HECM Loan Obligations and Benefits

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The TV advertisements make Reverse Mortgages sound like a no-risk opportunity to access money in which your home equity can finance your retirement. According to this view, taking out a HECM loan will enable you to stay in your home without ever making a payment.

What the ads forget to mention is a Reverse Mortgage is not quite that simple. While it is a great way for retirees to age in their homes, the mortgage can cause complications when the borrower doesn’t fully understand the loan or his or her responsibilities.

A reverse mortgage allows a homeowner age 62 or older to withdraw up to 65 percent of the equity in his or her property. The money can be taken as needed with a line of credit, in monthly payments or some combination of these two options. No payments are required until the last borrower dies, sells the house or is has left the house.

The program is not as straightforward as it sounds. Recently Congress has added consumer protections but it’s still easy for unsophisticated seniors to be misled

Before you take out a Home Equity Conversion Mortgage it’s crucial to know what you’re getting into.

The most important thing to remember is that the Reverse Mortgage involves costs and obligations:

  • There is an origination fee ($0 to $6,000) in addition to the normal mortgage refinancing closing costs.
  • Borrowers pay an upfront cost for private mortgage insurance (0.5 percent or 2.5 percent of the appraised value of the home).
  • Potential borrowers are assessed a one-time fee of about $125 for mandatory counseling (many senior rights organizations offer free or discounted counseling)
  • There is a yearly mortgage insurance fee (1.25 percent of the amount borrowed every year) and servicing costs of approximately $30 to $35 a month.

More than 90% of reverse mortgages today are issued through the Federal Housing Administration’s HECM program. The mortgage insurance amount is set by the FHA so that will be the same no matter which lender you use.

Other charges, such as the origination fee, which is capped at $6,000, and the loan’s margin, are negotiable. Financial advisors caution potential Reverse Mortgage borrowers that it’s important to shop around to ensure that they get the best deal. Listen to each lender’s proposal for his institution’s the interest rate, origination fees and other fees. Pay special attention to the proposed margin – many lenders will not volunteer that information unless asked.

Demonstrating past financial solvency and a good credit record are one way of pressuring a lender to give you the best deal possible. Other tips for people considering a Reverse Mortgage include:

Put both partners on the title and on the mortgage since, once the last person on the mortgage dies or is absent from the property for 12 months, the mortgage becomes due.

Review your entire financial picture to make sure that you’ll be able to keep up with the insurance payments, property taxes, home maintenance and other loan costs if you take out a HECM loan. You might wish to create a set-aside fund to ensure that the loan costs will always be covered to protect your interests.

If the lender tries to sell you other products, find another lending institution. The Department of Housing and Urban Development reminds seniors that such practice is illegal. However, there are still cases in which unscrupulous lenders have encouraged seniors to take out reverse mortgages and use the proceeds for risky annuities. It’s not a good idea to take financial advice from someone who is motivated by a commission.

Discuss the Reverse Mortgage option with a financial planner who doesn’t benefit in any way by your decision. The Reverse Mortgage can only be approved if the couple has attending a counseling session with a HUD-approved counselor, but it’s still a good idea to sit with a financial consultant and discuss your income sources and economic situation before making a decision about the Reverse Mortgage loan. Senior-rights organizations often provide free financial counseling for retirees.

Consider how you want to draw your money. You have the option of receiving monthly payments or a line of credit or a combination of the two. For most people, the line of credit is the best option because you only draw on it if you need it. The unused portion sits in your account and continues to draw interest. In specific cases you may receive permission to access your funds in a lump sum but if you take more than 60% of the principal limit upfront, you’ll be charged 2.5% of your home’s appraised value in mortgage insurance upfront rather than 0.5%.

New Protections for Reverse Mortgage Non-Borrowing Spouses

As the generation of Baby Boomers age the United States finds itself facing a retirement funds crisis – more and more retirees lack the financial capacity to support themselves during their ever-increasing life spans. Financial advisors are working with these individuals to help them explore ways in which they can stretch their existing income and even find new sources of income to supplement their retirement funds.

One such strategy involves the federally-insured Home Equity Conversion Mortgage (HECM), a reverse-mortgage program in which older homeowners can convert some or all of the equity in their homes into cash. Financial analysts see the HECM product as a well-designed program which allows seniors to draw funds in a variety of ways to meet their needs. The program was launched in 1989 but over the years it has remained small and a relatively small number of seniors have taken advantage of it. Major revisions in the program were initiated over the last 16 months and the HECM program now gives every indication that it is on the verge of significant expansion.

Beginning in the fall of 2012 Congress began to pressure the Department of Housing and Urban Development, the agency overseeing the Reverse Mortgage, to make changes that would make the HECM loan safer, both for the borrowers and for the government, which insures the loans.

Changes included removing the one-time draw option from the list of alternatives that a borrower has to access his/her money, limiting the amount of equity that a borrower can draw and establishing more oversight to ensure that a borrower can and will maintain the loan.

Recently HUD issued new Mortagee Letters to further minimize complexities that have left many senior borrowers confused about their loan, their rights and their obligations. HUD is clamping down on deceptive merchandising providers and is more willing to work with senior rights organizations and agencies to which many seniors look for guidance on financial products. These moves, together with the 2008 requirement that mandates that all HECM borrowers complete a counseling session with a HUD-approved counselor, ensure that the Reverse Mortgage product is stronger and more transparent than ever.

Finally, a new change is scheduled to come into effect on August 4th that may actually increase the amount of cash or monthly payments that a senior can draw under the HECM program. This sum of money that a borrower can access is based on the borrower’s age at the time at which the Reverse Mortgage was taken out — the older the individual, the larger the draw amount. If the property that is being mortgaged under the HECM loan is owned jointly by a married couple and both partners are covered by the HECM, the age of the younger one is used, which lowers the draw amounts.

Up until this month seniors had a choice of including their younger spouses as HECM co-borrowers, or not. If the partner was included the amounts that could be drawn under the Reverse Mortgage were lower. However, the surviving spouse could remain in the house and draw whatever funds were available before the death of the borrowing spouse. Alternatively, the couple could choose to draw larger amounts by leaving the younger spouse off the HECM. If the couple chose that option and the older spouse died first, the surviving spouse was obligated to vacate the property upon the borrowing spouse’s death.

The new rules are designed to protect non-borrowing spouses (NBSs) from being evicted after the HECM borrower dies. Starting on August 4th, if the surviving NBS assumes ownership of the property and meets other obligations of ownership including payment of property taxes, s/he can remain there indefinitely. Additionally, an NBS can be any age when the HECM is taken out, but the younger s/he is, the lower the amount that the HECM borrower can draw.

According to HUD, under this new rule, all spouses will have their tenure protected. If they are 62 or older, they are co-borrowers while if they are younger than 62 they are NBSs with protected tenure.

This is good news for many couples who otherwise wouldn’t take the risk of acquiring a HECM loan. Younger spouses will now have tenure protection — the cost will depend on the age of the NBS. For example, the borrowing power of a senior of 79 years old married to a NBS of 39 will be reduced by 36%. If the NBS is 25 years of age, the reduction becomes 47%. NBSs must be aware that, while their tenure is protected, they will not be able to draw funds under the HECM — only the borrower can do that.

How to Use your Reverse Mortgage

You’ve decided to take out a Reverse Mortgage and are looking for the wisest way to use it? Financial advisors offer an overview of the Reverse Mortgage product as well as some suggestions as to how the Reverse Mortgage can be used efficiently for your long-term financial security.

What are the biggest misconceptions about reverse mortgages?

The reverse mortgage is technically known as the FHA’s Home Equity Conversion Mortgage (HECM). Many people are familiar with the product from the commercials that feature well-known 60somethings discussing the benefits of the product. There are, however, aspects of the loan which the ads don’t address. It’s true that the HECM product can be used to increase a consumer’s monthly cash flow. There are, however, other benefits to the loan as well.

· HECM for Purchase program is an opportunity for individuals aged 62 and older to relocate. The loan makes it possible for seniors to take out a Reverse Mortgage and then apply it to a new home, all in one swoop. Many seniors want to downsize or move closer to their families, but find the procedure of obtaining a new mortgage, selling their existing house and financing their new house to be overwhelming. With the HECM for Purchase the entire procedure is taken care of when the borrower applies their Reverse Mortgage to their new home. All of the regulations and obligations of a standard HECM loan are applicable to a HECM for Purchase, including the requirement that the borrower maintain his/her new home and pay taxes and insurance on the new property.

· The HECM Line of Credit is a tool which can be utilized as part of a larger financial planning strategy. When the borrower decides to access part or all of his/her Reverse Mortgage assets as a line of credit, s/he can draw on the line of credit as needed but keep unused funds in savings where they grow.

· HECM Monthly Payment Plan is probably the product’s most popular option. Borrowers are entitled to receive a monthly payment, based on the value of the percentage of their equity that they obtain through their Reverse Mortgage Loan. These monies can be used to bolster existing retirement funds or may be used to fund extra projects or activities.

Why do originators promote Reverse Mortgages? How do they benefit from offering reverse mortgages?

Reverse mortgages add to the bottom line of a mortgage company because they decrease the average origination cost per loan. As more customers are helped, the origination cost decreases. This is one of the reasons that borrowers are advised to select a lender who has a strong Reverse Mortgage clientele.  The HECM program allows the lender to originate more loans and assist each consumer understand how the product will affect him or her personally. Originating Reverse Mortgages help lending institutions expand referral business through the customers served, realtors and builder partners.

The Reverse Mortgage is a HUD-insured product so the lender knows that he won’t lose money, even if the value of the property declines or the borrower defaults.

How can HECM loans be used as part of smart financial planning?

The HECM is an important tool in numerous financial planning strategies, including

1. Helping borrowers pay off existing liens, mortgages or other debts. By accessing Reverse Mortgage funds the senior borrowers are able to free up hundreds of dollars every month for significant cash flow relief. Borrowers are assured that, as long as they meet their loan requirements, they will be able to age in their own home.

2. Allowing borrowers to spend down the equity in their home before they tap into their existing cash assets. This allows the senior borrower’s cash assets to grow for additional years.  The equity diminishes over time, but the trade-off involves the promise of more cash assets down the road.

What are borrower obligations for a reverse mortgage?

The borrower is responsible for paying property taxes, home insurance and HOA dues (if any). The borrower must maintain the loan by paying monthly interest payments and reside in the home – if the borrower leaves the home for 12 months, the loan ends and the home reverts to the lending institution.

Do reverse mortgages burden the borrower’s heirs?

When an HECM borrower no longer lives in their house the loan and interest come due. The house is sold and if the selling price is for more than the amount of the interest and loan, then the homeowner, or heirs, receive the difference.

If the house is worth less than what’s due, the FHA, the HECM insurer, covers the remaining balance. Reverse mortgages are non-recourse loans so heirs are not responsible for paying the negative difference.

Heirs do have the opportunity to buy the house if they pay off the loan amount and the remaining loan interest — either with a new mortgage or by selling the house. This is their choice.

New FHA Letter Cautions Potential Borrowers to be Cautious about Misleading Practices with Reverse Mortgages

Recently the Federal Housing Administration published a mortgagee letter that reiterates its policies against potentially misleading advertising practices which, it writes, it has observed in industry marketing techniques. Reverse Mortgage lenders target “baby boomers” – individuals who are in their 60s or approaching that age and are thinking about ways that they can supplement their income. Some of these potential borrowers are financially savvy but others have been misled by lender misrepresentations.

Applying for a Reverse Mortgage through the FHA’s Home Equity Conversion Mortgage initiative is an increasingly popular alternative which enables a borrower to access a percentage of the equity that he holds in his home as either a line of credit or via monthly payments. The loan product is popular among senior citizens who see HECMs as a way for them to get real benefits from their years of hard work and struggle. Throughout the second half of the 20th century most American families sunk their savings into their homes. Now, in their retirement years, they have a chance to take out a Reverse Mortgage in which the lending institution buys the house but does not take possession of the house until the owner(s) die or move away.

HECM loans are regulated and insured by the FHA, an agency of the Department of Housing and Urban Development. HUD issues periodic Mortgagee letters which serve as guides to the banks and financial institutions that act as the lenders. In a letter dated June 18th 2014 the HUD warned financial institutions against deceptive or misleading marketing practices.

Most Reverse Mortgage lenders present the loan product to potential borrowers carefully. There are many advantages to the loan including the borrower’s ability to access part of his home’s equity as cash and the assurance of a federally-insured loan product. The lenders are also required to remind potential borrowers about borrowers’ obligations under the loan such as requirements that the borrowers continue to pay their homeowner’s insurance and taxes, that they maintain their property and that they pay the loan’s monthly interest payments.

Above and beyond that, however, HUD wrote that “the Department has become aware of a variety of marketing and advertising strategies currently employed or being proposed by mortgagees to encourage borrowers to obtain HECMs”….including the attempt to minimize or ignore the “risks in connection with new fixed interest rate HECM products” and to “mitigate the potential for abuse, largely related to the advertising and presentation of these particular products.”

In its June 2014 Mortagee Letter the FHA reminded financial institutions that they were obligated to ensure that their marketing efforts didn’t include “misleading advertising and presentations that appear to limit their options” and that they present potential borrowers with ” the full complement of HECM-supported products.”

The HUD mortagee letter stated that “Senior borrowers deserve freedom of choice when considering whether a reverse mortgage is appropriate for them… guidance is intended to make sure lenders know we’re keeping a watchful eye on their marketing and advertising practices that might steer borrowers toward reverse mortgage options that limit their available choices.”

The mortgagee letter cautions lenders against potential subterfuge and product misrepresentations in their dealings with senior consumers. In spelling out specifics of this policy, the Letter reminds lending institutions to inform potential borrowers that:

  • FHA insures fixed interest rate mortgages, as well as annual and monthly adjustable interest rate mortgages;
  • the mortgagor has the ability to change the method of payment under the HECM at any time provided funds are available;
  • fixed interest rate mortgages are limited to the Single Disbursement Lump Sum payment option where there is a single, full draw at loan closing and the mortgage does not provide for future draws by the mortgagor under any circumstances;
  • adjustable interest rate mortgages provides for five, flexible payment options and allows for future draws
  • the amount of funds available to the mortgagor is currently determined by the age of the youngest mortgagor,
  • the disbursement of mortgage proceeds during the first twelve month disbursement period is subject to an initial disbursement limit as determined by requirements set by the Secretary.

In summary, the Mortagee Lesson reiterates prohibitions on restricting a mortgagor’s freedom of choice and on using misleading product descriptions.

Reverse Mortgage Market is Expanding

When the Federal Housing Administration (FHA) changed the regulations regarding the percentage of a home’s equity that a Reverse Mortgage borrower could access, along with a change in the options that the borrower had for receiving those funds, most financial observers predicted that Reverse Mortgages would decline. The change, which took effect in the summer of 2013, was thought to lessen the attraction that the HECM product would have for senior borrowers.

In a startling development lenders have actually been reporting an increase in new loan applications. The new regulations have, it seems, made the HECM even more attractive to retirees who want to use the equity that they have in their home to add to their retirement income.

Today senior borrowers can access just 60% of their Reverse Mortgage funds, and only as a line of credit or as monthly payments. These regulations were introduced in order to make sure that borrowers spread out the proceeds of their loan to avoid the kind of financial distress that sometimes occurred in the past when borrowers could access a higher percentage of their equity and could take it as a lump sum payment.

Financial advisers believe that the 2014 upswing in Reverse Mortgage applications is due to the fact that seniors have more confidence than ever in the Reverse Mortgage loan. They see it as a stable product that has built-in safeguards to guide them in using their funds in moderation while they maintain their ability to meet their loan obligations.

In 2012 the Department of Housing and Urban Development presented a financial statement to Congress that showed that, due largely to the Reverse Mortgage product, the FHA was experiencing a shortfall of 16.3 billion dollars in their insurance fund. It soon became clear that this was largely due to instances in which borrowers accessed their loan funds as a lump sum payment and were left without enough reserves to make their HECM interest payments and other obligatory loan payments. In 2013, with the bi-partisan support of Congress, HUD revised the rules. The amount of equity that a borrower could access was reduced and the draw options were limited to accessing loan funds as a line or credit or via monthly payments.

Other regulation changes were also instituted. These new rules include the requirement that reverse mortgage lenders conduct financial assessments of potential borrowers to ensure that borrowers will have the necessary residual income to pay taxes, insurance, loan interest payments and maintain the property.

The new regulations are also changing the way in which reverse mortgages are advertised. More retirement planners now view a HECM loan as a valuable retirement tool which forces the industry to market differently. Whereas in the past, borrowers may have defaulted when they couldn’t afford to pay taxes and insurance, the new rules protect the borrowers as well as the future of the entire program. .

In addition, the adjustable-rate line of credit, a more stable product than the fixed line of credit, has come to dominate the reverse mortgage industry. About 75% to 80% of HECMs being originated today are adjustable-rate loans with the most popular reverse mortgage product being an adjustable-rate HECM with a 10% lifetime cap. This means that, with a starting interest rate of 3%, the rate of a reverse mortgage cannot go higher than 13%. This is good news for reverse mortgage borrowers who feel more confident than ever in the HECM product.

The FHA reported that HECM originations totaled $4 billion in the first quarter of 2014, up from $3.4 billion in the last quarter of 2013.

Tax Obligations and Reverse Mortgages

Home Equity Conversion Mortgages (HECMs) have become popular among older homeowners who are searching for additional sources of income. That’s because this type of loan, which is only available to homeowners who are 62 years or older, allows property owners to turn part of the equity that they have in their homes into regular cash payments.

HECMs are known as a “reverse” mortgages. If you take out a Reverse Mortgage you receive a payment, based on the amount of equity that you own in your home and your home’s worth. Instead of sending a check each month to your mortgage lender, the lender pays you. You are exempt from paying back your reverse mortgage loan until you sell your home, move or die. Until that time, your only loan obligations involve paying the loan’s monthly interest rate and other household expenses.

If, for instance, you have $200,000 of equity in your home, based on today’s HECM limit of a 60 percent Reverse Mortgage ceiling on that amount, you would be able to access $120,000. You can take your payment as a line of credits or you can receive a set amount each month.

When you, or the last surviving borrower, dies, sells the home or permanently moves out the loan will need to be repaid. This is generally accomplished when the lending institution sells the home and uses the proceeds to recoup its investment. If you anticipated leaving the home to your heirs, they will be obligated to repay the loan plus loan servicing fees, interest and mortgage insurance premiums.

In addition to the monthly interest payments you’ll be responsible for your home’s upkeep which includes paying property taxes and insurance payments. If you fall behind on these payments the lending institution may foreclose on the home. You can, however, request that the lending institution create a “set aside” fund which will automatically take care of these payments so that you’ll be protected from any difficulties that may arise from unpaid taxes and fees.

Seniors should be aware of how a Reverse Mortgage can impact their taxes and other benefits. The IRS does not require borrowers to pay taxes on the income that they receive from a Reverse Mortgage. IRS Publication 936 explains that “because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable.”

In addition, a Reverse Mortgage will not affect your Medicare benefits. In some instances a Reverse Mortgage may affect your eligibility for Supplementary Social Security or Medicaid benefits. Generally, payments from a Reverse Mortgage will not be counted as income as long as they are spent within the same month that they are received. However, the unspent balance from a reverse mortgage loan could put you over the allowable limit for SSI eligibility and/or Medicaid benefits.  Even if the loan is taken as monthly payments or as a line of credit, your payments could accumulate and push your resources over the SSI or Medicaid limits.

Social Security and Medicaid regulations are quite complex and differ from one circumstance to the next, so senior financial advisors suggest that that a potential borrower consult with a senior advocate or a financial planner who specializes in elder law before signing on for a HECM loan. It’s important to consult with an advisor IN YOUR STATE because local laws differ from state to state.

New Guidelines for Reverse Mortgage Spouses

Long-awaited new guidelines have been announced by the Department of Housing and Urban Development to allow the spouses of deceased borrowers to stay in their home without the threat of foreclosure. As of August 4th, these surviving spouses will not be evicted from their homes as long as they continue to pay taxes, insurance and other fees associated with the Reverse Mortgage.

The issue of how HUD will deal with non-borrowing Reverse Mortgage spouses has been a bone of contention for many years, pitting government offices responsible for administering the Reverse Mortgage against senior rights advocates. When the Home Mortgage Equity Conversion (HECM) program was created, the government believed that it was clear to borrowers that, in the event that only one spouse signed on the loan, the Reverse Mortgage would be terminated upon that person’s death. At that point the surviving spouse would either have to pay back the loan or leave the house so that the lending institution would be able to sell the property and recoup their investment.

Over the years many non-borrowing spouses of Reverse Mortgage borrowers were taken by surprise by this interpretation of the rule. They believed that they would be allowed to stay in their homes, even after the borrowing partner died or had to leave the home. The Federal Housing Administration, however, held that these surviving spouses had forfeited their rights to stay in the house and were no longer the owners of the home. Reverse Mortgage guidelines stated that full repayment of the reverse mortgage was due after the death of the borrower. This left a widow or widower whose name was not on the mortgage liable for the debt or obligated to sell the home.

As of August 4th 2014 that payment will be deferred until after the spouse’s death.

The change came as a result of a court case in which two non-borrowing spouses sued the Department of Housing and Urban Development. They claimed that by evicting non-borrowing spouses HUD was circumventing the intention of the Reverse Mortgage, which had been created specifically to allow seniors to age in their own homes. Reverse mortgages, also known as HECM loans, allow seniors 62 or older to convert their home equity into cash. The loan is structured so that, instead of paying the bank each month, the borrower gets paid, either as a line of credit or in monthly payments.

Reverse Mortgages constitute a significant part of the housing market. In 2011, the Consumer Financial Protection Bureau counted 740,000 reverse mortgages nationwide. But as more baby boomers become eligible for the product the market is expected to grow significantly. Most reverse mortgages are not taken out until homeowners are in their late 60s to early 70s so lending institutions are expecting to see an upsurge in Reverse Mortgages in the coming years.

Odette Williamson, an attorney with the National Consumer Law Center, said that, in the past, borrowers may have been counseled to leave younger spouses off reverse mortgages so the payout amount would be higher since the older the borrower is, the more they can receive from their reverse mortgage.

Williamson commented that “A lot of spouses were being taken off the loans, and were being encouraged to do so with bad information. Sometimes they were plain misled and didn’t understand the consequences.”

The new rule addresses the problem by ensuring that a non-borrowing spouse can remain in the home after the borrowing spouse’s death. In addition, the new guidelines also allow a reverse mortgage to be written if one spouse is younger than 62. The payout amount, however, will be based on the younger spouse’s age.

In order to remain in the home after a borrower’s death, the non-borrowing spouse must have stayed married to the borrower throughout his or her lifetime, live in the house as a primary residence and pay all loan interest payments and property tax payments. The individual must maintain the house and keep up the homeowner’s insurance.

Reverse Mortgages, Terms, Changes and Important Updates

This fiscal year has brought significant Reverse Mortgage changes, both for borrowers and for lenders. Under the Reverse Mortgage Stabilization Act of 2013 new changes are aimed at making these loans less risky and less prone to default.

Home equity conversion mortgages (HECMs) are for senior homeowners who are at least 62 years of age. The Reverse Mortgage allows the homeowner to draw on his or her home equity without repaying it as long as s/he stays in the house. The borrower receivess the money upfront and repayment is deferred until the borrower dies or moves to a nursing home.

Questions—and litigation—continues over the status of non-borrowing spouses and whether they can remain in their homes when their partners die or leave the house (oftentimes for a long-term care facility). The Federal Housing Administration (FHA) recently issued a new advisory concerning that—more on that below.

First, here’s a recap of HECM rules that took effect in September 2013 and January 2014.

  • Financial assessments and set-asides: Lenders are now required to analyze borrowers’ credit history, cash flow, and residual income. The potential borrower’s income, credit, property charges (taxes, association fees, ground rents, insurance and assessments) and assets are all verified and past credit history is reviewed to ensure that the borrower is ready and willing to pay the loan’s obligatory payments (insurance, home upkeep, property taxes, loan interest). Where a question exists about the borrower’s ability/preparedness to make these payments, the lending institution must create a set-aside account in which a portion of loan proceeds or monthly loan payments are set aside to cover taxes and insurance.
  • Principal limit: Borrowers can access up to 60 percent of their home’s equity, based on the claim amount, the youngest borrower’s age and the interest rate.
  • Type of disbursement: Borrowers can access their loan payments as monthly payments, as a line of credit or as a combination of the two draw options. This includes the greater of 60% of the principal limit or mandatory obligations plus 10 percent of the principal limit. (Mandatory obligations involve origination and closing fees, federal tax debt, warranties and inspections, mortgage insurance, removal of liens and repairs.)
  • Mortgage insurance premiums: The existing annual 1.25 percent MIP will stay in effect. For disbursements of 60% or less of the principal limit, an additional one-time premium of 0.50% is charged while an additional one-time premium of 2.50% is charged for a disbursement of more than 60 percent.

The new rules have not addressed the nagging issue of non-borrowing spouses. Recent such suits have reached the United States Court of Appeals in which non-borrowing spouses sued the US Department of Housing and Urban Development (HUD).

The cases relate to surviving spouses who removed their name from the house deed so that their spouse could take out the loan. The plaintiffs contend that HECM lenders advised them to relinquish their interest in their homes so that their older spouses could obtain larger loan payments. They also contend that the lenders told them that they wouldn’t lose their homes if their spouses died.

After their spouses died the plaintiffs were notified that the Reverse Mortgage loans were due as per the mortgage agreement which states that the loans become payable when a borrower dies and the property is not the principal residence of at least one surviving borrower. HUD foreclosed on the homes because the surviving spouses were unable to repay the loans.

In their lawsuits the plaintiffs contend that HUD violated federal law which defines a “homeowner” as one which includes a surviving spouses. In their brief to the court the plaintiffs wrote that HUD’s required HECM mortgage contract contradicts the law because it states that a Reverse Mortgage ends when the borrower dies, regardless of whether a non-borrowing spouse survives.

The Appeals Court sided with the plaintiffs and, as of April 2014, the foreclosures in the cases became inactive. HUD is now considering its options and the FHA, which insures HECMs, issued an advisory to lenders.

The FHA continues to maintain that the earlier “due and payable” interpretation is accurate but the agency does note that “recent events have advanced another possible interpretation” of the law — FHA insurance can be issued on HECMs that include the non-borrowing spouse at the time of the mortgage’s origination.

All relevant rules and regulations pertaining to the HECM loan are reviewed for potential applicants in the federal-mandated counseling session in which loan applicants must participate before they make their application for the loan.

Individualizing a Reverse Mortgage

Not every senior citizen qualifies for a reverse mortgage. Some seniors have not yet reached the age of 62, which is the minimum age to apply for a Reverse Mortgage. Others are still paying off their mortgage and the balance that they owe on their existing mortgage is too high for them to acquire a Reverse Mortgage.

Reverse Mortgages are counter-indicated for many retirees as well. Seniors who want to pass on a debt-free house to their estate are advised that a Reverse Mortgage isn’t consistent with their plans. A reverse mortgage builds up debt and the beneficiaries of the individual’s estate must pay that debt off if they want the house to stay in the family. Even if you simply want those now living with you in your home – your spouse, your children, your grandchildren – to be able to continue to live there after you die, you should pass on a Reverse Mortgage because the terms of the loan state that after your death the property reverts back to the lending institution which can then sell it to recoup their investment.

Finally, the Reverse Mortgage carries costs and monthly interest payments. If you don’t need the cash that you’d receive from the loan, you should find other ways to invest your money

Who Should Consider a Reverse Mortgage

Senior homeowners who need some additional cash should research the benefits that they’d get from a Reverse Mortgage. These are generally people who are retiring. Many are still paying on a mortgage. The cash that they would be able to draw from their HECM reverse mortgage might allow them to pay off the old mortgage and give them extra income for their retirement years.

Another population of potential reverse mortgage borrowers includes people who retire before they’re 65 but who want to wait until after they’re 65 to collect social security. Social Security payments are larger when they are deferred until age 65 (or later) so drawing a term monthly payment under a HECM reverse mortgage for the period until you’re ready to draw social security can provide a temporary source of income and ensure you higher social security payments later on. Even if you’re looking for some temporary income for special projects (renovating your house) or events (a vacation) the extra Reverse Mortgage income can help you achieve your goals.

For those living on Social Security or small pensions and are looking to supplement their incomes indefinitely, drawing a tenure payment under a HECM reverse mortgage can grant them needed monthly income for as long as they live in the house. This population also includes individuals who are living on retirement income or on a nest egg and are afraid that their money might run out. Having Reverse Mortgage income can eliminate the anxiety – in particular, the HECM credit line draw options which grows if you don’t draw it

There’s a special Reverse Mortgage, the Reverse Mortgage for Purchase, which is specifically for people who want to buy a new house but who don’t want to commit to monthly payments. In effect, this mortgage allows a borrower to complete the purchase transaction and the Reverse Mortgage transaction in one action, eliminating the need to conduct several different transactions as the Reverse Mortgage passes from one property to the next.

Seniors with fluctuating incomes can draw on a HECM credit line when their income drops and then repay the line when their income recovers. With this strategy, the credit line continues to earn interest at the mortgage rate, rather than the lower deposit rate that a bank loan would provide.

The HECM calculator helps you determine the amount that your Reverse Mortgage would be worth so that you can decide if, how and when to take out a HECM loan.

Who Takes Out Reverse Mortgages?

If you think that reverse mortgages are only for cash-strapped seniors without any other financial options, think again. Reverse mortgage features have been evolving over the years. Research now suggests that the Reverse Mortgage loan is actually most helpful for retirees who want to find a strategy that will allow them to manage a dependable stream of income during their retirement years.

There are different types of reverse mortgages but these days almost all reverse mortgages involve Home Equity Conversion Mortgages. These HECMs are issued by a variety of lenders but they are all insured and regulated by the Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development (HUD).  The HECM program has evolved over the years as it developed new rules which make the home equity conversion mortgage more dependable and sustainable for the majority of borrowers. Many problems with earlier versions of the HECM have been addressed including more practical safeguards, better consumer protections and some attractive new features.

In September 2013, HUD made some important changes which removed some of the risks of the HECM loan.  First, the HUD limited the amount of a home’s value which a borrower could access. This change was instituted to ensure that borrowers don’t overextend themselves.  Secondly, after finding that excessive first-year payouts strongly correlated to problem loans, HUD instituted strong incentives which were designed to encourage borrowers to limit their first-year’s maximum payout to 60% of the maximum loan value. This was accomplished by raising the loan’s interest rate if a borrower exceeded 60% of his total loan’s value

Finally, in early 2014, HUD began to require that all potential borrowers go through financial counseling with a third party before applying for the loan. This requirement was implemented in order to establish that the borrower had the ability to manage the loan.  If, via a financial assessment, a lender determines that a borrower’s income may be insufficient to manage his cash flow, the lender can set aside a portion of a borrower’s loan funds to pay ongoing loan obligations.

Research at several financial planning institutions, including the financial planning program at Texas Tech University, suggests that the current structure of reverse mortgages offer the best benefits to borrowers who are planning to use the loan to balance their household budget while they simultaneously stabilize their retirement income.

So, at what point should an individual start thinking about a Reverse Mortgage?

Financial advisors suggest that for borrowers who are able to organize their loan income to ensure that they won’t use the proceeds from a Reverse Mortgage in a way that leaves them without sufficient income to pay the loan’s costs and obligations, the loan can offer the advantages that they’re looking for. A HECM loan can provide them with the opportunity to utilize the equity that they hold in their home to access cash that gives them more disposable income.

A few things to remember:

1. If you are married or otherwise live with someone who relies on the home as their primary residence, keep in mind that the property reverts back to the lending institution when the individual who signed on the loan no longer lives in the house.

This clause means that, if only one partner signs, when that partner dies/leaves the home first, the other spouse must either buy the home back from the lender or leave the home.

2. You must budget the loan to include the loan’s costs – third party costs that pay the lender for processing the loan – as well as for the loan’s monthly interest payments. These payments must continue throughout the life of the loan, even if you have used up your funds that you received from the loan.

You will also be expected to continue to pay all property tax payments, home upkeep and insurance payments. Failure to keep up these payments can result in foreclosure.

3. Before you apply for the loan you must attend a counseling session with a HUD-approved counselor. At this session the counselor will help you determine whether the HECM loan is the best solution for your needs and situation.

Five Important Things to Know When You’re Checking Out a Reverse Mortgage

Reverse mortgages have gained a bad reputation over the years but experts say that acquiring a Reverse Mortgage can be a good financial move for a certain segment of the market.

Susan Tiffany, director, consumer periodicals at the Credit Union National Association says “they do make sense for people who have no other alternatives. What happens over time is people build equity in their home and until recent years, the equity was illiquid. They couldn’t tap it without selling the house or getting a home equity loan. A reverse mortgage lets you get at that equity.”

Regardless of whether you’re looking to pad your nest egg or you simply need some extra cash, financial advisors suggest that before you move ahead with a Reverse Mortgage you make sure that you fully understand the mortgage product’s framework as well as your responsibilities as a borrower.

Your Age

Eligibility for a reverse mortgage is determined by your age. You must be age 62 or older to apply for a reverse mortgage. The older you are, the higher the payouts that you receive, based your home’s equity. You can draw your mortgage as a line of credit, monthly payments or a combination of both. Since the money that you get is based on the total value of your home and the age of the youngest borrower, the older you are, the more you receive.

Maintenance, Taxes and Insurance

Home Equity Conversion Mortgage is the official name of the federally-insured Reverse Mortgage product. The loan provides access to the equity that you have in your home but you shouldn’t look at it as free money.

When you take out a Reverse Mortgage you’ll have to pay fees that are associated with taking out this type of loan. These fees include an origination fee and other closing costs. In addition you must also maintain the house, pay your property taxes and home insurance and pay for the loan’s interest payments. If you don’t take care of those things, the mortgage can come due You should also be aware that the interest on a reverse mortgage can’t be written off on a tax return until the loan is paid, either partly or in full.

Financial advisors note that the mortgage insurance portion has slowly been dropping over the course of the last few years and has been cut down to half-a-percent. The Federal Trade Commission reminds borrowers that the amount they owe will increase over time since interest is charged on the outstanding balance and then added to the amount that’s owed.

The interest rate can also change based on market conditions since the rates are tied to a financial index.

Tax and Heir Considerations

Borrowers are not obligated to pay taxes on the income that they receive through their Reverse Mortgage. Reverse Mortgage income does not affect Medicare benefits but it may, in some instances, affect Medicaid benefits.

If your heirs want to keep the Reverse Mortgage house in the family they will have to purchase the home from the lending institution after the house reverts back to the lender when you die or leave the house. Although reverse mortgages have a non-recourse clause which prevents you or your heirs from owing more than the value of the home when the loan comes due, if your heirs want to retain ownership of the home they will have to repay the loan in full.

Reverse Mortgages 2014 – Are they Really More Difficult to Obtain?

You might have heard that tighter rules on Reverse Mortgages have recently gone into effect. You may be wondering whether those regulations have made it harder to get a Reverse Mortgage.

The reason that Congress mandated these changes was because they wanted strengthen the Home Equity Conversion Mortgage (HECM) product, which was suffering from a struggling housing market and a growing number of borrower defaults. Here’s a rundown of how Reverse Mortgages work today:


The basics of the Reverse Mortgage haven’t changed. A Reverse Mortgage is a loan that allows senior homeowners to borrow money against the equity that they hold in their home. You don’t have to repay your loan until you sell your house, die or move out for at least twelve months or more. Throughout the course of the loan you continue to own your house so, under the terms of the Reverse Mortgage loan, you are still responsible for property taxes, insurance and repairs.


Senior citizens who are at least 62 years old, own their own home (or owe only a small balance) and currently are currently living in their home are eligible for a HECM loan.

Financial Assessment

One of the recent changes to the Reverse Mortgage structure involves the obligation for the lending institution to conduct a financial assessment of your income, assets and credit history to determine whether you can afford to make all the necessary tax and insurance payments over the projected life of the loan and meet the loan’s other obligations. Depending on your financial situation you may be required to put part of your loan proceeds into an escrow account to pay future bills.

If the financial assessment determines that you are not going to be able to pay your loan obligations and monthly loan interest payment while still having enough cash left to live on, your loan request can be denied.


Nearly all Reverse Mortgage loans that are offered today are Home Equity Conversion Mortgages (HECM), which are insured by the FHA to protect both the borrower from lender collapse and the lender from borrower default. These loans are offered through private mortgage lenders and banks. HECM’s home value limits vary by county but cannot exceed $625,500. Be sure that you select a HUD-approved lender to administer your Reverse Mortgage.

Loan Amounts

The amount you get through a reverse mortgage depends on your home’s value, your age and the prevailing interest rates. Generally, the older you are and the more your house is worth, closer to the maximum loan amount you’ll be eligible to access. Also, keep an eye on interest rates – the lower the interest rates, the more you can borrow. For example, a 70-year-old with a home that’s worth $300,000 can borrow up to $170,000 with a fixed-rate HECM. .

Loan Costs

You must be prepared to pay the Reverse Mortgage up-front fees which include a 2% lender origination fee for the first $200,000 of a home’s value and 1% of the remaining value. There is a cap of $6,000 on this origination fee.

There is also a 0.5% initial mortgage insurance premium fee, an appraisal fee and closing costs along with other miscellaneous expenses. Most fees can be deducted from the loan amount so your out-of-pocket closing costs are reduced.

The loan also includes an obligation to pay an annual mortgage insurance premium of 1.25 percent of the loan amount.

Throughout the course of the loan you are required to maintain your home and pay your property taxes and homeowner’s insurance payments.

Payment Options

You can receive your loan funds as a line of credit, in regular monthly checks or as a combination of these two payment options. In most cases, you will not be able to withdraw more than 60 percent of the loan during the first year — if you do (you must receive special permission to withdraw more than 60% which may be granted for special circumstances) you’ll pay a 2.5% upfront insurance premium fee.


All borrowers are required to get telephone or face-to-face counseling through a HUD approved independent counseling agency before beginning the application process for a Reverse Mortgage. Some government and public service agencies offer counseling for free but most charge around $125 to $250. During your counseling session the counselor will explain all of the loan’s regulations and will look at your individual situation to help you decide if, when and how to apply for a Reverse Mortgage.

Does Someone In Your Family Want to Take out A Reverse Mortgage? What You Need to Know

If someone in your family is thinking about taking out a Reverse Mortgage, they may not be completely clear about the loan requirements, obligations and benefits. You can help protect them by learning everything that you can about the Reverse Mortgage loan as you guide them through their decision-making process.

First of all, remember that not all Reverse Mortgages are the same. This is something that few people know – there are actually three different types of Reverse Mortgages, the Single-Purpose Reverse Mortgage, the Proprietary Reverse Mortgage and the Federally-insured Reverse Mortgage.

· Proprietary Reverse Mortgages are private loans which are backed by private lending companies. Proprietary reverse mortgages usually have the highest upfront costs of the three Reverse Mortgage loan options

· Single-Purpose Reverse Mortgages are not offered everywhere. In places in which they are available they are offered by non-profit organizations and state and local governments. The equity that you receive through these mortgages can be used for one purpose, as defined by the lender or the government – usually for home improvements or repairs. This is generally the least expensive Reverse Mortgage option.

· Federally-Insured Reverse mortgages are insured by the Federal Housing Administration and backed by the U.S. Department of Housing and Urban Development. These loans are known as Home Equity Conversion Mortgages. Borrowers can access more of their equity through the HECM loan. Borrowers can receive their money as a line or credit or in monthly payments. The loan has lower costs than a proprietary loan.

All of these loans are all dependent on a number of factors including the borrower’s age, the appraised value of his home and the current interest rates.

Home Equity Conversion Mortgages

When an individual takes out a HECM Reverse Mortgage the ownership of the property is not signed over to the lending institution. The home’s title remains in the borrower’s name. If the borrower dies the family has the option to pay off the reverse mortgage and maintain ownership of the home. If the heirs cannot pay off the mortgage the house becomes the property of the lending institution which can then sell it to recoup their investment.

Since borrowers are not obligated to make monthly payments the interest and the balance of the loan grow each month. Unlike a traditional loan in which the balance gets smaller every month, with a Reverse Mortgage the balance actually grows. This is because a payment is added each month along with the principal and the interest. Advisors suggest that as a person ages, they take out a smaller reverse mortgage because if the heirs want to keep the home in the family, the borrower should take out a Reverse Mortgage only what can be repaid. If the borrower plans on leaving an estate and the heirs cannot pay off the reverse mortgage loan, the money may be taken from the estate, leaving a smaller estate.

If the borrower does not pay the loan’s interest payment along with the home insurance and property tax payments, the reverse mortgage can be deemed in default and foreclosed. It is therefore vital to ensure that the borrower makes these payments. In some families, it’s a good idea to have a younger family member on call to monitor these financial issues.

A Reverse Mortgage does not affect income tax payments or medicare benefits but it may affect benefits from Medicaid – families should consult with an accountant, an accountant or with a financial player who specializes in elder law to determine how the Reverse Mortgage may affect the borrower’s rights.

If the borrower is not able to stay in the home — for medical reasons, to move to a long-term care facility or because of death, the loan ends and either the family repays the loan or the property reverts to the lending institution.

What the Commercials for Reverse Mortgages Don’t Tell You

You’ve probably seen commercials for Reverse Mortgages. Major stars, including Robert Wagner, Pat Boone, Senator Fred Thompson — former senator from Tennessee and star of “Law & Order — and Henry Winkler aka “The Fonz” have taken to the airwaves to describe the benefits and advantages of Reverse Mortgages on TV.

Teague McGrath, director of marketing at the reverse mortgage company American Advisors Group, discusses the importance that Reverse Mortgage lenders place on using a credible and trustworthy individual as their Reverse Mortgage representative. The target audience for Reverse Mortgages includes couples who may need to extra cash to help out their children, travel or even meet their day-to-day living expenses. McGrath comments that, rather than leave money through inheritance, these seniors want to enjoy their nest egg themselves or see their loved ones enjoy it — these borrowers generally include women in their late 60s or early 70s whose husbands have died or have entered nursing homes, leaving them in a situation in which they need the money to stay in their homes and maintain their independence. These ladies respond to traditional gender roles and look to a man to help them make their financial decisions. “Our customers also look for someone older than they are; they want to look up in age, not down. And, of course, someone they can trust” McGrath said in explaining why stars such as Winkler, Thompson and other 70ish men are appropriate spokespeople for Reverse Mortgages.

Financial advisors note that these promoters focus on the positive aspects of the loan and present it as a risk-free option. Yet the industry representatives often gloss over the loan obligations which, if ignored, can put the borrower in financial distress. Obtaining a HECM mortgage is a serious decision that should not be made without a full understanding of its pros and cons.

The actors who promote the Reverse Mortgage on TV may gloss over the implications that a Reverse Mortgage can have on the negative aspects of the loan. If, however, you do your homework, you’ll be prepared for everything and anything that the mortgage will mean to your life.

Reverse Mortgages, also called “Home Equity Conversion Mortgages” are loans which are available to homeowners who are 62 years or older. These mortgages enable seniors to convert part of the equity in their home into cash. The borrowers can then use the proceeds in any way that they wish including to cover health care, long-term nursing home care and even basic living expenses. There is no restriction on how proceeds can be used.

Lending institutions often have their own Reverse Mortgage plans but federally-insured Home Equity Conversion Mortgages (HECMs) are the most popular types of reverse mortgages. HECMs were created by the U.S. Department of Housing and Urban Development which regulates the loan. HECMs are not government loans but are issued by private banks.

The amount that can be borrowed under a HECM loan is determined by a formula which takes the percentage of the home’s value based on the borrower’s age and current interest rates into account to calculate the equity that the borrower can access.

To take out a traditional mortgage the borrower commits to making payments to the lender. The HECM “reverses” that payback stream. The lender makes payments to the borrower in the form of an annuity (a steady stream of income), a lump sum payment or a line of credit that the borrower can draw on as needed. The borrower does not pay pack the loan until s/he no longer lives in the home When the loan comes due (when the homeowner(s) die or leave the house, the house becomes the property of the lender which then recoups its investment by selling the home. If family members wish to purchase the home they may do so from their own assets or from other assets from the borrower’s estate.

A few of the cautions that the Reverse Mortgage TV representatives don’t emphasize enough include the borrower’s obligation to maintain the house and continue to pay property taxes and homeowner’s insurance throughout the course of the loan. This means that default on the loan is possible if the borrower does not meet these obligations.

Senior advocates remind older Americans to carefully review all of the Reverse Mortgage’s terms before accessing a HECM loan. Many retirees, however, have noted that Fred Thompson’s own mother took out a Reverse Mortgage and has been pleased with the financial security and independence that the loan afforded her. That one loan may have more of an impact on potential borrowers than the pitch of 100 Hollywood stars.

National Reverse Mortgage Lenders Association Meeting Focuses on Improved HECM Loan

In March 2014 the National Reverse Mortgage Lenders Association (NRMLA) met in New York for the annual Northeast NRMLA conference. The meeting was designed to update members about recent changes and improvements to the HECM loan.

The Northeast NRMLA Regional Meeting was held on March 18th and 19th. It focused on recent changes and improvements to the loan which is regarded as a tool for seniors to use in their financial planning for their retirement years.

The Home Equity Conversion Mortgage (HECM) loan was established in 1989 as a mechanism which allows seniors aged 62 and older to access the equity that they hold in their home while continuing to live in their home. Over the years the Department of Housing and Urban Development (HUD), which administers the loan, has made changes to the loan structure but as the loan approached its 25th year of activity Congress authorized HUD to implement more significant changes to shore up the loan and institute additional safeguards to protect borrowers, lenders and the Federal Housing Administration which insures the loan.

Congress’s mandate, which comprised a bi-partisan effort and encountered no opposition, directed HUD to establish additional loan requirements that will improve “the fiscal safety and soundness” of the Reverse Mortgage program. The first changes were instituted in April 2013 and additional changes were implemented over the summer and early autumn of 2013. Reverse Mortgage lenders took advantage of the NRMLA New York conference to learn more about the new rules and regulations that were issued after Congress directed HUD to make the changes.

The New York Regional NRMLA meeting included panel discussions, workshops and debates that updated the participants about new changes and provided information and suggestions regarding ways to educate investors and consumers about the benefits involved in using a HECM loan as part of a retirement plan. Karin Hill, HUD’s Director for Single Family Programs, joined the session and participated in panels to expand the scope of the participants’ understanding about myths and misconceptions regarding new HECM changes. Many participants joined the panels including one in which the presenters, representing HECM investors, focused on their expectations for an improved HECM market in the coming months.

NRMLA is a professional organization for Reverse Mortgage lenders and related professionals. It was established in 1997 to enhance the professionalism of the Reverse Mortgage lenders. NRMLA is comprised of more than 300 lending institutions and more than one thousand people who are involved in the Reverse Mortgage industry. NRMLA membership is responsible for more than ninety percent of all Reverse Mortgage transactions that take place in the United States. NRMLA serves as the national voice for the Reverse Mortgage lenders as it provides educational resources to members and advocates for the HECM industry. All members of the NRMLA commit themselves to the NRMLA Code of Ethics and Professional Responsibility.

The conference brought together NRMLA members, Washington representatives and Wall Street representation. The keynote speaker at the Finance and Investment Forum, Mr. John F. Getchis, Senior Vice President of the Office of Capital Markets at Ginnie Mae, drew on 35 years of experience in his background in working on mortgage-backed securities and capital markets to present a round-up of how the recent changes will gear the HECM loan for growth and diversity over the coming years. Getchis also related to considerations that should be taken into account when helping seniors plan for their retirement.

Other conference sessions included information about the Retirement Funding Gap and a CRMP-credit training session on how to fill out financial assessments, one of the loan’s coming changes.

As of April 2014 over 750,000 borrowers, both senior singles and couples, have accessed an FHA-insured HECM loan to help meet financial needs.

Surviving Spouses of Reverse Mortgage Borrowers File Lawsuit Against HUD

In March 2014 four surviving spouses of FHA-insured Home Equity Conversion Mortgage borrowers filed a lawsuit against the Department of Housing and Urban Development (HUD) In the lawsuit, the plaintiffs claim the Reverse Mortgage loan has caused them undue harm due to a statue that will force them to leave their home.

In this suit the plaintiffs seek relief on the impending foreclosure on their homes. They claim that, because their name had been removed from their home’s title or because they were not named on the title of the home prior to the closing of the Reverse Mortgage loan, and they survived their borrower-spouses, the loans have been closed and they face losing their homes.

Charlie Plunkett of Miami Florida, Clarisa Welte of Temecula California, Roselaine Labonte of Haverhill Massachussets  and Winnie Barlock of Las Vegas Nevada worte, in their class action suit, that they “challenge HUD’s failure to protect them and other surviving spouses of Reverse Mortgage borrowers from foreclosure and displacement, as required by the Reverse Mortgage statute.”

The AARP is representing these plantiffs as they seek relief for themselves as well as those who are similarly affected by the clause in the Reverse Mortgage agreement.

Craig Briskin, an AARP attorney who is representing the plaintiffs, said “The motion is filed under federal law to say whatever relief these folks are getting will be extended to those similarly situated.” Briskin believes that ultimately, the suit could affect thousands of individuals who have faced, or are facing, similar situations.

In the suit the plaintiffs write that “subject j [of the Reverse Mortgage law] means what it says: the loan obligation is deferred until the homeowner’s and the spouse’s deaths.” They claim that the Department of Housing and Urban Development violated federal law by foreclosing on the homes they had shared their late spouses—the reverse mortgage borrowers—even though they themselves were not listed on the home’s title.

The suit follows up on an October 2013 ruling by the Court of Appeals regarding a similar lawsuit in which two surviving spouses contested the HUD’s policy of not allowing surviving spouses to remain in their homes after the death of the borrowing spouse. In that suit the Court of Appeals ruled that the surviving spouses must be protected as homeowners. The plaintiffs sought a declaratory judgment that HUD’s regulation violates federal law and demanded that HUD take steps to protect surviving spouse homeowners as required by law. The Appeals Court judge ruled that HUD must grant relief and identify a “remedy” to the issue, though it’s still not clear what that remedy might involve.

Relating to the previous case, Jean Constantine-Davis, senior attorney with AARP Foundation Litigation said “The decision marks a turning point for surviving spouses such as our clients and ensures that they will receive the protections guaranteed by the law: that they will be able to remain in their homes, despite the loss of their husband or wife” At that time the AARP expressed the belief that the decision will ultimately affect an “untold but substantial number” of similar surviving spouses.

Although HUD now requires that potential borrowers undergo a counseling session with a HUD-approved counselor who will explain and expand on the various issues involved, borrowers who took out their HECM loan before the counseling requirement was introduced in 2009 are still facing uncertainty. The AARP hopes that the new suit will provide relief to spouses who are facing foreclosure due to the HUD’s previous lack of clarity on the issue of spousal involvement in the Reverse Mortgage.

The HECM Reverse Mortgage – For You?

The HECM Reverse Mortgage was introduced in 1989 as a loan that allows senior citizens aged 62 and older to use the equity that they have in their house while they continue to live in the house. The loan is insured by the Federal Housing Administration so regardless of fluctuations in the housing market, the borrower never owes more than the amount of money that he signed for when he took out the loan.

The HECM loan isn’t appropriate for everyone. Financial advisors warn against using a HECM loan to cover daily living expenses. The loan is meant to help seniors augment their existing income – social security, pensions, annuities, 401ks, etc – by providing them with additional monthly income that can help them ease their lives and raise their standard of living to include “extras.”

Borrowers who intend to use the Reverse Mortgage for emergency funds, to pay off debt or to pay off an existing mortgage should request the services of a qualified financial advisor who specializes in senior finances before they sign for the loan. In addition to an individual’s personal accountant or attorney, many senior support organizations provide this service free or charge or for a small fee.

Even before you consult with an advisor, you can do a bit of homework and begin the process of determining whether or not you would benefit from a HECM mortgage. An HECM calculator gives an overview of when and how a HECM loan can offer the financial boost that you may be looking for. By looking at examples of seniors living in different circumstances you can get an idea of what a HECM loan can offer you.

You have three options for drawing funds on a HECM loan: as monthly payments, through a line of credit and as a combination of the monthly payment and line of credit plans. Using the HECM calculator you can find the option or combination of options that best meets your needs. You can then compare the funds that you can draw with the total settlement costs and decide whether the benefits are worth the cost.

For example, Sylvia Arnold has a house worth $400,000. She has paid off her mortgage and has no immediate need for additional funds. Sylvia, however, is concerned that the nest egg on which she relies for her living expenses may become depleted while she is still alive — she worries that she will outlive her money. She wants protection against that contingency. The HECM calculator indicates that Sylvia can obtain a credit line of $233,000 on an adjustable-rate HECM. If she leaves this credit line untouched the line of credit will grow every year at a rate equal to the mortgage insurance premium plus the current interest rate. If Sylvia depletes her nest egg while she is still alive she will be able to begin to draw on her unused line of credit. If the interest rates don’t change the unused line will grow to $848,000 when Sylvia hits 95 while if rates increase in the future, the available line will be even larger. Thus, the ratio of available funds loan costs of $8,200 exceeds the loan costs by 28 to 1 and HECM loan costs will absorb very little of the equity in Sylvia’s house, unless she outlives her assets.

Arthur Lawrence is 65 and his house is worth $200,000. He has a $98,000 mortgage balance but because he is now living on a reduced income he is having difficulty making the mortgage payments. According to the HECM calculator a fixed-rate HECM will allow him to pay off his existing mortgage which will eliminate the payment burden but will leave him nothing for future draws. Arthur will max out at age 65. Arthur might be better off trying to make payments on his existing mortgage for another five years at which time the HECM can put money in his pocket.

Earl and Mary Beardsley have a house that’s worth $400,000. They carry a mortgage balance of $80,000. The HECM calculator indicates that a Reverse Mortgage will allow them to pay off the $80,000 balance and maintain a credit line of $153, 380 on an adjustable-rate HECM. They’ve decided to plan for a monthly draw of $600 which will leave a credit line of $46,000 which will grow every month that it’s not in use. The value of the funds at their disposal is 27 times larger than the settlement costs of $8,200, making a Reverse Mortgage a good financial decision.

Every Reverse Mortgage decision is individual, based on the value of the house, the age of the potential borrowers and the borrower’s financial situation. In addition to the calculator you can receive guidance from the HUD-approved counselor with whom you will meet before signing on any loan agreement.

Baby Boomers look to Reverse Mortgages

The wave of baby boomers who are reaching retirement age has expanded from a trickle to a flood. These individuals are, by and large, well-educated and well-informed. For years they’ve struggle to pay their mortgage, help their own kids with their expenses of college and starting their lives. They’ve built up their 401ks, dealt with medical expenses, repaired the house and how they’re looking forward to enjoying their retirement years in an atmosphere of quiet and security. Unfortunately, for many of these individuals, pension cuts and reductions in other benefits have left them with barely enough income to allow them to live comfortably.

There’s not a lot that retirees can do to boost their income but one option that is suitable for many of these people involves taking out a Reverse Mortgage. The Reverse Mortgage is a loan program that involves taking out a loan based on the equity that the senior holds in his home.

A Reverse Mortgage, also known as a Home Equity Conversion Mortgage, is not without risk.  It is a loan, and as with any loan, there are loan obligations. It’s marketed as a supplement to a senior’s income but in reality, it’s a loan. The difference is that the Reverse Mortgage doesn’t have monthly payments. The loan balance is satisfied when the house is sold after the last surviving person on the deed no longer lives in the house. That’s what makes it so attractive — there are no monthly payments.

Reverse mortgages are specifically designed for borrowers who are 62 and older. Anybody who is on the deed has to be at least 62. If two partners are signed onto a home’s deed but only one partner is 62, the Reverse Mortgage can be issued in that older partner’s name, but the younger partner then takes a risk that if the older partner dies or leaves the house, the loan will become due and the younger partner will be forced to leave the house.

Additionally, just like in the forward mortgage world, no one is going to be able to walk into the offices of a lending institution and take out a loan that’s valued at 100 percent of the value of the home. The amount of equity that the borrower can obtain is based on several factors including the age of the youngest borrower, the value of the property, and the current interest rate. The house does not have to be mortgage free as long as there’s sufficient equity — if there’s still a mortgage on the house, the amount of the Reverse Mortgage must be sufficient to cover the remaining portion of the mortgage that needs to be paid. For instance, if a potential borrower owns a $200,000 home with $50,000 left on the mortgage, he could take out a Reverse Mortgage for approximately $112,000. $50,000 of that loan amount would first go toward paying off his mortgage with the remaining funds available for the borrower to use as he wishes. Many senior homeowners prefer to pay off their mortgage in this way.

Many seniors are reluctant to take out a Reverse Mortgage because they worry that their children will be left with the bill. However, if the borrowers end up owing more than what the home can be sold for at the time of their death or when they leave the home, the FHA insurance makes up the difference. In addition, no deficiency balance is passed along through the estate and the FHA won’t pursue any of the borrower’s assets, such as a savings account or a life insurance payment, to settle a shortfall.  If there’s a balance left over after the lending institution sells the house, the inheritors receive the difference. The lender collects what’s owed on the loan, the principal, any interest and the loan’s closing costs.

Reverse Mortgages are a good move for some seniors but not for everyone. Financial advisers suggest HECM loans for retirees who have enough money to meet their monthly expenses and simply need or want a little extra income every month.

New Tax Incentives for Long-Term Care Planning Include Reverse Mortgages

Long-term care services, which are generally not covered by regular health insurance or by Medicare, can be an expensive proposition for many families. Long term care agencies see that the cost prevents many seniors who need the care from seeking it out. Today however, the government has begun to offer tax relief to people who are paying for long-term care. These tax benefits apply to multiple ways of paying for care which can range from long-term care insurance to reverse mortgages and annuities.

What are the tax benefits of owning long-term care insurance? For the 2014 tax year, federal tax deduction limits for long-term care insurance range from $370 to $4,660, depending on the age of the taxpayer. That’s up from $360 to $4,550 from the 2013 tax year. If you already have a policy, the 2013 limits will still apply for this year’s return, due April 15 2014. If you don’t have a policy, you can set future deductions in motion now, starting with limits for 2014.

Many states also offer incentives for purchasing long term care insurance for state returns. Well over half of the states now offer some form of tax deduction or credit for owning long term care insurance. Insurance agents provide information.

What are the tax benefits of life insurance and annuities that cover long-term care?

1. Some long term care riders convert life insurance or annuity benefits into an long term care benefit that covers care as needed  but most available riders are not tax-qualified. When purchasing long term care insurance, it’s important to find a carrier that does offer tax-qualified LTC riders.

2. The tax benefits for critical illness insurance protects the policy holder in case of a major conditions (such as cancer or dementia) that may lead to the need for long-term care. Premiums for critical care insurance are not currently tax-deductible but the benefits received are tax-free.

3. Reverse mortgage income can be used to pay for long-term care if and when it’s needed. Reverse mortgages are designed with the specific needs of the elderly in mind. The proceeds are tax-free and do not affect the borrower’s social security, Medicare or pension income. Reverse mortgages are available to homeowners who are 62 or older. They are special mortgage loans which are insured by the Federal Housing Administration. Payment on these loans does not become due for as long as the homeowner resides in the house as his primary residence.

4. Organizations may also benefit from long term care tax incentives. Premiums can be one hundred percent tax-deductible to a business because they are not considered income to the employee. When benefits are received, they’re generally tax-free.”

Financial Planning for Seniors

As an individual or couple nears retirement age, senior advocates suggest that the individual(s) seek out a financial planner to help them prepare for their financial future. Retirement involves a new economic reality — pension income is generally reduced as opposed to the previous paycheck income.

Some basic questions for people approaching retirement age:

  • Should you tap your savings? You’ve been saving for your retirement for years, but accessing your savings will reduce available funds in case of an emergency.
  • What additional factors should you factor in? Will you be eligible for Medicare?  Medicaid?  Social Security?  Are you going to see your health insurance premiums go up? What other new costs might you be seeing?
  • Will you be able to help your unemployed/underemployed adult children? Can you help out with grandchildren expenses?
  • Do you have other income possibilities? Part-time work? A cottage industry idea? Is tapping your home’s equity with a Reverse Mortgage a good idea?

Whatever your decisions and options, as you reach retirement age, you need to build a financial plan, both for your own future and for your family’s security.

  1. Review long-term care insurance options. Most seniors don’t purchase long-term care insurance but by the time they need it the policy is prohibitively expensive. Buy long-term care insurance so that you will be able to cope with any eventuality without panic.
  2. Don’t hesitate to use the services of a professional as you plan your future. Talk to a lawyer or a financial advisor that you trust. This adds outside authority to your decisions and opens up possibilities that you might not have considered.
  3. Find out what benefits you are entitled to access? Everyone knows about Social Security and Medicare but you might have additional benefits from your pension package, insurance policy or the state or federal government. In addition, many organizations, stores and services offer special discounts and assistance to seniors. Maximizing your rights can save you significant sums of money and allow you to use your available income for more of your desired expenditures.
  4. Consider a Reverse Mortgage. A Reverse Mortgage, also known as a HECM loan, is one of the most powerful tools that seniors have to increase their available income. When you take out a Reverse Mortgage loan you’ll mortgage your home to a lending institution. You will, however, be able to continue to live in your own home throughout the course of the mortgage as lending institution pays you, in monthly installments or via a line of credit, the payment based on your home’s worth and your age upon accessing the mortgage.

Reverse Mortgages aren’t free. There are costs including upfront fees, lenders’ servicing charges and FHA insurance premiums. You’ll also need to take into account the cost of other annual fees including property taxes, homeowner’s association payments, your homeowner’s insurance payments and home maintenance.

If you decide to access a HECM loan you will need to prove that you have sufficient income, via your Social Security and/or your pension payments, to afford these expenses. The lending institution will review your financial situation and, if it feels that you will not be able to meet these payments,   may mandate a “set-aside” fund that will be deducted from your total draw and will be set aside to meet loan expenses.