Last time, we blogged about looking at things upside down. This time we’ll do a complete about-face and take the REVERSE view – reverse mortgages, that is.
If you own a TV, you’ve probably seen the commercials where former acting superstars or politicians tout the advantages of reverse mortgages. True, there are some! But there are also some things you need to know in advance.
If you passed the age of the “New 40” two or more years ago – meaning you are at least 62 years old -- and want or need cash to pay off your mortgage, buy toys, pay for health care, etc., you may want to consider a reverse mortgage. In short, this will allow you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. Woo hoo! This is kind of like pay-back for having been a solid citizen all those years, right? Well, sort of ... Just remember, you must be a primary resident of the home to qualify for a reverse mortgage, meaning you live there 183 days or more per year. Before you ask, Reverse Mortgages are available for single family homes or 2-4 unit homes where one unit is occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
If you are a never-be-prepared, fly-with-the-wind kind of person you can stop reading now and consult a Certified Reverse Mortgage Professional or at least one who has loads of experience closing these loans. But first, you’re probably wondering what kinds of reverse mortgages there are and how they work? Glad you asked.
How They Work
When you have a standard, typical mortgage, you pay the lender every month and this essentially allows you to own your home over time. In a reverse mortgage, you get a loan in which the lender pays you. What??? It’s true. Reverse mortgages take some of the equity in your home and convert that into payments to you. And, the money you get usually can be tax-free! (Time for another WHAT??) Here’s more – receipt of funds from a reverse mortgage usually don’t affect your Social Security or Medicare benefits! But note that while no monthly mortgage payments are required with a reverse mortgage, the homeowner is still responsible for property taxes, utilities, fuel, insurance, and maintenance. In addition, interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.
If you don’t pay your property taxes, keep homeowner’s insurance, or maintain your home, the lender might require you to repay your loan. So a financial assessment is required when you apply for the mortgage. As a result, your lender may require a “set-aside” amount to pay your taxes and insurance during the loan. The “set-aside” reduces the amount of funds you can get in payments. So you basically can’t “take the money and run” unless, of course, you have staff paying your bills and maintaining your property (in which case you probably wouldn’t need a reverse mortgage.)
When the last surviving borrower passes on to no-mortgages-ever-again land, sells the home, or no longer lives in the home as a primary residence, the loan has to be repaid. (In some cases, a non-borrowing spouse may be able to remain in the home.) This, of course, can mean selling the home to get money to repay the loan. Since most lawsuits surrounding reverse mortgages are rumored to be initiated by the “heirs”, please pay attention.
Reverse mortgages can use up the equity in your home, which means in terms of your home that you may have MUCH less – or nothing? – for your heirs to inherit. Most reverse mortgages have something called a “non-recourse” clause. This means that neither you nor your estate can owe more than the value of your home when the loan becomes due and the home is sold. If you chose a HECM loan – details coming soon -- and if you or your heirs want to pay off the loan and keep the home rather than sell it, you would not have to pay more than the appraised value of the home.
As you get money via your reverse mortgage, interest is added onto the balance each month. That means the amount you owe grows as the interest on your loan adds up over time.
Most reverse mortgages have variable rates, which are tied to a financial index and change with the market. Variable rate loans tend to give you more options on how you get your money. Some reverse mortgages – mostly HECMs – offer fixed rates, but they may require you to take your loan as a lump sum at closing. Often, the total amount you can borrow is less than you can get with a variable rate loan.
The Process
So how does this all work? Here, in very brief, are the steps involved in obtaining a reverse mortgage:
-Investigation, education, and decision-making (you can count reading this as a teensy part of education!)
-Counseling (not marriage or gambling addiction counseling but one specific to reverse mortgages)
-Application completion and fee payment
-Loan processing and underwriting
Let’s go through some of these steps a bit more in depth.
Types of Reverse Loans
There are three kinds of reverse mortgages: single purpose reverse mortgages; proprietary reverse mortgages; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs – yes – Heck-Em!).
Single-purpose reverse mortgages are the least costly option. Some state and local government agencies, as well as non-profit organizations offer them, but they’re not available everywhere. These loans may be used for only one purpose, which the lender determines. For example, you may be told the loan can only be used for home repairs, improvements, or property taxes. Typically, homeowners with low or moderate income qualify for these loans, where offered.
Proprietary reverse mortgages are private loans that are backed by certain companies. If you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. If your home has a higher appraised value and you have a small mortgage, you might qualify for more funds.
Home Equity Conversion Mortgages (HECMs) are federally-insured reverse mortgages and are backed by the U. S. Department of Housing and Urban Development (HUD). HECM loans can be used for any purpose. There is even a “HECM for Purchase” that may allow a homeowner to downsize or move closer to friends or family and still receive money each month.
To make matters even more complex yet enjoyable (?), The HECM lets you choose among several payment options:
-The single disbursement option – this is only available with a fixed rate loan, and typically offers less money than other HECM options.
-The “term” option – fixed monthly cash advances for a specific time.
-The “tenure” option – fixed monthly cash advances for as long as you live in your home.
-The line of credit – this lets you take part of the loan proceeds at any time, in amounts you choose, until you have used up the entire line of credit. This naturally limits the amount of interest imposed on your loan, because you owe interest on the credit that you are using.
-A combination of monthly payments and a line of credit.
And you may be able to change your payment option for a small fee.
$$ Details
With HECMs, there is a limit on how much you can take out the first year. Your lender will calculate how much you can borrow, based on your age, the interest rate, the value of your home, and your financial assessment. This amount is called your “initial principal limit” or IPL (ipple?)
In most cases, you can take out up to 60 percent of your initial principal limit in the first year. There are exceptions, though.
HECMs and proprietary reverse mortgages may yield higher upfront costs. Be sure to understand those, especially if you plan to stay in your home for just a short time or borrow a low amount. How much you can borrow with a HECM or proprietary reverse mortgage depends on several fabulous factors:
-Your DOB (age)
-The type of reverse mortgage you choose
-The appraised value of your home
-The current interest rates
-A financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance
In general, the less you owe on your home, the more money you can get. You’ll learn more about all of this from your Counselor, who is required to explain the loan’s financial aspects. The Department of Housing and Urban Development (HUD) tells us, “The counselor also must explain the possible alternatives to a HECM – like government and non-profit programs, or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. You can visit HUD for a list of counselors, or call the agency at 1-800-569-4287. Counseling agencies usually charge a fee for their services, often from approximately $125 to $250. This fee can be paid from the loan proceeds, and you cannot be turned away if you can’t afford the fee.” There is a link at the bottom of this which explains what to expect from counselling.*
There are additional fees and other costs. Reverse mortgage lenders generally charge an origination fee and other closing costs, as well as servicing fees over the life of the mortgage. Some also charge mortgage insurance premiums (for federally-insured HECMs). The maximum origination fee allowed is 2% of the initial $200,000 of the home's value and 1% of the remaining value, with a cap of $6,000.
The Mortgage Insurance Premium (MIP) is another fee paid by the borrower to the Federal Housing Administration (FHA), to protect the lender and the borrower in a HECM. Be sure to ask about this amount and understand how amount you take out year 1 effects MIP.
Be ESPECIALLY sure to shop around. Compare the costs of the loans for which you qualify. While the mortgage insurance premium is usually the same everywhere, the other loan costs – including origination fees, interest rates, closing costs, and servicing fees – vary among lenders. Come on, after at least 62 years of good living, you deserve to be a pushy, nosy nudge!
You are charged MIP annually. But, this fee is not from your loan proceeds. Instead, it accrues over time and you pay it once the loan is called due and payable. The annual premium is equal to 1.25% of the outstanding loan balance.
An appraiser is responsible for assigning a current market value to your home and for ensuring there are no significant defects. Appraisal fees vary by region, type and value of home, but average $450. And this fee is generally paid in cash, often before the loan is made, and not with the loan proceeds.
Other closing costs that are commonly charged to a reverse mortgage borrower include:
-Credit report fee ~ $20 to $50;
-Flood certification fee ~ $20;
-Escrow, settlement or closing fee ~ $150 to $800 depending on your location;
-Document preparation fee ~ $75 to $150;
Recording fee ~ $50 to $500 depending on your location;
-Courier fee ~ $50;
-Title insurance ~ varies by size of the loan;
-Pest Inspection ~ $100;
-Survey ~ $250
You may also have to pay a monthly servicing fee, deductible from your loan proceeds. These are normally no higher than $35/month. If your lender determined you needed a “set-aside” fee to ensure payments of taxes, insurance etc., this will need to be included in your education/investigation as well.
(Note #1: Costs can and will change over time; consult your Mortgage Loan Officer. Also, some bratty states may have fees that are not included here. Note #2: No fees may be incurred by you or on your behalf, with the exception of the charge for a credit report, prior to completion of mandatory counseling.)
With most reverse mortgages (except HECM for Purchase), you have at least three business days after closing to cancel the transaction for any reason, without penalty. This is known as your right of “rescission.” Be sure to get the process for this from your lender.
And, as mentioned earlier, be 100% certain you and the family members you care about are crystal clear on how a Reverse Mortgage effects your “estate”.
My dad used to hate technology, but now he gives lectures on his idea of a bike with a reverse gear. Talk about back pedaling!
For more information but less enjoyable reading, see:
http://www.reversemortgage.org/
http://reversemortgageguides.org
http://www.consumer.ftc.gov/articles/0192-reverse-mortgages
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten
*http://services.nrmlaonline.org/NRMLA_Documents/Preparing_For_Your_Counseling_Session.pdf
