The rising popularity of Reverse Mortgages continues to create questions. Potential borrowers are obligated, by the HUD HECM rules, to complete a counseling session with a HUD-approved counselor before they formally apply for the Reverse Mortgage loan.
These sessions, however, don’t always address all of the issues that are raised when an individual considers taking out a Reverse Mortgage loan. The potential borrower doesn’t necessarily remember to ask all of his/her questions at the counseling session and sometimes doesn’t even know which questions s/he should be asking!
This overview, part two of a three-part series, continues from last week’s post as it examines the Reverse Mortgage from all angles. The series is designed to provide information which will help a potential applicant determine whether a Reverse Mortgage is the most financially appropriate tool for his/her particular set of circumstances.
A number of important changes have been instituted in the Reverse Mortgage product over the past 2 years and these posts include this new information.
Q: What percentage of a property’s value will the borrower receive?
A: The amount that the borrower is eligible to receive depends on the borrower’s age (or the age of the youngest spouse, when there is a couple), current interest rates and the appraised value of the property. As of 2014 the Federal Housing Authority’s lending limit is set at $625,500. If the property is worth more, the appraisal will still be based on the $625,500 loan limit. The older the borrower is, the higher the level of the appraised value of the house s/he can obtain.
After closing on the loan, for the first 12 months, the borrower will not be able to access more than sixty percent of the available loan proceeds. After the year passes the borrower can access as much or as little of the remaining funds as he wishes.
There are exceptions to the sixty percent rule. These exceptions include paying off a pre-existing loan or other debits or paying for medical expenses. In such a case the borrower can take an additional 10 percent of the available funds, even if that amount exceeds sixty percent.
Interest on the Loan
Q: Do you pay interest on a reverse mortgage loan?
A: With a reverse mortgage, you are charged interest on the proceeds that you receive. You have a choice between a fixed or variable interest rates. Interest is not paid out of your loan proceeds, but instead compounds over the life of the loan until the loan is repaid.
Q: What is Rescission?
A: Reverse Mortgage borrowers have the right of rescission, meaning that they have the right to cancel the loan at any time within 3 business days after the loan’s closing. Interest cannot be charged on the funds which are held available during the three day rescission period. Interest begins to accrue on the day after the first disbursement is made.
Q: Why does the borrower sign two Mortgages Notes at closing?
A: When an individual takes out a Reverse Mortgage, the lender is placed in a first lien position and the Federal Housing Administration is placed in a second lien position. If the lender fails to meet its obligations the FHA can step in and assume responsibility for the loan to ensure that the borrower continues to receive access to his funds.
Q: What is the servicing fee for the HECM loan?
A: The monthly servicing fee covers costs which are associated with administering the reverse mortgage loan. These tasks include maintaining accurate records of interest and mortgage insurance premiums, collecting interest payments and monitoring property tax and home insurance payments. The lender is also responsible for certifying the borrower’s occupancy status, issuing account statements and discharging the mortgage.
Q: What is the Set Aside for the Service Fee?
A: When the loan’s original principal limit is determined, the lender will set aside a service fee to ensure the future payment of the monthly servicing fee. This is not considered part of the outstanding loan balance. Funds remaining in the service fee set aside at time of loan repayment are not subject to refund.
Mortgage Insurance Premiums
Q: What is the Reverse Mortgage’s MIP?
A: HECM borrowers are charged a mortgage insurance premium (MIP) based on the funds withdrawn during the first year. The MIP for borrowers who access 60% or less of their funds is 0.50 percent of the appraised value of the home. Borrowers who take more than 60 percent (available to pay off debts, an existing mortgage or for medical expenses) are assessed a 2.50% MIP.
In addition, there is an annual MIP which must be paid when the loan is called due. This amounts to 1.25 percent of the outstanding loan balance.
The MIP is collected by the FHA. This payment guarantees that if the lender goes out of business, the government will ensure that the borrower has continued access to the loan funds. The MIP also guarantees that the loan’s balance will never be more than the total value of the property.