A reverse mortgage is a
special type of home loan that lets a homeowner convert a
portion of the equity in his or her home into cash. The equity
built up over years of home mortgage payments can be paid
to you. But unlike a traditional home equity loan or second
mortgage, no repayment is required until the borrower(s) no
longer use the home as their principal residence. More and
more extremely reputable lenders are now offering their own
proprietary loans as well.
Reverse mortgages are becoming more and more popular every
day. Last year, the number of reverse mortgages increased
by 80%. They can give older Americans greater financial security
to supplement social security, meet unexpected medical expenses,
make home improvements, and can help maintain financial independence.
Can I qualify for a HUD Reverse Mortgage?
To be eligible for a HUD
reverse mortgage, HUD's Federal Housing Administration (FHA)
requires that the borrower is a homeowner, the youngest spouse
must be 62 years of age or older; own your home outright,
or have a low mortgage balance that can be paid off at the
closing with proceeds from the reverse loan; and must live
in the home. You are further required to receive consumer
information from HUD-approved counseling sources prior to
obtaining the loan. The proprietary reverse mortgage loans
generally have identical qualifications and also include counseling
requirements for your protection. You can contact the Housing
Counseling Clearinghouse on 1-800-569-4287 to obtain the name
and telephone number of a HUD-approved counseling agency and
a list of FHA approved lenders within your area. If you prefer,
we can provide several approved counselors for you to consider.
Eligible property types
include single-family homes, 2-4 unit properties where you
live in one of the units, condominiums, and townhouses. In
general, co-ops are not allowed. Just recently proprietary
lenders have established programs that permit reverse mortgages
on second homes.
What’s the difference between a Reverse Mortgage and
a bank Home Equity Loan?
With a traditional second
mortgage, or a home equity line of credit, you must have sufficient
income versus debt ratio to qualify for the loan, and you
are required to make monthly mortgage payments. The reverse
mortgage is different in that it pays you, and is available
regardless of your current income. The amount you can borrow,
depends on your age, the current interest rate, and the appraised
value of your home or FHA's mortgage limits for your area,
whichever is less. Generally, the more valuable your home
is, the older you are, and the lower the interest rate, the
more you can borrow. You don't make payments, because the
loan is not due as long as the house is your principal residence.
Like all homeowners, you still are required to pay your real
estate taxes and other conventional payments like utilities,
but with an FHA-insured HUD Reverse Mortgage, you cannot be
foreclosed or forced to vacate your house because you "missed
your mortgage payment." Private lenders have introduced
many more choices for Reverse Mortgages in addition to the
traditional FHA mortgage. New programs include loans with
no limits called “jumbo” reverse mortgages, and
reverse mortgages on second homes.
Can the lender take my home away if I outlive the loan?
No! The lender can’t
take your home even if you outlive your “life expectancy”.
You do not need to repay the loan as long as you or one of
the borrowers continues to live in the house and keeps the
taxes and insurance current. You can never owe more than your
home's value. If your home’s value goes down, the lender
takes the loss. Your heirs or estate can never be responsible
for amounts that exceed your home’s value. This is called
a Non-recourse loan.
Will I still have an estate that I can leave to my heirs?
When you sell your home
or no longer use it for your primary residence, you or your
estate will repay the cash you received from the reverse mortgage,
plus interest and other fees, to the lender. The remaining
equity in your home, if any, belongs to you or to your heirs.
None of your other assets will be affected by a reverse mortgage
loan of any type. This debt will never be passed along to
the estate or heirs. If you wish to ensure a certain amount
that you will leave your heirs, you may want to investigate
using some of your proceeds for a life insurance policy.
What About the Proprietary
or “Jumbo” Reverse Mortgage ? We offer several "jumbo" proprietary
reverse mortgage products that have traditionally benefited
homeowners living in higher-priced homes valued above the
FHA and Fannie Mae lending limits. There is a growing number
of these programs available. This type of loan works well
for many situations.
Many of these programs compare
favorably with the federally insured Home Equity Conversion
Mortgage by enabling homeowners living in properties valued
over $450,000 to access greater amounts of equity.
All proprietary reverse mortgage
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. It should be noted
that currently “jumbo” loans require the borrower
to either take a credit line for the eligible amount or receive
the full amount in a lump sum.
In the near future, many
more types of proprietary loans will be available due to the
tremendous growth and popularity of reverse mortgages and
the resulting competition among lenders. It is anticipated
that they will be available for homes falling in the FHA price
range, ie under the $362,700 maximum, and will be less expensive
than FHA loans in that the 2% insurance premium will not be
necessary. Be sure to ask us about any new proprietary loans
that have become available.
How much money can I get from my home?
The amount of money you
can borrow with a HECM or proprietary reverse mortgage depends
on several factors, including your age, the type of reverse
mortgage you select, the appraised value of your home, current
interest rates, and where you live. In general, the older
you are, the more valuable your home, and the less you owe
on it, the more money you can get. To get an idea of what
you qualify for on a monthly basis, we recommend you use the
Calculator link on the left side of the home page, or you
may contact us at any time. You should also be aware that
there is often a difference between the initial interest rate
of the loan and the anticipated interest rate. The anticipated
interest rate is utilized by the lender to determine the amount
you may borrow. The initial interest rate, however, is applied
to the initial amount borrowed, and unless the loan has a
fixed rate, will be adjusted from time to time, according
to the terms of the loan.
How do I receive my payments?
You have several options:
Equal monthly payments as long as at least one borrower
lives and continues to occupy the property as a principal
residence.
A Line of Credit - unscheduled payments or in installments,
at times and in amounts of borrower's choosing until the
line of credit is exhausted. Depending on the terms of
your loan, the unused line of credit available will increase
about 4% annually.
A combination of line of credit with monthly payments
for as long as the borrower remains in the home.
A lump sum payment for the entire amount.
A combination of monthly payments, credit line, and
lump sum.
Currently, jumbo loans are only offered in a
Line of Credit similar to a standard equity loan or in a lump
sum. In every case, however, you have no monthly payments.
You should be aware that the lenders are assessed a penalty
if they do not pay you within 5 days of your request.
What are the different types of Reverse Mortgages?
The three basic types of
reverse mortgage are; federally-insured reverse mortgages,
which are known as Home Equity Conversion Mortgages (HECMs)
and are backed by the U. S. Department of Housing and Urban
Development (HUD); The Home Keeper which is sponsored by Fannie
Mae, and proprietary reverse mortgages, which are private
loans that are backed by the companies that develop them.
HECMs and proprietary reverse mortgages tend to be more costly
than other home loans. The up-front costs can be high, so
they are generally most expensive if you stay in your home
for just a short time. They are widely available, have no
income or medical requirements, and can be used for any purpose.
HECMs generally provide larger loan advances at a lower total
cost compared with proprietary loans. But owners of higher-valued
homes may get bigger loan advances from a proprietary reverse
mortgage. That is, if you have a higher appraised value without
a large mortgage, then you may likely qualify for greater
funds. Location (for example, your neighborhood) is only one
part of the determination of appraised value. More and more
proprietary reverse mortgages are being introduced into the
market all the time. It is likely that competition will result
in better terms for the borrowers.
The Home Equity Conversion
Mortgage (HECM) is the oldest and most popular reverse mortgage
product, accounting for 90-plus percent of the total market.
They have been available since 1989.
The amount of available proceeds you can
qualify for under the HECM program depends on 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 funds you qualify for.
Another factor is your home's location. The
size of a HECM depends on the maximum loan limit, which varies
by county. Currently (for 2006), the FHA loan limits vary
from $200,160 (used predominantly in rural areas) to $362,790
(used in urban areas).
Normally, the size of a HECM depends on the
appraised value of your home. But if your home's value 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
$600,000, but the county lending limit is $362,790 (current
maximum limit), then the loan amount will be based on $362,790.
As part of the upfront closing costs, you
pay a mortgage insurance premium (MIP), equal to 2 percent
of the maximum claim amount (the value of the home or FHA
county lending limit, whichever number is less), plus an annual
premium thereafter equal to 0.5 percent of the loan amount.
As an example, if you own a home worth $275,000 in a county
where the lending limit is $225,000, then the upfront MIP
will equal $4,500 ($225,000 multiplied by 0.02).
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.
With the HECM program, HUD limits the fee that a lender can
earn to 2 percent of the maximum claim amount (again, this
number is equal to the value of the home or FHA county lending
limit, whichever is less). Depending on where you live, the
lender will earn anywhere from $4,003 to $7,256, which is
comparable (perhaps even less) to what you would pay a lender
to purchase a home in today's market.
One last comment. The ongoing interest rate that you pay on
a HECM is the same no matter which lender you choose. That's
because the rate is based on the 1-year U.S. Treasury bond,
plus a margin. The interest rate is a variable rate that can
change either monthly or annually, based on your decision.
A majority of people choose the monthly adjusting option because
you get more money, but it's important that you seek advice
from your lender as well.
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.
Fannie Mae is not a lender. With Fannie Mae's permission,
lenders can offer the Home Keeper product to consumers, like
yourself.
The Home Keeper is available in every state to homeowners
62 years of age and older. Eligible property 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 interest rate charged on a Home Keeper reverse 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.
One interesting feature of the Home Keeper is that you can
use the program to purchase a new home – all in a single
transaction. The transaction reduces the out-of-pocket cash
needed to buy a new home, eliminates any new monthly mortgage
payment, and helps you keep more of the sales proceeds from
the old house – or a larger amount of savings –
to use for other purposes.
More About the Proprietary or “Jumbo” Reverse Mortgage
We offer several "jumbo"
proprietary reverse mortgage products that have traditionally
benefited homeowners living in higher-priced homes valued
above the FHA and Fannie Mae lending limits. There is a growing
number of these programs available. This type of loan works
well for many situations.
Many of these programs compare favorably with the federally
insured Home Equity Conversion Mortgage by enabling homeowners
living in properties valued between $450,000 and $750,000
to access greater amounts of equity.
All proprietary reverse mortgage 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. It should be noted that currently “jumbo”
loans require the borrower to either take a credit line for
the eligible amount or receive the full amount in a lump sum.
In the near future, many more types of proprietary loans will
be available due to the tremendous growth and popularity of
reverse mortgages and the resulting competition among lenders.
It is anticipated that they will be available for homes falling
in the FHA price range, ie under the $362,700 maximum, and
will be less expensive than FHA loans in that the 2% insurance
premium will not be necessary. Be sure to ask us about any
new proprietary loans that have become available.
Will a Reverse Mortgage Affect my Benefits?
A reverse mortgage does
not affect your Social Security, Medicare, or pension benefits.
However, “need based” public benefits such as
SSDI and Medicaid can be a different story. It is generally
possible to structure the loan in a way that your benefits
remain intact. It is an important question to ask your loan
originator. In addition, before the loan is issued, you will
meet briefly with an unbiased, government approved counselor.
It is also wise to consult an elder law attorney with these
questions. The appropriate government agencies can also be
helpful.
Before getting a reverse
mortgage, you will first have to meet with an independent
reverse mortgage counselor at no cost to you. Your counselor
will answer any questions you have, inform you about other
alternative options for your unique situation, and help you
decide if you even need a reverse mortgage, and if so, which
type would be the best fit for you and your needs.
You may also choose to contact the following organizations: U.S. Department of Housing and Urban
Development (HUD): toll free
(888) 466-3487.
Federal Trade Commission (FTC): write to obtain a free
brochure, "Reverse Mortgages Fast
Facts." Consumer Response Center, FTC
600 Pennsylvania Ave. N.W.
Washington, DC 20580
Or call, (202) FTC-HELP
American Association of Retired Persons (AARP): write
to obtain a free guide on Reverse Mortgage borrowing: Home Made Money
AARP Home Equity Information Center,
601 E. Street N.W.
Washington, DC 20049 Fannie Mae: Call (800) 732-6643 for a free guide, "Money
from Home: A Consumers Guide to Reverse Mortgage Options."
Reverse mortgage loan advances
are not taxable, and do not affect Social Security or Medicare
benefits. You retain the title to your home and do not have
to make monthly repayments. The loan must be repaid when the
last surviving borrower dies, sells the home, or no longer
lives in the home as a principal residence. In the HECM program,
a borrower can live in a nursing home or other medical facility
for up to 12 months before the loan becomes due and payable.
As you consider a reverse mortgage, be aware that Lenders
generally charge origination fees and other closing costs
for a reverse mortgage. Lenders also may charge servicing
fees during the term of the mortgage. If you are interested
in a federally-insured HECM, know that all HECM lenders must
follow HUD rules, and that many of the loan costs including
the interest rate will be the same no matter which lender
you select. Still, some costs including the origination fee,
other closing costs, and servicing fees may vary among lenders.
The amount you owe on a reverse mortgage generally grows over
time. Interest is charged on the outstanding balance and added
to the amount you owe each month. That means your total debt
increases over time as loan funds are advanced to you and
interest accrues on the loan.
What are the Interest Rates on Reverse Mortgages?
Reverse mortgages may have
fixed or variable rates. Most have variable rates that are
tied to a financial index and will likely change according
to market conditions.
When a HECM loan is paid to the borrower in a monthly fixed
amount, the interest rate is adjustable monthly. The initial
interest rate is based on the one year Treasury Bill + a 1%
margin (recently reduced from 1.5%), with a loan lifetime
cap of 10%. If the loan adjusts annually, the initial interest
rate is the weekly average of the 1 year Treasury Bill + a
3.10% margin. There is a 2% annual cap, and a 5% lifetime
cap.
Since the interest rates of Reverse Mortgages are based on
the relatively stable Treasury Bill, the average interest
rate in last 25 years under either formulation is about 7%.
Because there are no payments,
you can’t lose your home if you pay the taxes and insurance,
and maintain your home. A “nonrecourse” clause,
found in most reverse mortgages, prevents either you or your
estate from owing more than the value of your home when the
loan is repaid.
Is the Interest on reverse mortgages Tax Deductible?
Interest on reverse mortgages
is not deductible on income tax returns until the loan is
paid off in part or completely.
What are the 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 $200,160 (for rural areas)
to a high of $362,790 (for high-cost metropolitan areas).
Therefore, the 2 percent origination fee generally ranges
between $4,003 (2 percent of $200,160) and $7,256 (2 percent
of $362,790).
With proprietary loans, 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.
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
Service
Fee Set-Aside
The service fee set-aside is an amount of money deducted from
the available loan proceeds 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.
All of the closing costs, with the exception of the appraisal,
can be paid from your loan proceeds.
My house is not paid off yet - can I still get a reverse mortgage?
Absolutely - as long as
your equity is greater than the amount you still owe. You
can either pay off the old debt before you get a reverse mortgage,
or you can use the initial proceeds from the reverse mortgage
to pay the debt.
If I get a reverse mortgage - does the bank own my home?
Absolutely
not. With a reverse mortgage - you still own your home.
Of course, that means you must continue to pay your property
taxes, make necessary repairs to the home, and keep home-owner's
insurance.
Will my children be responsible for repayment of the reverse
mortgage?
No. A reverse mortgage is
what is called a non-recourse loan. This means the bank can
never come after any person or estate for repayment of the
loan. The bank can only use the value of the home as repayment.
Your children may, however, either sell your home or take
out a new mortgage, after you leave your home, in order to
receive the equity still in the home. Most Reverse Loans typically
allow your heirs six months to a year to pay off the Reverse
Mortgage through a sale or re-mortgage.
Are there any restrictions I should be aware of?
During your loan period, there may be restrictions
for:
Are there any restrictions on how I use my reverse
loan proceeds?
There are no restrictions
on how your proceeds are used. Medical care, property taxes,
condominium assessments, home repairs, help with a grandchild’s
college costs, or just to improve your quality of life are
just some of the ways you may use your money.
What if I change my mind?
Relax - even after you close your reverse mortgage,
you still have a chance to reconsider. Should you decide for
any reason that you no longer want the loan, you have three
days to cancel.
Isn't it selfish to get
a reverse mortgage rather than leave my home
equity to my children?
Some potential reverse mortgage
candidates are concerned they will have less home equity to
leave their heirs – until they actually speak with their
heirs. Many adult children want to see their parents living
comfortably and enjoying their retirement rather than struggling
just to leave something behind when they die. Besides, a reverse
mortgage can actually grant seniors the freedom to help their
children and grandchildren with expenses while they are still
alive and to see them enjoy it. And don't forget: your heirs
will still receive the remaining equity after the loan is
repaid. Some people even use some of their Reverse Mortgage
proceeds to purchase a life insurance policy to insure that
their heirs will receive a fixed amount in addition to the
remaining home equity.
Can I sell my home and use a reverse mortgage
to purchase a new home?
One interesting feature
of the some newer reverse mortgages that are available is
that you can use the program to purchase a new home –
all in a single transaction. The transaction reduces the out-of-pocket
cash needed to buy a new home, eliminates any new monthly
mortgage payment, and helps you keep more of the sales proceeds
from the old house – or a larger amount of savings –
to use for other purposes.
For example, let’s say a 75-year-old woman sells her
home in Pennsylvania for a $100,000 profit and wants to buy
a new home in Florida costing $150,000. To avoid a mortgage
payment on the new house, she would need to pay $50,000 in
cash. This means she would have to use the entire $100,000
from the sale of her first home, plus another $50,000 from
her savings. If she doesn’t have the $50,000, 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 qualify for about a $100,000
reverse mortgage, purchase the new home outright, or nearly
so, using money from the reverse mortgage, plus the $50,000
of the profit on her Pennsylvania home. She would be in her
new home with no monthly payments and approximately $50,000
in her savings account.
This type of reverse mortgage might be used, for instance,
by older homeowners, who want to sell their old home and move
closer to their children, to a warmer climate, or move into
a home that provides greater accessibility or easier maintenance.
Aren’t reverse mortgages much more costly than other mortgages?
Not at all. The truth is
that closing costs average only about 1% more than that of
a regular FHA mortgage on the same property. If you compared
the reverse mortgage to many other conventional mortgages,
the reverse mortgage could actually be lower in cost due to
the fact that conventional mortgages can charge more than
the 2% origination fee allowed on all reverse mortgages.
The cost of a reverse mortgage compares to the average cost
of selling your home. When you consider the cost of then purchasing
a new home, it’s not even comparable.
Additionally, if a reverse mortgage allows you to stay in
your home with no monthly payments for even five years, instead
of going into an assisted living facility or nursing home,
it more than pays for itself.
