Reverse Mortgage - see Innovative Uses of a Reverse Mortgage for more information on these options.