But now…

With home prices still under pressure and fears of a double-dip recession rampant, reverse mortgages no longer look so safe. Moreover, new government underwriting guidelines are likely to crimp the market’s stellar growth.

According to a survey by the National Reverse Mortgage Lenders Association, of the year-to-date loans booked by the three largest lenders, had the October 1 changes been in effect for the entire year, one out of five borrowers would not have qualified for their loans because the amount of equity available to them would have been less than what was still owed.

Declining home prices have had a major impact on the reverse mortgage industry and seniors who are considering their financial options. Currently, a potential customer doesn’t know if a reverse mortgage will work for them until the appraisal comes in.
Once homeowners get an appraisal, they may find out that it was appraised for less money than expected; they may not receive enough reverse mortgage proceeds to pay off an existing mortgage or to handle another financial issue.

During these tough times, reverse mortgage servicers also have to keep an eye on borrowers to make sure they are maintaining their real estate tax payments and home insurance payments. On a traditional mortgage, these payments are often escrowed and the servicer automatically pays them. But the borrower is responsible for making these payments on a reverse mortgage.

As a result of weak home prices it is difficult for people to know what their homes are worth and if a reverse mortgage will get them enough proceeds.
There is hope, however, that the economy and consumer confidence will recover. As home prices and retirement assets stabilize, we’ll get back into a healthy phase of growth, people will reassess their retirement/home situations, and will include reverse mortgages in their financial plans.

Read the full article here

What is a reverse mortgage?

It’s a loan on your house that lets you tap your home’s equity.  Like a cash advance, a bank fronts you the money—either as a lump sum, a line of credit or monthly draws—and you have to repay it eventually, with interest.

Unlike a traditional mortgage, you don’t have to repay the loan during the term of a reverse mortgage.  Instead, you pay it off all at once at the end of the loan.  There are no income or credit qualifications, but homeowners must be 62 or older.

You retain title and ownership of your house.  You are still responsible for paying the property taxes and the costs of insurance and repairs.  If you still have a regular mortgage, you either have to pay it off before taking the reverse mortgage, or use part of the proceeds from the reverse mortgage to retire it.

In this article, we’ll focus on the most popular reverse mortgage:  the Home Equity Conversion Mortgage, or HECM, which is insured by the Federal Housing Administration. Until the credit crunch, private reverse mortgages were also available, but lenders are no longer offering them.

When must the money be repaid?

The money doesn’t have to be paid back as long as the homeowner remains in the house and keeps up with taxes, insurance and repairs.  Generally, repayment is triggered when the homeowner dies, sells the house or moves out for 12 months or more.  If a couple owns the home and one spouse dies, the surviving spouse can stay in the home without having to pay back the loan until he or she dies, sells or moves out for 12 months.

When it’s time to repay the loan, you or your estate will pay the principal you tapped and the accrued interest.  Be aware that the interest expense can quickly accumulate.  If you take out the loan in your sixties and stay in your house until your eighties, the interest owed on the loan could be much greater than the principal amount you took out.  After the loan is paid off, there could be little or no equity left to use, say, for a move to assisted living. The HECM does have a “non recourse” feature however, which means that you never have to pay back more than the house is worth at the time of sale.  If the debt exceeds the sales price, the insurance covers the shortfall.

As for taxes, because a reverse mortgage is a loan, the money you receive is not taxable income.  But you can’t deduct the interest on your tax return each year.  In the year the loan is paid off, you or your estate can write off at least part of the interest (see IRS Publication 936 Home Mortgage Interest Deduction)

Can my heirs keep the house?

Sure, if they pay off the reverse mortgage. If the debt is more than the house is worth though, the heirs would have to come up with the difference.  The insurance that covers such a shortfall only kicks in if the house is sold. If your heirs decide to sell the house, they have at least six months to do so, and that can be extended to 12 months with a written request. If the heirs sell the house and money is left over after the reverse mortgage is paid off, they will inherit that cash.

How do I get the money from a reverse mortgage?

You can take a lump sum, open a line of credit to tap whenever you choose or receive monthly payouts (either for a set number of months or for as long as you live in the house), or you can choose a combination of those options-say, a lump sum for part of the mortgage with the rest in a line of credit.

If all else is equal, the line of credit is more advantageous; you use it when you need it.  The money that’s not tapped won’t rack up interest.  The unused portion also grows larger over time, generally at the same rate as the loan’s interest rate.  Unlike a home equity line of credit, which can be reduced or frozen by a lender, a reverse mortgage line of credit is safe, thanks to the FHA insurance.

Interest rates recently ranged from 5% to 6%, depending on the lender, the payout option and type of rate.  A fixed rate is typically only available if you take a lump sum, which could be suitable to lock in costs for those who want to use all of the money at once.  A line of credit or monthly payout comes with an adjustable rate, which can change monthly or yearly.

Are there non-interest costs?

• There is an origination fee, which is 2% on the initial loan and 1% on the balance, with a cap (which will be adjusted for inflation).
• You’ll also pay closing costs, such as title insurance and recording fees, that will likely run several thousand dollars.
• You must also pay insurance premiums.  The FHA insurance guarantees that you will receive your money and that the lender later receives its money.  You’ll be charged an upfront premium of 2% of the home value (or the lending limit, whichever is less) plus an annual 0.5% premium of the mortgage balance.
• Finally, the lender sets up what’s known as the “servicing fee set aside.”  This is a pool of your money that the lender sets aside to ensure the loan’s servicing fee, which typically is $30 to $35 a month, will be paid for.

In total, these costs could run upward of 10% of the loan.  If you have a short-term need for the cash or you plan to move within the next five years, consider other options, such as a home equity loan, a home equity line of credit, or selling the house and buying a cheaper one.

It pays to shop around.  Fees set by the government won’t vary, but some costs, such as the interest rate and the monthly servicing fee, can differ by lender.  Compare reverse mortgages from at least three lenders.  Lenders will issue you a Total Annual Loan Cost, or TALC, for each option to help you compare costs.

How much equity can I tap?

This is based on a calculation that factors in your age, the interest rate and the value of your home.  The older you are, the lower the interest rate and higher the house value (i.e. money you’ll be able to tap).

There is a limit on the amount of home value that can be taken into account for HECMs:  $625,500 until the end of 2009.  So if your home appraises for $1 million, a HECM will cap the home value in the calculation at $625,500 (that limit is scheduled to fall to $417,000 in 2010).
You can’t tap 100% of your equity.  The calculation leaves plenty of room for accrued interest.  Instead, you get a portion of the equity in your home and you pay interest on that.

A reverse mortgage must be set up at the maximum amount the homeowner is eligible to receive. For example, if you qualify for $250,000 in loan proceeds, you can’t just set up a loan for $50,000.  In this situation, you could choose the line of credit option, which will let you tap $50,000 now and keep the remainder in the line for future use.  If you truly only need $50,000, your best option may be to find an alternative to a reverse mortgage because many of the fees are based on the maximum loan amount.

Reverse mortgages can be refinanced. You will pay loan costs for the new reverse mortgage, which will pay off the old reverse mortgage.

Do consumers have any protections?

You can back out of the loan within three days of signing the paperwork.  Ask if you can repay the reverse mortgage early without penalty—usually you can.

The government requires borrowers to attend a counseling session, either in person or over the phone.  The counselor will explain how the reverse mortgage works, including the costs. Your lender will likely provide you with a list of counselors approved by the Department of Housing and Urban Development, but the lender should not direct you to a specific one.  You can find a counselor on your own;  HUD can help direct you to approved counselors in your area.

How do I know if a reverse mortgage is right for me?

Reverse mortgages are generally a last resort for seniors who have no other option to cover expenses.  Think about what you plan to do with the proceeds – for instance, a reverse mortgage might be a good fit for a senior who wants to age in place, with the loan proceeds paying for home health care, instead of moving to assisted living.  For more information on reverse mortgages visit our FAQ Page.

What is a reverse mortgage?

A reverse mortgage is a loan that enables senior homeowners, age 62 and older, to convert part of their home equity into tax-free* income—without having to sell their home, give up title to it, or make monthly mortgage payments. The loan becomes due when the last borrower (s) permanently leaves the home.

* Consult Financial Advisor. Not all products available in all states.

How is a reverse mortgage like a home equity loan? How is it different?

Both a reverse mortgage and a home equity loan use the equity you have built up in your home to provide you with readily available cash.

They differ in that with a home equity loan you must make regular monthly payments of principal and interest. However, with a reverse mortgage you do not make any required monthly mortgage payments for as long as you stay in the home.

Can my current income influence my ability to get a reverse mortgage?

No. Since reverse mortgage borrowers need not make monthly repayments, there are no income qualifications.

What are the advantages of a reverse mortgage?

There are many. Here are a few of the most significant:

• Remain independent. A reverse mortgage allows you to remain in your home and retain home ownership.
• Stay in your home. It allows you to remain in your home and retain home ownership.
• No monthly mortgage payments required. You need not pay back the reverse mortgage loan nor make any monthly mortgage payments until
  you permanently move out of the home.
• Tax-free money. Because the money you receive from a reverse mortgage is not considered income, it is tax free* and will not affect your Social Security or Medicare benefits.
• Freedom and flexibility. The money you get from a reverse mortgage is yours to use in any way you choose.

* Consult Tax Advisor

I’ve heard that with a reverse mortgage the lender would own my home. Is this true?

It’s absolutely false. The borrower retains title to the property. The reverse mortgage lender is merely extending a loan to the borrower.

Because the homeowners retain title, they remain responsible for the payment of property taxes, hazard insurance, and maintaining the home in reasonable condition – just as they would with a standard first mortgage or home equity loan.

Can I refinance a reverse mortgage, as I would be able to do with a traditional home mortgage?

Yes. Refinancing can make sense if your home either increases in value, the interest rates drops or the maximum lending limit increases. Keep in mind that when deciding to refinance a reverse mortgage, it is important to compare the amount of benefit versus the cost of the loan before making this decision. The amount of benefit received should be twice the amount of the cost to refinance the loan.

Can a reverse mortgage lender take my home away if I outlive the loan?

No they cannot. And the loan is not due at that time either. In fact, you don’t need to repay the loan as long as you or another borrower continues to live in the house as the primary residence and keep the taxes paid and hazard insurance in force.

How do you determine the amount of cash I am eligible for?

The amount you can borrow depends on several factors, including your age, the type of reverse mortgage you select, current interest rates, the appraised value of your home and FHA’s lending limits for your area. In most cases, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.

Are there any limits on how I use the money I receive from a reverse mortgage?

You can use the money for virtually anything you choose, from daily living expenses, home improvements, healthcare expenses, paying off existing debts, or simply enhancing your retirement years. For many people, the money provides a “financial security blanket,” in case unexpected expenses arise.

It is important to know that with adjustable rate mortgages, an increase in the interest rate could affect the amount of money available to borrow in the future and the amount of money owed when the loan becomes due.

Is there a choice in how I receive the cash from my reverse mortgage?

Most definitely. With most reverse mortgages you have a wide range of payment options, one of which may be ideal to meet your financial needs.

• You can choose to receive the money all at once, as a lump sum.
• You can receive equal monthly payments as long as one of the borrowers lives and continues to occupy the property as a principal residence.
• You can choose to receive equal monthly payments for a fixed period of months.
• You can get a line of credit; which allows you to take funds at times and in amounts of your choosing until the line of credit is exhausted. This is the most popular option, chosen by more than 60% of reverse mortgage borrowers.
• ou can opt for a combination of line of credit with monthly payments for as long as the borrower remains in the home.
• Or, finally, you can choose a combination of the above.

Who can qualify for a reverse mortgage?

Seniors 62 years of age or older may qualify. There are virtually no income or credit qualifications.

I still owe money on a first or second mortgage. Can I still get a reverse mortgage?

Yes. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage. The funds you would receive from the reverse mortgage would be used to pay off whatever existing mortgages you have on the property.

Can I get a reverse mortgage on a second home or resort property I own?

Unfortunately no. Reverse mortgages may only be taken out on your primary residence.

What kinds of homes are eligible for a reverse mortgage?

First and foremost, the reverse mortgage must be on the borrower(s) primary residence, that is, where they live most of the year. Most reverse mortgages are taken on single family, one-unit homes. Some programs also accept two-to-four unit buildings that are owner-occupied. Some programs offer reverse mortgages on condominiums and manufactured homes built after June 1976. Mobile homes and cooperatives are generally not eligible for a reverse mortgage. Click here to contact the Financial Freedom representative nearest you to determine if your home is eligible.

Would a home that is in a “living trust” be eligible for a reverse mortgage?

Yes. In most cases a homeowner who has put his or her home in a revocable living trust can usually take out a reverse mortgage. A review of the trust documents would be conducted by the reverse mortgage lender to determine if anything in the living trust would be unacceptable.

Are all reverse mortgages the same?

No, below are the basic types of reverse mortgages:

1. Federally-insured reverse mortgages. Known as Home Equity Conversion Mortgages (HECM), they are insured by the U.S. Department of Housing and Urban Development (HUD). They are widely available, have no income requirements, and can be used for almost any purpose. (For more on HECM reverse mortgages, click here.)
2. Government-sponsored reverse mortgages. A Home Keeper® is Fannie Mae’s conventional market alternative to the Home Equity Conversion Mortgage (HECM). It is a government-sponsored enterprise program and works like a HECM loan in many ways. However, a Home Keeper® reverse mortgage has been discontinued as of September 2008 due to new legislation that increases the limit of reverse mortgage loans.

When will I have to pay the principal and interests cost of this loan?

Your reverse mortgage loan becomes due when one or more of the following conditions occurs: (a) the last surviving borrower passes away or sells the home; (b) all borrowers permanently move out of the home; (c) the last surviving borrower fails to live in the home for 12 consecutive months; (d) the borrower fails to pay property taxes or hazard insurance; (e) the borrower does not maintain the home in reasonable condition.

What is a non-recourse loan?

A non-recourse loan is a home loan in which a lender may look only to the value of the home for repayment of the loan; no other assets may be attached if the loan balance grows beyond the subject property home value.

If I take a reverse mortgage, will I still have an estate that I can leave to my heirs?

When you sell your home or no longer use it as your primary residence, you or your estate must repay the lender for the cash received from the reverse mortgage, plus interest, monthly service fees and any other accrued costs. Any remaining equity belongs to you or your heirs. It’s important to remember that you can never owe more than the fair market value of the home when it is sold. None of your other assets will be affected by your reverse mortgage loan.

When the loan is due, will I ever owe more than my home is worth?

If the borrower or heirs/estate do not wish to retain ownership of the property upon loan maturity, the borrower or heirs/estate will not be required to pay more than the home is worth upon loan maturity.

In the event the borrower or heirs/estate decide to keep the home upon loan maturity, the borrower or heirs/estate will be responsible for the full amount owed.

What fees are involved in a reverse mortgage?

Most reverse mortgages have an origination fee, third party closing costs (such as appraisal, title and escrow), insurance, and a monthly servicing fee. These charges can be paid from the proceeds of the reverse mortgage, resulting in no immediate burden to the borrowers; the costs are added to the principal and paid with interest when the loan becomes due.

Are reverse mortgage interest rates fixed or variable?

Most reverse mortgages extended to seniors to date have variable rates that are tied to a financial index and will vary according to market conditions. In addition, Financial Freedom offers a fixed rate HECM program.

What is “TALC” and why should I know about it?

TALC is short for “Total Annual Loan Cost.” It combines all of the costs of a reverse mortgage into a single annual average rate and can be very useful when comparing one type of reverse mortgage to another. If you are considering a reverse mortgage, be sure to ask the lender and counselor to explain the TALC rates for the various reverse mortgage products.