Reverse mortgages

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A reverse mortgage allows homeowners 62 and older to withdraw a portion of home equity as income or a line of credit without selling the home or making monthly payments. In 2009, half of homeowners 62 or older had 55% or more of their net worth in home equity. [1] A reverse mortgage has been described as a loan of last resort because it can mean fewer assets for the homeowner and heirs. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home. The first reverse mortgage in the United States was issued in 1961. In 1987 Congress passed a reverse mortgage pilot program called the Home Equity Conversion Mortgage Demonstration, signed into law in 1988.[2]

Reverse mortgages saw abuses by lenders and earned a bad reputation when the housing bubble burst in 2008-2010. [3] The number of reverse mortgages dropped from an annual peak of about 115,000 in 2009 to 30,000 in 2016, according to the Federal Housing Administration. Reverse mortgages are now regulated by the Federal Housing Administration and the Consumer Financial Protection Bureau. For FHA Home Equity Conversion Mortgages, the FHA covers any difference between the sale value and the mortgage balance, preventing "underwater" loans. [4]

There are three types or reverse mortgages: FHA Home Equity Conversion Mortgage (HECM), single-purpose reverse mortgage, and proprietary reverse mortgage. [5]

FHA Home Equity Conversion Mortgage (HECM)

The Federal Housing Administration's (FHA's) Home Equity Conversion Mortgage (HECM) is a federally-insured mortgage backed by the U. S. Department of Housing and Urban Development (HUD). The loans can be used for any purpose. They are more expensive than traditional home loans or single-purpose reverse mortgages and the financing costs are higher, a factor if the home stay is short or the mortgage is small. [6]

FHA Reverse Mortgages (HECMs) for Seniors [7]

Borrower Requirements -- You must

  • Be 62 years of age or older
  • Own the property outright or paid-down a considerable amount [note 1]
  • Occupy the property as your principal residence
  • Not be delinquent on any federal debt
  • Have financial resources to continue to make timely payment of ongoing property charges such as property taxes, insurance and Homeowner Association fees, etc.
  • Participate in a consumer information session given by a HUD-approved HECM counselor [note 2]

Property Requirements -- The following eligible property types must meet all FHA property standards and flood requirements:

  • Single family home or 2-4 unit home with one unit occupied by the borrower
  • HUD-approved condominium project
  • Manufactured home that meets FHA requirements

Mortgage Amount Based On -- The amount you may borrow will depend on:

  • Age of the youngest borrower or eligible non-borrowing spouse
  • Current interest rate
  • Lesser of the appraised value or the HECM FHA mortgage limit of $625,500 (as of 2015) or the sales price

If there is more than one borrower and no eligible non-borrowing spouse, the age of the youngest borrower is used to determine the
amount you can borrow.

Financial Requirements

  • Income, assets, monthly living expenses, and credit history will be verified.
  • Timely payment of real estate taxes, hazard and flood insurance premiums will be verified
  • For adjustable interest rate mortgages, you can select one of the following payment plans:
    • Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
    • Term - equal monthly payments for a fixed period of months selected.
    • Line of Credit - unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
    • Modified Tenure - combination of line of credit and scheduled monthly payments for as long as you remain in the home.
    • Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
  • For fixed interest rate mortgages, you will receive the Single Disbursement Lump Sum payment plan.

HECM Costs

You can pay for most of the costs of a HECM by financing them and having them paid from the proceeds of the loan. Financing the costs means that you do not have to pay for them out of your pocket. On the other hand, financing the costs reduces the net loan amount available to you.

The HECM loan includes several fees and charges, which includes: 1) mortgage insurance premiums (initial and annual) 2) third party charges 3) origination fee 4) interest and 5) servicing fees. The lender will discuss which fees and charges are mandatory.

You will be charged an initial mortgage insurance premium (MIP) at closing. The initial MIP will be .5 percent or 2.5 percent, depending on your disbursements. Over the life of the loan, you will be charged an annual MIP that equals 1.25% of the outstanding mortgage balance.

Mortgage Insurance Premium You will incur a cost for FHA mortgage insurance. The mortgage insurance guarantees that you will receive expected loan advances. You can finance the mortgage insurance premium (MIP) as part of your loan.

Third Party Charges Closing costs from third parties can include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks and other fees.

Origination Fee You will pay an origination fee to compensate the lender for processing your HECM loan. A lender can charge the greater of $2,500 or 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000. HECM origination fees are capped at $6,000.

Servicing Fee Lenders or their agents provide servicing throughout the life of the HECM. Servicing includes sending you account statements, disbursing loan proceeds and making certain that you keep up with loan requirements such as paying real estate taxes and hazard insurance premium. Lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate or has a fixed interest rate. The lender may charge a monthly servicing fee of no more than $35 if the interest rate adjusts monthly. At loan closing, the lender sets aside the servicing fee and deducts the fee from your available funds. Each month the monthly servicing fee is added to your loan balance. Lenders may also choose to include the servicing fee in the mortgage interest rate.

In general, the older you are and the more equity you have in your home, the greater the loan can be. [8]

One unusual suggestion for a reverse mortgage is for buying a new home to downsize:

"Instead of eliminating debts, paying for healthcare or covering daily living expenses, you can also use a reverse mortgage to purchase a new home that better suits your needs. The advantage of using HECM for Purchase is that the new home is purchased outright, using funds from the sale of the old home, private savings, gift money and other sources of income, which are then combined with the reverse mortgage proceeds. This home buying process leaves you with no monthly mortgage payments." [9]

FHA HECM Counselor training manual

A helpful reference to the details of the program is the counselor training manual "Introduction to Home Equity Conversion Mortgages (HECM)" by the NeighborWorks Training Institute. [10]

FHA HECM Reverse mortgage calculator

The input and output forms for the National Reverse Mortgage Lenders Association (NRMLA) calculator are shown below (click on an image for full size). Sample cases were run in 2016 for

  • a $200,000 home
  • in the Midwest
  • with no mortgage, and
  • owners of the same age, for a range of ages.

In general, the "net loan limit" (maximum loan after fees) and amount available in the first year increased with age, while interest rates were constant. The calculator endnote and disclosure say that results vary with lender, geographic location, and prevailing interest rates. But if you want your entire home value, you'll have to sell.


FHA HECM Reverse Mortgage Calculator Input and Output
(Click on the image to view full size.)
Rev mort calc in.JPG Rev mort calc out.JPG
Ages Net Loan Limit 1st Year Limit Variable Interest Fixed Interest
65 51% 29% 4.2% 6.3%
75 58% 34% 4.2% 6.3%
85 67% 39% 4.2% 6.3%
95 71% 41% 4.2% 6.3%

NRMLA Calculator Endnote

The figures on this page are estimates only. These estimates are based on interest rates for the week of July 18, 2016, which may or may not be applicable to a loan for which you may qualify. These estimates are not an offer to make you a loan, do not qualify you to obtain a loan, and are not an official loan disclosure. Rates, fees and costs vary from lender-to-lender. Only an approved lender can determine eligibility for a loan or provide a “Good Faith Estimate” of loan terms.

NRMLA Calculator Disclosure

Please note: This reversemortgage.org calculator is provided for illustrative purposes only. It is intended to give users a general idea of approximate costs, fees and available loan proceeds under the FHA Home Equity Conversion Mortgage (HECM) program. The rates and fees shown are not the actual rates you might be offered by any particular lender, but generally represent rates that may be available in the market today, with the maximum origination fee allowable under HUD rules reflected for illustrative purposes only, along with an estimated FHA Mortgage Insurance Premium for a loan based upon the home value provided, and estimated recording fees and taxes, and other types of closing costs typically associated with a reverse mortgage loan. Note these closing costs can and do vary by geographic area or region.

Lenders might also offer different options on interest rates and fees. Interest rates on variable rate HECM loans are comprised of two components, an index and a margin. The "index" (our calculator uses the Monthly Adjusted LIBOR, which is a common index used in the market) will adjust regularly, as market interest rates move up or down.

The lender will add a "margin" to the index to determine the rate of interest actually being charged. The margin used in our calculator is 250 basis points (2.50%). You might find reverse mortgage originators that offer higher or lower margins and various credits on lender fees or closing costs. Upon choosing a lender and applying for a HECM, the consumer will receive from the loan originator additional required cost of credit disclosures providing further explanations of the costs and terms of the reverse mortgages offered by that originator and/or chosen by the consumer. The National Reverse Mortgage Lenders Association (NRMLA) is not a licensed lender or broker and does not make or offer loans. You can find a list of our lender members by clicking here.

Single-purpose reverse mortgage

Single-purpose reverse mortgages are the least expensive option. They’re offered by some state and local governments and non-profit organizations, but they’re not available everywhere. These loans may be used only for the purpose specified by the lender, for example, home repairs, improvements, or property taxes. Low or moderate income homeowners can qualify for these loans. [11]

These loans are not widely available and make up a tiny percentage of the reverse mortgage market. They often go by another name, such as property tax deferral programs. [12] These can be found online for California, Colorado, Connecticut, Idaho, Illinois (contact County Treasurer's office), Massachusetts, Michigan, Minnesota, Oregon, Tennessee, Texas, Washington, Wisconsin, and Wyoming. Approximately half the states have some type of property tax deferral program. [13] Check your state.

Proprietary reverse mortgage

Proprietary reverse mortgages are private loans backed by the companies that offer them. Higher-appraised homes might qualify for a bigger loan with a proprietary reverse mortgage. They are more expensive than traditional home loans or single-purpose reverse mortgages and the financing costs are higher, important if you plan to stay in your home for a short time or borrow a small amount. [14]

The loan size depends on the same factors as an HECM, but is limited only by the risk the lender is willing to take. These mortgages vanished after the housing bubble burst in 2008-2010, then returned when home prices rebounded. They aren’t as common as HECMs because they lack a secondary market for lenders, and cannot be easily secured by sale to Fannie Mae and Freddie Mac. [15]

Reverse mortgage criticism

The most common criticism is that reverse mortgages are more expensive than traditional home loans and the financing costs are higher. [16] But other problems have been noted:

  • Because there are no required mortgage payments, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. [17] That said, with an FHA-insured HECM the borrower can never owe more than the value of the property.
  • Reverse mortgages can be confusing, and many obtain them without fully understanding the terms and conditions. [18] In October of 2010, the National Reverse Mortgage Lenders Association (NRMLA) surveyed 600 owners with reverse mortgages across the U.S., and only 46% of respondents felt they understood the financial terms "very well" when they secured their reverse mortgage. [19] A Consumer Financial Protection Bureau report to Congress in 2012 stated that "government investigations and consumer advocacy groups raised significant consumer protection concerns about the business practices of reverse mortgage lenders and other companies in the reverse mortgage industry." [20]

    But a 2006 survey of borrowers by AARP showed 93 percent said their reverse mortgage had a "mostly positive" effect on their lives. [21] And the 2010 NMRLA survey reported 56% of seniors with a reverse mortgage would not be able to cover monthly expenses without it. [22]

  • Information available to help consumers understand prices and risks, including federally required disclosures and counseling, are not sufficient to ensure that they are making good decisions. [23]
  • Homeowners are taking out reverse mortgages at increasingly younger ages with more money upfront, exhausting their resources sooner. [24]

Other options

Unlike a reverse mortgage, the first two options require monthly repayments to the lender. A reverse mortgage is generally easier to qualify for than a home equity loan or home equity line of credit (HELOC), which require adequate income and credit scores. [25] The HELOC is more flexible than the home equity loan, and a less expensive way to borrow smaller amounts if the principal is paid back quickly. In general, a reverse mortgage is better for long-term income in spite of a reduced estate. A home equity loan or HELOC is better for short-term cash, if you can make monthly repayments and want to avoid selling. [26]

Home equity loan

A home equity loan is a "second mortgage", a lump sum paid back over a set time period, using the home as collateral. The loan is based on the difference between the homeowner's equity and the home's current market value. The mortgage also provides collateral for an asset-backed security issued by the lender and sometimes tax-deductible interest for the borrower.

Interest rates on such loans are usually adjustable rather than fixed, but lower than standard second mortgages or credit cards. Loan terms are usually shorter than first mortgages. [27]

Home equity line of credit

A home equity line of credit (HELOC) is more like a credit card that uses the home as collateral. A maximum loan balance is established, and the homeowner may draw on it at discretion. Interest is predetermined and variable, and usually based on prevailing prime rates.

Once there is a balance owed, the homeowner can choose the repayment schedule as long as minimum interest payments are made monthly. The term of a HELOC can last anywhere from less than five to more than 20 years, at the end of which all balances must be paid in full. The interest is often tax-deductible, making it more attractive than some alternatives. [28]

Government benefit programs

Many consumers considering a reverse mortgage may not realize they are eligible for government benefit programs. One reverse mortgage counseling agency reports finding other solutions for 50% of the potential borrowers it counsels. Available benefits include federal programs such as Supplemental Security Income (SSI) and state and local programs such as home energy assistance. [29]

Taxes and Government Assistance

Reverse mortgages have been suggested as a possible tool to lower income taxes in retirement (See Social Security tax impact calculator). Generally, money from a reverse mortgage is not taxable and does not affect Social Security or Medicare benefits. [30] Eligibility for certain government assistance programs may be limited. [31]

"A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain count as an asset and could impact eligibility. For example, if you receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. To be safe, you should contact the local Area Agency on Aging or a Medicaid expert." (emphasis added)  [32]

See also

Notes

  1. "Considerable" is not defined, but factors into the required financial assessment.
  2. Search online for "HECM counselor" or call (800) 569-4287 toll-free. Counseling agencies usually charge a fee for their services, often around $125. This fee can be paid from the loan proceeds, and you cannot be denied for lack of fee.

References

  1. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pg. 5.
  2. Jessica Linn Guerin, » Spotlight: A Historical Timeline of the HECM Program | Reverse Mortgage Magazine, October 2012
  3. Carole Fleck,"Reverse Mortgages Ripe for Abuse", AARP Bulletin, October 7, 2009.
  4. John F. Wasik, "The Quiet Comeback of Reverse Mortgages", The New York Times, July 22, 2016.
  5. Federal Trade Commission, "FTC Consumer Information: Reverse Mortgages", retrieved July 23, 2016.
  6. Federal Trade Commission, "FTC Consumer Information: Reverse Mortgages", retrieved July 23, 2016.
  7. U.S. Department of Housing and Urban Development, "FHA Reverse Mortgages (HECMs) for Seniors", retrieved July 23, 2016.
  8. Federal Trade Commission, "FTC Consumer Information: Reverse Mortgages", retrieved July 23, 2016.
  9. National Reverse Mortgage Lenders Association (NRMLA), HECM Payment Options, retrieved July 24, 2016.
  10. Introduction to Home Equity Conversion Mortgages (HECM), HO 111, NeighborWorks Training Institute, retrieved September 5, 2016.
  11. Federal Trade Commission, "FTC Consumer Information: Reverse Mortgages", retrieved July 23, 2016.
  12. Investopedia, "Single-Purpose Reverse Mortgage", retrieved July 23, 2016.
  13. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pg. 38.
  14. Federal Trade Commission, "FTC Consumer Information: Reverse Mortgages", retrieved July 23, 2016.
  15. Investopedia, "Proprietary Reverse Mortgage", retrieved July 23, 2016.
  16. Federal Trade Commission, "FTC Consumer Information: Reverse Mortgages", retrieved July 23, 2016.
  17. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pg. 5.
  18. Simon Santow, "Reverse mortgages grow, but so do warnings", Australian Broadcasting Corporation, 25 May 2011.
  19. "Interesting Reverse Mortgage Facts", American Advisors Group, retrieved July 30, 2016.
  20. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pg. 7.
  21. "Reverse Mortgages Are Not the Next Sub-Prime", Mortgage Professor.com, January 25, 2009.
  22. "Interesting Reverse Mortgage Facts", American Advisors Group, retrieved July 30, 2016.
  23. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pp. 7-9.
  24. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pp. 7-9.
  25. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pg. 5.
  26. Jean Folger, "Reverse Mortgage Or Home-Equity Loan?", Investopedia, October 17, 2014.
  27. Investopedia, Home equity loan, retrieved July 23, 2016.
  28. Investopedia, Home equity line of credit, retrieved July 23, 2016.
  29. "Report to Congress on Reverse Mortgages", Consumer Financial Protection Bureau, June 28, 2012, pp. 39-40.
  30. Federal Trade Commission, "FTC Consumer Information: Reverse Mortgages", retrieved July 23, 2016.
  31. Helen Simon, "Should a Reverse Mortgage Be Part of Your Retirement Income Plan?", The Motley Fool, December 24, 2015.
  32. National Reverse Mortgage Lenders Association (NRMLA), "Most Frequently Asked Questions", retrieved July 24, 2016.

External links