Today, many seniors along with their families and senior advocates are questioning whether it’s a good idea to risk that asset by mortgaging the home in a Reverse Mortgage. In a Reverse Mortgage, also known as a Home Equity Conversion Mortgage (HECM), the homeowner mortgages the home’s equity which is then available for him to draw immediately as a line of credit, a one-time cash payment or thorough monthly payments. The Reverse Mortgage is a federally-insured loan which is regulated by the Federal Housing Administration, an office of the Department of Housing and Urban Development.

The terms of the loan dictate that the loan remains in effect for as long as the borrower continues to live in the house. This is a positive situation for many seniors who would prefer to remain in their own homes for as long as possible. Proceeds from the loan allow seniors to tap into the value of the home to pay for home repairs, property taxes other expenses. With reductions in the value of pensions and increasing life-expectancy, the additional cash provides a welcome relief for many retirees.

Reservations about Reverse Mortgages include the relatively high interest rates and service fees that accompany the loan. In addition, there is a concern that seniors who take out the loan in their early 60s are depleting the loan’s resources and will not be able to live out their lives with needed income. Despite these hesitations, the FHA believes that the Reverse Mortgage is continuing to prove itself  and will not even require a government subsidy past 2012.

At a Congressional hearing in May 2012, confidence in the HECM loan was strengthened by an AARP (American Association of Retired Persons) request that Congress increase the current limit on the number of Reverse Mortgages allowed under FHA insurance. The AARP, which advocates for the rights and welfare of seniors, testified before Congress that “AARP supports legislation that would remove the statutory limit on the number of loans that can be insured by HUD in a given …lifting the statutory loan limit would be helpful in encouraging lenders to offer reverse mortgages and remain committed to this market.”

The AARP reminds seniors that Reverse Mortgages are not the best alternative for every retiree. Reverse Mortgages should not be taken to pay off a credit card debt and retirees should wait until their late ’60s to apply for a Reverse Mortgage to ensure that they adequately budget their resources for their later senior years. In addition, in some states, Reverse Mortgage income can limit Medicaid benefits.

Mandated counseling sessions address these issues but potential borrowers should be aware of the limitations of a Reverse Mortgage before they begin an application process.

A new report by the  MetLife Mature Market Institute and the Council of Aging points out that the probability that younger seniors, aged 62 - 64, will take out a HECM loan has steadily increased over the last decade. This is worrisome because these individuals will not be able to borrow as much from their home’s equity as older seniors. This puts them at financial risk as they age.

In the year 2000, the average age of a potential borrower who attended a Reverse Mortgage counseling session was 76 while in 2011 the average age of the potential borrowers was 71.5. Twenty percent of the borrowers in 2011 were between the ages of 62 and 64.

Reverse Mortgages are regulated by the United States Department of Housing and Urban Development and guaranteed by the Federal Housing Administration. HECM loans allow homeowners aged 62 and older to take out a loan against the equity of their home. The borrowers may continue to live in the home as long as the home remains their primary residence. All existing mortgages on the home must be paid off before the homeowner can draw cash from this loan, but the loan may be used to pay off an existing mortgage. Borrowers are responsible for paying the mortgage insurance premium as well as the loan’s interest — these payments can be deducted from the cash balance provided by the loan. Borrowers must also pay for the home’s upkeep and maintain property tax payments. When the homeowner dies or moves, the house reverts to the loan’s lending institution which can then sell the home to recover the money paid out by the loan.

The amount that a borrower is eligible to access with an HECM loan is dependent on the borrower’s age and the appraised value of the home. Standard HECM loans give  older borrowers more money while the HECM Saver allows for a smaller loan with lower interest rates and loan fees.

According to the HECM guidelines, the minimum age for taking out a reverse mortgage is set at 62. Advocates for the elderly and financial consultants advise retirees to wait a few years before applying for the loan. A home is, for most people, their most important asset and waiting a few years may make the difference between a sufficient loan amount to carry seniors through their retirement or not.

Reverse Mortgage Industry advisors suggest that homeowners who are looking at a Reverse Mortgage to help cover debts and expenses work with a financial planner to ensure that they have a clear understanding of the loan’s impact and repercussions.

Reverse Mortgage Eligibility

All borrowers must be 62 years old to sign on the loan. This means that if a couple wants to take out a Reverse Mortgage on their home, only one partner needs to be 62 years old, BUT if that partner dies, the house reverts to the lending institution, even if the second partner is still living in the house. Consultants therefore suggest that a couple wait until both partners are eligible to apply for the HECM loan before signing on the loan.

Borrowers must own the house outright or owe a small enough balance on the existing mortgage so that the proceeds of the Reverse Mortgage can pay off the existing mortgage. When the Reverse Mortgage is approved, this balance will be paid before any other payments are made to the borrower.

Borrowers must occupy the home as their primary residence for the majority of the year.

Eligible Properties

The following types of property are eligible for a Reverse Mortgage: Single family one-unit dwellings, some manufactured homes, some condominiums and 2-4 unit owner occupied dwellings.

Types of HECM Mortgages

There are three HECM mortgage options. The HECM Standard offers a Reverse Mortgage whose worth is based on the age of the youngest borrower, current interest rate, the lesser of home’s appraised value or the HECM FHA mortgage limit of $625,500 and the Initial Mortgage Insurance Premium. The HECM Saver charges lower interest rates and loan fees but borrowers are able to borrow less money than with the HECM Standard. The HECM for Purchase allows borrowers to use the proceeds from the loan to purchase a second property under prescribed circumstances.

Fees and Charges

The HECM loan includes several fees and charges including the mortgage insurance premiums, payment to the lending institution, origination fees, interest and servicing fees. Not all fees are mandatory — the borrower will be able to learn, at a counseling session, which charges are mandatory.

Counseling

The Federal Housing Administration mandates counseling sessions for all HECM potential borrowers. These counseling sessions can be done either face to face or by telephone, according to the borrower’s preference. All individuals listed on the house’s title must attend these counseling sessions.

All individuals listed on the house’s title must apply for the reverse mortgage and sign the loan papers.

Seniors aged 62 and older are entitled to mortgage their home under a federally-insured Home Equity Conversion Mortgage plan. This HECM mortgage, also called a “Reverse Mortgage,” allows the borrower to convert their home’s equity into a tax-free payment while they retain ownership of their home. The loan is repaid when the borrower no longer lives in the home, at which point the ownership of the house reverts to the lending institution. The lending institution then sells the property and recoups funds. Even if the value of the house declines, the borrower is not liable for the difference between the value of the loan that he received and the value of the house at the time that the bank takes possession.

Draw Options

The Federal Housing Authority caps the HECM maximum lending limit at $625,500. Reverse Mortgage borrowers have their choice of draw options. These options include taking the money as a lump sum cash payment, obtaining the funds as a line of credit or signing up to receive monthly payments. It is also possible combine these three alternatives when signing up for the preferred draw option. Borrowers should be aware that the monthly payment alternative offers varying monthly sums, with higher monthly sums available for older seniors. For this reason, Reverse Mortgage advisors suggest that seniors try to wait a few years beyond age 62 before they apply for a Reverse Mortgage.

Each individual borrower should consider his or her financial reasons for taking out a HECM loan when deciding on the method of payment. Many financial counselors suggest that seniors use a Reverse Mortgage to pay off a significant credit card debt, thus saving the credit card interest charges. In such a case, the borrowers will want a full or partial lump sum payment. In other cases, seniors who are having difficulties meeting monthly expenses on their retirement budgets will want to consider a line of credit or the monthly payment option.

Responsibilities

As part of the Reverse Mortgage contract, borrowers agree to continue the regular property tax payments on their home and maintain the home’s upkeep. In addition, borrowers are liable for the loan’s processing fees and must pay the loan’s interest costs. Lending institutions allow Reverse Mortgage borrowers to pay off these fees by subtracting them from the loan’s total payment.

Financial advisers advise senior clients to shop around among lending institutions before signing up for a HECM loan. Fees and interest rates vary among lending institutions. It is also possible to negotiate fees and interest rates with lending institutions, especially if a homeowner can demonstrate that he has a good credit rating.

Mortgagee Letter

As of March 2012 the Deval LLC consulting firm will serve as the mortgage servicing contractor for HECM mortgages and other single family property mortgages.

This was announced by the Department of Housing and Urban Development on April 2^nd 2012. Carol J. Galante, Acting Assistant Secretary for Housing-Federal Housing Commissioner. The announcement was made by HUD Mortgagee Letter 12/07. The change means that once a loan reaches 98% of the max claim amount the servicer can assign the loan to the HUD through Deval.

The letter was sent to all approved mortgagees, all HUD field offices, all proved housing counseling agencies and all homeownership centers. These individuals and agencies will now submit all correspondence, documentation and servicing for HUD-held single family mortgages to DEVAL LLC.

The following HUD-held assets are included in this announcement:

1. Assigned Home Equity Conversion Mortgages (HECM mortgages)

2. HUD-held Title II Mortgages

3. HECM Subordinate Mortgages

4. Partial Claim Subordinate Mortages

5. Section 235 Subordinate Mortgages

6. Nehemiah Subordinate Mortgages

7. Good Neighbor Next Door (GNND) Subordinate Mortgages

8. Hope for Homeowners (H4H) Subordinate Mortgages

9. Asset Control Area (ACA) Mortgages

10. Emergency Homeowners Loan Program (EHLP) Subordinate Mortgages

HECM servicer inquiries can now be referred to hecmservicing@deval.us or, by phone, to the DEVAL toll-free number at 877-622-8525.

DEVAL is a women-owned Hispanic-American SBA 8(a). It is a certified, SDB, DMBE consulting firm which offers clients advisory services in finance, real estate,  accounting, and management consulting. It provides financial, real estate, accounting and management consulting services.

Soft-Landing Program

Attendees of the March 2012 National Reverse Mortgage Lenders Association (NRMLA) heard a review of the innovative Soft-Landing program which the NRMLA administers in conjunction with the National Council on Aging.

The program offers counseling to reverse mortgage borrowers whose HECM mortgages are endangered due to a tax or insurance default. A key point of a HECM mortgage involves the borrower’s obligation to maintain home upkeep, property tax payments and payments on the loan’s interest. Seniors who fall behind on these payments may run the risk of foreclosure.

The Soft-Landing program identifies borrowers-at-risk and sends in a case worker who will help the borrower find a suitable way of managing funds and paying back debts.

Program organizers told the NRMLA Western Conference that the program has proven itself. Steps are being taken to identify options for extending and expanding the program.

There are a number of money management options that seniors should review in order to help them manage their finances more efficiently. Analysts remind retired individuals that not all suggested alternatives are applicable to every situation but seniors should carefully review each proposal to ascertain those which apply to their particular circumstances.

Credit Cards
Peter Macaluso, vice president of the Retirement Services Division at Franklin Mutual Group Insurance (FMI) suggests that seniors make it a practice to pay off their credit cards at the end of each month. He notes that this practice will save the credit card owner the costs associated with the credit cards’ high interest rates which increase the debt. With reduced income, seniors are at a greater risk of getting into a high-interest form of debt when they can’t pay off their cards at the end of each month. Macaluso also advises seniors to take out a personal loan, with a lower percentage rate, when necessary, to pay off the credit card debt.

Annuities

Elle Kaplan of Lexion Capital Management LLC is expresses her reservations regarding investing in annuities, especially for seniors who may not recognize the hidden fees associated with this type of investment. Annuities provide limited tax deferments and death benefits but the money is often locked in, unavailable to investors who may need the cash to take care of emergencies or other unexpected expenses. This is a major drawback, especially for seniors who may invest in annuities without fully understanding the implications of keeping their savings unaccessible for several years.

Life Insurance
Retirees should carefully review the cost of a life insurance policy verses the value of the policy. Financial consultants urge seniors to investigate the cash surrender value of a life insurance policy versus the cost of the annual premium payments before signing on for such a policy.

Reverse Mortgages

Home Equity Conversion Mortgages (Reverse Mortgages) can offer real cash relief for retirees who want or need a monthly income or a lump sum payout. The Federal Housing Administration (FHA) - insured product offers seniors aged 62 and over assured alternative sources of income based on the equity in their home. Payment is not due until the borrower no longer lives in the house. The Department of Housing and Urban Development (HUD) regulates the industry and provides resources which ensure that potential borrowers have access to legitimate lending institutions for the HECM loan. HUD requires that potential borrowers undergo counseling with an approved HECM counselor before a lending institution can grant the Reverse Mortgage loan.

Financial advisers note that there are fees, insurance payments and interest rates associated with the loan which potential borrowers must take into account. In addition, many advisers suggest that, although seniors are eligible to take out a Reverse Mortgage at age 62, they should wait a few years to get a better return on their investment. The Reverse Mortgage, however, is a secure product which can offer financial relief to many retired people.

Through the ensuring years the Reverse Mortgage program has been a lifeline for many borrowers. Some potential borrowers have waited to see how the program develops before applying for a loan. In recent years the number of applications for Reverse Mortgages has begun to increase, signaling heightened public trust in the program.

Lending institutions are obligated to maintain the HECM loan for the amount of time that the borrower is living in the home. When the borrower leaves the house, the bank claims the home and sells or refinances the house, using the proceeds to repay the loan. HECM loans are insured by the Federal Housing Administration (FHA), a division of the Department of Housing and Urban Development (HUD). This means that if the HECM lender does not receive full repayment of the loan from the home’s refinancing or sale, FHA insurance will cover the losses.

Financial advisors remind potential borrowers to review their particular circumstances when considering a HECM loan. The HECM loan makes the most sense for seniors who are healthy and plan to stay in their home for a long period of time because those are the borrowers who receive the highest payback when they mortgage their home’s equity. In addition, each potential applicant should research the possible impact that a Reverse Mortgage may have on their Medicaid or Supplemental Social Security Income. The situation differs from one person to the next so these questions should be raised in the pre-loan counseling session that every applicant is required to attend.

Borrowers can also reduce the upfront fees and interest rates when they take out a HECM Saver, as opposed to the HECM Standard loan. The mortgage insurance premium fee is lower with a HECM Saver, though the Saver also offers a smaller amount to borrow. With a Reverse Mortgage borrowers are entitled to take the loan based on a percentage of the home’s appraised value — the maximum claim amount. This amount caps out at $625,000 but lenders calculate the amount that a borrower can mortgage according to the borrower’s age. Loan-to-value ratios vary, ranging from approximately fifty percent to almost eighty percent with older borrowers receiving the highest lending percentage.

Borrowers also must remember that if they have an existing mortgage, that mortgage must be paid off before the borrower will receive any cash payments from the Reverse Mortgage. This protects the Reverse Mortgage lending institution, leaving it in a first lien position.

The HECM Standard is the original Reverse Mortgage. The HECM Standard is available to seniors aged 62 and older who want to take out a loan against the equity of their home. A lending institution will assist the borrower to calculate the percentage of the home’s equity which can be mortgaged in a HECM loan. The borrower commits to the home’s upkeep, including maintaining property tax payments, and can then choose to obtain the loan funds as a line of credit, a one-time cash payment or in monthly installments. The monthly payments continue for as long as the borrower lives in the home. When the borrower no longer lives in the home the house’s ownership reverts to the mortgage’s lending institution which can then sell it to recoup the loan funds.

The HECM Standard has drawn the attention of financial advisors and seniors rights advocates because it carries significantly higher closing fees and interest rates than most other insured mortgages. To answer that concern the Federal Housing Administration launched a new reverse mortgage, the HECM Saver, in 2010. The HECM Saver charges significantly lower upfront fees in exchange for borrowing a lower amount of money. The HECM Saver charges only 0.01 percent of a home’s value, effectively eliminating the upfront mortgage insurance premium. On the other hand, depending on the borrower’s age, the borrower has access to between 10 and 18 percent less of the home’s equity than would be available with the HECM Standard.

Borrowers of both the HECM Standard and the HECM Saver must pay an ongoing insurance premium of 1.25 percent annually. Both loans are federally insured.

The HECM for Purchase provides an opportunity for seniors to purchase a new principal residence by using the proceeds from their HECM loan. Seniors who may want to consider this loan include homeowners who want to move to live near their children or wish to move to a property that has better physical access (handrails, ramps, wider doorways, etc). HECM for Purchase borrowers must demonstrate that they are moving to the new residence within 60 days.

All types of Reverse Mortgages require that the borrowers attend a counseling session with a FHA-approved counselor. At this counseling session potential Reverse Mortgage borrowers will hear the details of the loan including the loan requirements, commitments and obligations.

]]> http://www.reversemortgageadviser.com/blog/reverse-mortgages/1055/feed/ http://www.reversemortgageadviser.com/blog/reverse-mortgages/important-remember-ready-reverse-mortgage/ http://www.reversemortgageadviser.com/blog/reverse-mortgages/important-remember-ready-reverse-mortgage/#comments Fri, 16 Mar 2012 13:27:11 +0000 Laurie http://www.reversemortgageadviser.com/blog/?p=1053 Seniors who are considering taking out a Home Equity Conversion Mortgage (HECM) on their home should review the terms and conditions of the loan carefully before signing for the mortgage. The HECM, also called a “Reverse Mortgage” is a federally-insured loan that allows seniors aged 62 and older to take out a loan based on the equity that they hold in their home. The loan becomes “due” when the borrowers no longer live in the home. At that point, the lending institution takes possession of the home and sells it to repay the loan.

The loan sounds like a dream come true to many older people who are struggling to manage on a limited income. Financial analysts are generally positive about the Reverse Mortgage but caution potential borrowers to carefully review the HECM’s provisions to ensure that they fully understand their rights, obligations and responsibilities under the loan’s terms.

First, a HECM loan is dependent on the eligibility and value of the home. The government agency which administers the loan, the Federal Housing Authority (FHA) stipulates that homes eligible for a HECM loan include single family homes, two to four unit homes where one unit is occupied by the borrower, HUD-approved condominium projects and FHA-approved manufactured homes.

A mortgage calculator will assist applicants ascertain how much they can borrow. Amounts vary, depending on the current interest rate and the home’s value — either the home’s appraised value or the FHA mortgage limit, whichever is lower (presently capped at $625,000). In addition, the loan is dependent on the age of the youngest borrower (if a couple apply for a loan together, the age of the younger spouse sets the loan’s value).

Secondly, applicants must prepare to assume the mortgage’s terms. The HECM mortgage obligates borrowers to continue to maintain the house and pay property taxes on the home. In addition, the Reverse Mortgage fees are built into the terms of the loan which the borrower can either pay upfront or in monthly installments. These fees include the mortgage insurance premium, third party charges (for the home’s appraisal, title search, mortgage taxes and recording fees), origination fees (to the lender to cover loan processing costs), the interest rate and servicing fees.

Thirdly, borrowers can obtain the funds from their loan according to their needs. Payment options include taking the loan as a line of credit, as a one-time payment or by monthly payments. If a borrower wants to use the funds to buy another property, he can select the HECM for Purchase option.

The FHA mandates that all applicants for a HECM mortgage attend a counseling session before signing on the mortgage. At that time, applicants will hear more about the loan’s requirements and alternatives from a trained counselor. For additional assistance, potential applicants may contact the Department of Housing and Urban Development’s Resource Center for assistance.

A HECM loan provides a homeowner who is 62 or older with the opportunity to convert the equity from their home into cash. The borrower does not need to repay the loan while he lives in the house but when he leaves home the lending institution accepts ownership and sells the house. The proceeds from the sale cover the loan along with any unpaid loan interest and fees. The loan is insured so even if the house sells for less than the loan paid out the FHA insurance will cover the loss.

A recent MetLife Mature Market Institute survey indicates that almost half the applications for a HECM loan today come from seniors below the age of 70. The recession, loss of pension income and difficulties of older people to find employment after they lose a job accounts for the willingness of many 60somethings to turn to a Reverse Mortgage to make up for the lost income. Other younger seniors simply want to obtain some extra cash for travel or luxury purchases, reasoning that they’ll enjoy life while they’re still young and healthy.

AARP advisors are united in their concern about such financial planning. They note that once a borrower uses up the funds from the Reverse Mortgage he can find himself in more difficult circumstances than ever. If he is unable to maintain his loan obligations, including property upkeep and property taxes, the lending institution can foreclose on the Reverse Mortgage.

The AARP reminds seniors that they must examine the terms of a Reverse Mortgage carefully before signing. There are several ways for a borrower to draw out the funds from a Reverse Mortgage. These include taking the money as a line of credit, as a one-time cash payment or in monthly installments. “Tenure” monthly installments appear to be the most secure form of payment because these payments continue for the duration of the borrower’s residence in the house, irregardless of how long the borrower lives in the house.

The AARP reminds seniors that the amount of tenure monthly payments is dependent on the age of the borrower when they take out the Reverse Mortgage. Younger borrowers will receive lower monthly payments and these amounts, in real dollar terms, remain constant for the duration of the loan. This means that the borrowers, especially younger seniors, must incorporate these arrangements into their financial planning when considering a Reverse Mortgage.