What is a Reverse Mortgage?
A Reverse Mortgage allows elderly Americans who are at least 62 years of age to take a loan out against their home’s equity without requiring any monthly payments for as long as they live in their home as their primary residence. A reverse mortgage enables a homeowner to liquidate some of the equity of their home into cash to be used for any purpose.
What is HECM?
The Home Equity Conversion Mortgage (HECM) is a reverse mortgage program through the Federal Housing Administration (FHA) and the department of Housing and Urban Development (HUD). The two branches work together to offer this loan, the FHA insures this loan while HUD runs the program that offers it to people.
Why do I need a Reverse Mortgage?
Many seniors use the funds from a Reverse Mortgage loan to supplement their social security, meet any unexpected major expenses such as medical or home improvement, as well as many other reasons. Some people even use these funds for travel or to finance the purchase of a new residence. If you are interested in the option of buying a new home with the proceeds from your Reverse Mortgage you will apply for the “Reverse Mortgage for Purchase” which is explained in further detail later.
Do I/We Qualify for a Reverse Mortgage?
The eligibility requirements for a FHA Reverse Mortgage are simply that you are a homeowner at least 62 years of age or older, and that you either own your home outright or have a low mortgage balance that will be paid off at closing with the proceeds from the Reverse Mortgage. You must also be living in the home against which you are getting the Reverse Mortgage. Most types of homes are eligible including single-family homes and one to four unit homes where one unit is occupied by the borrower. Condominiums and manufactured homes must be HUD approved and meet FHA requirements. There are not any health, credit, or income eligibility requirements at this time.
Why do I need counseling?
This counseling is required by section 255 of the National Housing Act, and it is really looking out for your best interest. The government wants to ensure that people are not being taken advantage of in any way, and that you have the chance to speak with an independent third-party from whom you will receive unbiased information on the entire Reverse Mortgage process. We will be sure to answer all of your questions so that you can go into the process with a clear understanding of how it works and knowing that this will be the right decision for you. If you are still trying to decide whether or not to go through with the Reverse Mortgage the counseling may be beneficial to you because once you have all the information we provide during the counseling you will likely have an easier time deciding what to do. A well-informed decision is always the best decision.
When you are ready to schedule your counseling please contact us at
1-800-920-2262, or visit our website at: www.debthelper.com
How much money will I get with a Reverse Mortgage?
The factors that determine how much you will be able to get through a Reverse Mortgage are:
- Your age (the older you are, generally the more you are able to get)
- The appraised value of your home or FHA’s mortgage limit for you area, whichever is less
- The current interest rates
Clearly, the more your home is worth, and the lower the interest rates, as well as the older you are, the more you will be eligible to borrow. There are several calculators online that will let you estimate how much you will be eligible to borrow. If you do not have access to the internet, when you speak with a loan officer, they will also be able to estimate what you will be eligible to receive.
Reverse Mortgage Interest Rates
The HECM will allow you the option of choosing between a monthly adjustable, annually adjustable, or a fixed interest rate. Each these options has pros and cons that should be carefully considered before you make your final decision. Both monthly adjustable and annually adjustable rates are tied to the U.S. Treasury Security Rate (known as the T-rate) and fluctuate in accordance with whatever the T-rate is.
Annually Adjustable Rate: with this option your rate will go up or down once per year based on the amount that the T-rate has gone either up or down. There are limits however which state that your rate will never increase or decrease by more than 2 percentage points in one year and will not change by more than 5 points total during the life of your loan. These limits, known as “caps” are here to protect you in the case that the rates fluctuate by more than that during your loan.
Monthly Adjustable Rate: with a monthly-adjustable your interest rate will either increase or decrease every month based on the change of the T-rate that month. The only cap on the monthly-adjustable rate option though is that it cannot change your original interest rate by more than 10 percentage points throughout the life of your loan.
Fixed Interest Rate: Fixed rates are set by the lender and typically require the borrower to withdraw all proceeds at closing.
- At any given point the interest rates for the annual-adjustable rate is always going to be one and six-tenths percentage points greater than the monthly-adjustable rate. For example, on January of 2005 the annual rate was 5.87% and the monthly rate was 4.27%, a difference of 1.6%.
- If you opt for the monthly-adjustable rate you will be able to receive more money from your loan, your rates will drop sooner than with an annually-adjustable rate, and as long as the T-rate does not change by more than 3.6% in one year your rates will be lower than those with an annually-adjusted rate.
- For example in January of 2005 a 75 year old borrower who owned a home in California that was worth $200,000 would be eligible to receive $102,100 from an annually-adjustable Reverse Mortgage compared to about $126,500 with a monthly-adjustable Reverse Mortgage. You have to carefully consider the value of this additional upfront cash though, because in the end going with a monthly-adjustable rate may end up costing quite a bit more due to the more frequent changes in the rate.
- The biggest advantage of the annually-adjustable rate is that it has tighter limits on the rate changes, as was explained earlier. With an annually-adjustable your rate will not change by more than 2% per year and not by more than 5% over the course of the loan.
- Also, with annually-adjustable rates your rate will not increase as soon if the T-rate goes up, as it would with a monthly-adjustable.
- According to the AARP, most Reverse Mortgage borrowers chose to go with the monthly-adjustable rate because they do not believe that the T-rate will increase by more than 3.6% in any one year and not by more than 6.6% over the life of their loan. You have to look at the recent history of these rates and think about whether or not this is likely. Most people like the idea of the monthly-adjustable because they can get the most money and potentially have the lower rate, so long as the T-rate does not go beyond those number previously stated.
- Some people take comfort in the caps and chose to go with the annually-adjustable rate because they are not in dire need for the additional funds they would receive and are worried that the rates could fluctuate a good deal and end up costing them more. Without the protection of the caps they feel that the loan will cost more in the end, thereby leaving their heirs with less equity when the loan is over.
- Fixed rates can be costly if the borrower does not need to use all of the proceeds right away.
- Discuss these options with your involved family members and/or friends who are helping you with your decisions in regards to the reverse mortgage. You may also speak with your loan officer or counselor about the rates and the recent trends and their opinion on the matter, in the end though the decision will, of course be up to you and what you will feel the most comfortable with.
Impact on Heirs
You also need to think about the impact of a reverse mortgage on your heirs. A loan with “rising debt and falling equity” means there will be less equity left for your heirs. If you get a lot of cash over many years from the loan, there may be little if any equity left for them.
If your heirs decide to keep the home then they will have up to one year to pay off the reverse mortgage balance in full. This often means that they must be able to qualify for a loan to repay the reverse mortgage or have other means to pay off the loan. Otherwise, they can sell the home and pay off the reverse mortgage with the proceeds from the sale and any equity left over would still go to your heirs.
When will the loan become due and need to be paid off?
One of the major advantages of a reverse mortgage is that you are not required to make monthly payments on it. The loan becomes due and payable if one of the following instances occurs.
- If you sell the home the Reverse Mortgage must be paid.
- If you are absent from the home for more than 12 consecutive months for health issues.
- If you transfer the title to someone else’s name (this includes gifting the home to family, friends, etc). If at any point the deed of the home changes to a name other than the original name (s) on the deed, it will be required that the Reverse Mortgage is paid off.)
- Or when the last survivor passes away.
When receiving the funds from your Reverse Mortgage loan you will have five options presented to you, they are as follows.
- Tenure: Equal monthly payments for as long as at least one of the borrowers is alive and continues to live in the home.
- Term: Equal monthly payments for a fixed amount of time, selected by the borrower.
- Line of Credit: Unscheduled payments or installments at any time and in any amount you decide until the line of credit is exhausted.
A line of credit is when you decide to keep your money in an account that you can access when you need to instead of, or in addition to receiving monthly payments from the proceeds of your Reverse Mortgage. If you place your funds into a credit line, based on interest, it will actually grow over time. The higher the balance of the credit line, the faster it will grow. The interest that compounds in your line of credit is the same percentage that is being charged on the loan plus one-half percentage point, divided by twelve. So, if your interest rate is 5.5% your credit line will grow by 0.5% (5.5% + 0.5% = 6% / 12 = 0.5%). This means that if your credit line at the beginning of the month has $80,000 in it, it would grow to $80,400 by the end of the month ($80,000 x 0.5% = $400). Clearly, a growing Reverse Mortgage credit line can end up giving you a lot more money than a credit line that does not grow. The credit line continues to grow for as long as you keep money in it. So, until you withdraw all of the funds from the credit line it will continue to grow interest.
Since this option is available to you it would clearly be unwise to take a lump sum of your proceeds to put into savings or investments because you would be charged interest on the full amount of the Reverse Mortgage lump sum that you take. Instead, consider the growing line of credit and allow your money to grow there. The rate at which the credit line is growing is likely to be greater than most savings accounts or safe investments anyhow so it should be looked at as a win-win.
- Modified Tenure: Monthly payments for as long as you remain in the home, as well as a line of credit.
- Modified Term: Monthly payments for a fixed period of time, as well as a line of credit.
If you chose to receive a lump sum, the amount will be direct deposited into your account. If you are not familiar with this method, it is an electronic transfer into your checking account. You will likely need to provide the lender with a voided check so that they may access your checking account to deposit the funds.
If you open a line of credit you will be given a set of coupons where you will be able to write in the amount you would like to receive from your credit line and then it will be transferred to your account via direct deposit (see above.) You will be able to take whatever amount you wish at closing, you will just need to let your loan officer know how much you want to get at that time and the remainder will go into your credit line and will be accessible to you via the coupons described above.
Impact on Taxes/Social Security/Other Benefits
Money borrowed through a Reverse Mortgage loan is not considered taxable income. Essentially, you are simply getting the money that you paid into your mortgage over the years back for a limited amount of time (until you cease to reside in the home) so it is not taxable income. Your regular social security and any other benefits such as Medicare should not be affected either.
Limitations on Using Funds
None! You will be free to use the proceeds you have borrowed in any manner you choose. Some people use it to pay off various bills, make improvements on their homes, pay tuition for a child or grandchild to attend college, travel, or in any other way you may wish to spend it. It is not recommended that you simply use the funds for investment purposes however.
The best thing to think about when deciding how to spend your equity is, the less you spend, the more you’ll have. This is simply because the less you spend right away the more you’ll have, either sitting in your line of credit, or just saving up for possible future expenses. If you spend all or most of the money right away you may be making things difficult for yourself later on in your life.
Cost of getting a Reverse Mortgage Loan
As with any other mortgage there are several various costs and fees associated with a reverse mortgage. These include a credit report fee, home inspection and appraisal fees (these are separate), a loan origination fee, mortgage insurance fee, monthly servicing fee, as well as other standard recording or closing costs. Most of these fees are able to be paid out at closing meaning they will come out of the total loan amount and not directly out of your pocket. Do keep in mind, that like any other loan, a reverse mortgage does accrue interest over time meaning that the amount owed will be slowly growing. Reverse Mortgage’s may have either fixed or variable rates most have a variable rate that is likely to change along with market conditions.
A ‘nonrecourse’ clause prevents the amount owed for the Reverse Mortgage to ever be higher than the value of the home at the time the loan is repaid. Something to be aware of is that you will be retaining the title and deed of your home which means you will be responsible for paying your property taxes and insurance, utilities, fuel and maintenance on the property. Here’s a list of the common fees so that you can get an idea of the real cost of a Reverse Mortgage loan.
Reverse Mortgage loan costs for a 75 year old borrower in a $250,000 home:
(For purposes of an example only, as the current rates are likely different)
|Loan Close: (Fees paid from proceeds)|
|Total Mortgage Insurance Premium Costs:||$7,933|
|Total Monthly Servicing Fees::||$5,040|
|Total Monthly Interest Charges:||$111,056|
|Total Loan Cose:||$136,029|
|Total Amount Owed:||$203,771|
Keep in mind when going over these fees that most of the fees that you have to pay prior to receiving funds from your Reverse Mortgage will be paid directly out of your proceeds at the closing. This means that more than likely at the closing table the lender will pay off any loans or mortgages you have against the home, the inspection fees, as well as the upfront costs for the loan, so no need to be concerned with these costs if there is enough equity in your home. This process does vary and sometimes you will be required to pay for some services upfront such as the property appraisal or counseling, but the upfront costs for the lender often come out of the proceeds of the loan at the closing.
Common misconceptions about Reverse Mortgages
- People seem to think that the lender will own their home if they take out a reverse mortgage, as stated above, this is not true. Your name(s) remains on the title and you are the owner of the home and responsible as such for maintaining property insurance, taxes, etc.
- The home must be debt-free to qualify for Reverse Mortgage – Not true; you may in fact have a mortgage or other debt out on your home. Any debts against the home however, must be paid off immediately with the proceeds of the Reverse Mortgage.
- Only those with excellent credit, income or health will qualify – This is also incorrect. There are not any requirements in regards to any one of those issues. The only requirements for a Reverse Mortgage loan are that the primary borrower be at least 62 years of age and that their primary residence is the home they are taking the loan out against.
- I will have to make monthly payments on the loan – As stated previously, the loan does not have to repaid at any point up until the borrower(s) cease to reside primarily in that home.
- Only desperate senior citizens can benefit from a reverse mortgage – It is true that some people are more in need of the income than others but this does not mean it could be just as beneficial to those looking to plan for their estate or use It for other purposes.
Information for Friends and Family
This information may be useful for a trusted friend or family member to go over to help you decide whether a reverse mortgage is the best option for you. If your friend or family member has asked you to go over this information with them it is because they are considering a reverse mortgage. A reverse mortgage can be highly beneficial to people in several circumstances however, it is a major financial decision that should be thought over carefully and with the advice of someone who is looking out for their best interest. Things to consider when you’re helping someone decide whether a reverse mortgage is the appropriate choice; Another option may be better for the following circumstances:
- If the borrower will only live in the house for a brief period of time.
- Reverse Mortgage is being considered as a temporary solution for major financial situations.
- If the borrower wants to provide cash to family members or friends who may not have regard to the future needs of the borrower.
A reverse mortgage may be the way to go in these situations:
- If the potential borrowers are seeking a way to get money without having to move or sell their home.
- If the borrowers are seeking financial independence and no longer want to rely on support from their friends or family.
- If the title of their home is threatened, a reverse mortgage enables them to retain the title of the home
Reverse Mortgage Facts
- The new nationwide lending limit is $625,000 meaning regardless of the home’s value, if the value is more than $625,000, they will base how much equity you can access from that amount. If the home is worth less than the new limit, they will base their information on that value, so a $200,000 home will be the base point for all fees and available equity access.
- The origination fee is 2% of the home’s property appraised value or HUD’s loan limit whichever is less. There have been set some guidelines. The lender can charge 2% of the first $200,000 and then 1% of the remaining amount up to a cap of $6000 total. A $500,000 home will incur an origination fee of $6000 because the first $200,000 at 2% equals $4000 and the remaining $300,000 at 1% will be $3000, but because the fee is capped at $6000, the remaining $300,000 at 1% will be just $2000. If the home is appraises less than $125,000, the lender is allowed to charge up to $2,500 for the origination fee.
- HUD MIP or the Mortgage Insurance Premium is capped at 2% of the lesser of the National Lending Limit or the home value. The 2% fee is set, nothing more, nothing less and it is required on every reverse mortgage loan and this fee, almost all by itself, keeps the reverse mortgage program going. A $200,000 home would have an MIP fee at $4000 or 2% of $200,000. There is also a 1.25% additional MIP interest rate added to the Initial Rate (see below) each month that also contributes to the security of the loan. The reverse mortgage program through HUD is not taxpayer funded, it is user funded. Now, of course there are taxpayer components, the borrower is a taxpayer and HUD is funded by taxpayer money but the insurance components are covered by the MIP and up to this point in time, 98% of all reverse mortgages have NOT needed to use any of the MIP funds to protect the homeowners. With more than 107,000 reverse mortgages originated last year alone, that puts more than $375 million into the mortgage insurance fund to protect the homeowner in a reverse mortgage (using an average of $175,000 home value).
- The rate that is used to determine how much equity they will let you have access to is called the Expected Rate and its based on 1 of 2 indexes, either the 10 Year Treasury yield (CMT) or the 10 Year Swap which is a LIBOR term. The Expected Rate is the index plus a lenders margin which can vary from 1.50 to 2.25 on the CMT or 1.25 to 1.75 on the LIBOR. The higher the Expected Rate, the less equity you have access to and conversely, the lower the Expected Rate, the more equity you would have access to. There is a floor level of 5.5% for the Expected Rate and even if the index and margin are below floor level, 5.5% will be the number used to determine equity access.
- The rate at which interest accrues on any money used by the reverse mortgage is based on 1 of 2 indexes, either the 1 Year Treasury Yield (CMT) or the 1 month LIBOR. This rate is oddly called the Initial Rate and you add the same margin you used for the Expected Rate to calculate the Initial Rate and this is only for monthly adjusting reverse mortgages. The reason it’s odd that it’s called the Initial Rate is because it is used every month for the life of the loan to calculate how much interest accrues on the loan balance. Maybe they should call it the Ongoing Rate. There is no floor for this since the 1 Year CMT could go to zero or it could go much higher. The cap on the Initial Rate is 10 points more than when it starts. An initial rate of 3.5% would have a cap of 13.5% which means that if the 1 Year CMT increased to 15%, the borrower would only incur interest at 13.5%.
- There is a fixed rate and annual rate reverse mortgage. No one uses the annual rate but some are starting to look at the fixed rates since they just came down to 5.81% and are providing equity access yields close to monthly adjustables. The downside to the fixed rate reverse mortgage is they require the borrower to take the entire amount in a lump sum instead of other options and that would result in your entire amount accumulating interest from day one of the loan process. This would be more likely to eat up any remaining equity for your heirs or estate and it doesn’t have a way to create credit line growth like the monthly would.
- All HUD reverse mortgages require the borrower undergo independent housing counseling either over the phone or in person from a qualified and recognized HUD counseling agency. The borrower pays for that counseling up front or can request it be paid at closing using the borrower’s equity to pay that fee and this is capped at $125.00.
- Only FHA approved loan officers and organizations can originate reverse mortgages. Non-FHA approved organizations cannot get involved with them.
- Only FHA approved appraisers can be used to appraise homes in this transaction.