Understanding Reverse Mortgages

By: Hilary Gibson, Staff Writer

 

There’s a relatively new way for seniors to get needed cash flow from their homes and it’s been around for at least 10 years … a “reverse” mortgage. While this type of loan can turn the value of your home into instant cash, like any type of important financial consideration, it needs to be fully understood before any informed decision can be made. All reverse mortgages, whether it is the government-insured Home Equity Conversion Mortgage (HECM) or a proprietary product, share a set of common characteristics, which include the following:

  • You must be at least 62 years old and own a home.

  • You always retain title (ownership) to the home. The lender never, at any point, owns the home, even after you (or last surviving spouse) permanently vacate the property.

  • You must still pay property taxes and insurance and maintain the home.

  • Repayment of the loan occurs when you (or last surviving spouse) permanently vacate the home. You or your heirs (estate) then must facilitate the payback of the loan by using either private funds or selling the home. After the loan is repaid, whatever assets remain go
    to you or the estate.

  • The amount of funds you are eligible to receive depends on your age (or age of the youngest borrower in the case of couples), the value of the home, the interest rate and the up front costs. With the HECM product, the county lending limit is a factor. With all products, the older you are, the more proceeds you are eligible to receive.

  • Loan fees can be financed, or paid out of the available loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage.

  • The loan balance (amount owed) grows each time you access funds from your line of credit or receive a monthly payment. In addition, the lender is charging you interest on the outstanding loan balance as well as a monthly servicing fee.

Barton Johnson, the president of Financial Freedom Senior Funding Corporation, simplifies the reverse mortgage and the financial queries that come with it by stating, “Since there are no payments due on a reverse mortgage loan until borrower(s) permanently leave their house, there is no financial qualification or credit underwrite required to obtain one.”

Simply put, reverse mortgages give you a way to receive money from your home without having to sell your home or make monthly payments. The reverse loan is made against your home, yet you don’t have to pay it back as long as you’re living in the home. The money to which you are entitled can be paid all at once, as monthly cash advances, or at times and amounts that you choose. The home must be considered the “primary” and/or “principal” place of residence. Single-family, one-unit dwellings are eligible, as well as some 2-4 units and owner-occupied dwellings. Condominiums, planned unit developments, and manufactured homes are also eligible, depending upon the circumstances. Co-ops and mobile homes are usually not eligible.

John E. Neumeier, CSA and Executive Vice President of the Generation Mortgage Company, wants seniors and their families to understand that “The reverse mortgage company never takes the home and you can never owe more than the home is worth and, even better news, you do not need to qualify financially. The proceeds from a reverse mortgage can be used for anything such as supplementing your monthly living expenses, home healthcare expenses and prescriptions, home remodeling or simply retaining the proceeds as a line of credit for peace of mind.”

What are the Costs ?

Origination Fee: The origination fee covers a lender’s operating expenses, including office overhead, marketing costs, etc., for making the reverse mortgage.

Mortgage Insurance Premium: Under the HECM program, borrowers are charged a mortgage insurance premium (MIP). 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. 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.

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

The Role of NRMLA

Founded in 1997, the National Reverse Mortgage Lenders Association (NRMLA) is a nonprofit trade association set up as a central forum of accountability regarding lenders and their practices regarding reverse mortgages. As the national voice for lenders and investors engaged in the reverse mortgage business, NRMLA fulfills several roles, including educating consumers about the opportunity to utilize reverse mortgages, training lenders to be sensitive to the needs of older Americans, developing Best Practices and creating and enforcing a code of conduct, making sure that lenders participating in the program treat seniors respectfully and promote reverse mortgages in the media in the right kind of light.

Peter Bell, the president of NRMLA, said that the main goals of a reverse mortgage “are to keep seniors in their homes comfortably and securely while generating income that provides choices.” He’s very concerned about some of the misconceptions that surround the reverse mortgage program regarding the integrity and the inner workings of the program. Many people think that as a borrower, they get all the money up front; however, the lender then immediately and automatically will take the home. This is not the case with reverse mortgages since the title of the home always stays with the borrower. Mr. Bell also stated that the reverse mortgage, combined with Medicaid in certain states, can make homecare available and affordable for seniors, enabling them to stay out of nursing homes.

Consumer Safeguards

Broader understanding of these consumer protection features is the reason why there is now a wider acceptance of reverse mortgages. Although all reverse mortgage products available in the marketplace work similarly, the most popular program is the Home Equity Conversion Mortgage, or HECM, administered through the U.S. Department of Housing and Urban Development (HUD). Among HECM’s consumer safeguards are several important features:

Standard & Capped Interest Rates: The interest rate is the same no matter which lender a senior chooses. On HECM, interest rates are adjusted both monthly or annually (the borrower chooses) and are based on an index called the one-year U.S. Treasury Constant Maturity Rate published weekly by the Federal Reserve. Both the monthly and annually adjusted rates have lifetime caps. On other products, different indexes are used.
Limitation on Fees: Origination fees are limited by HUD regulations and may be financed as part of the reverse mortgage. This means a senior incurs very little out-of-pocket expense to get a reverse mortgage.
Advance Disclosure: The Total Annual Loan Cost, or “TALC” disclosure, required by the Federal Reserve Board is provided to the prospective mortgage borrower and displays the total transaction costs over the projected life of the loan. This way, a senior is made fully aware of the costs incurred in obtaining the reverse mortgage.
Independent Counseling: Before a reverse mortgage application can be processed, the prospective borrower must first meet with an independent counselor.
No maturity date: A reverse mortgage cannot become due during the homeowner’s lifetime.
No Prepayment Penalty: Although the loan is not due and payable until the senior permanently moves out of the home, it can be paid-off at any point prior with no additional fees or costs.
No Penalty for Canceling the Loan: After the loan closes, a senior has up to three days to cancel the transaction, the so-called “right of rescission,” for any reason whatsoever.
Asset Protection: The HECM is a “non-recourse” loan. This means that the amount due can never exceed what the home is worth. Title to the home always remains with the borrower.
No Shared Appreciation: No reverse mortgage product in the marketplace has “equity-sharing” or “shared appreciation” features. In some earlier reverse mortgage products, the senior could obtain more money in exchange for giving up a percentage of the future value of the home. Such products are no longer offered.

Making the Decision

It’s highly advisable that seniors considering a reverse mortgage should share this information with family members so the loan won’t be a “surprise” when dealing with inheritance issues. Joel Sanders, Marketing Director/Loan Officer with United Northern Mortgage Bankers, Ltd., also handles the reverse mortgage program for seniors at his firm. He, like Mr. Bell, wants not only seniors, but their family members to become educated consumers. Mr. Sanders’ shares the following:

  • Family members generally support a senior’s decision to seek a reverse mortgage, especially upon being educated on the facts. Specifically, that equity will remain to inherit since only a fraction is being tapped; accrued interest will likely be offset and home equity preserved since, over the long haul, the home will likely appreciate in value; and a reverse mortgage allows seniors to live independently without need for help from their children or
    risk of foreclosure.

Payment Options

Once you’ve decided what kind of reverse mortgage to go with, there are three payment options to choose from to receive your loan:

  • in a single, lump-sum of cash

  • as a regular, monthly loan advance

  • as a line of credit that allows you to decide how much money you will need and when and how you will access it, or a combination of all three.

There’s a lot more information that you will need to receive in order to make a wise decision, so please do your homework thoroughly. During the consideration and selection process, remember to think about what type of reverse mortgage best suits your needs, circumstances, affordability, and what is actually available to you in your area.

Reverse Mortgage Resources

US Department of Housing and Urban Development
www.HUD.gov
(202) 708-1112

National Reverse Mortgage Lenders Association
www.reversemortgage.org
866-264-4466.

Financial Freedom
www.financialfreedom.com
1.800.301.6171

Generation Mortgage
www.generationmortage.com
1.866.399.3076

United Northern Mortgage Bankers, Ltd.
www.seniorsecurity.com
1.888.267.7900

 

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