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What is a Reverse Mortgage

A reverse mortgage is a loan available to people over 62 years of age that enables a borrower to convert part of the equity in their home into cash.

Reverse mortgages were conceived as a means to help people in or near retirement and with limited income use the money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care.  There is no restriction on how a borrower may use their reverse mortgage proceeds.

The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed.  Instead of making monthly payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower.

The borrower is not required to pay back the loan until the home is sold or otherwise vacated.  As long as you live in the home, you are not required to make any monthly payments towards the loan balance, but you must remain current on your tax and insurance payments.

 

Borrower Requirements and Responsibilities

Age qualification: All borrowers listed on title must be 62 years old. A husband or wife with a spouse younger than 62 may obtain a reverse mortgage, but the name of the younger spouse must must come off the title.

Primary lien: A reverse mortgage must be the primary lien on a home. Any prior mortgage must be paid to acquire the reverse mortgage. (Reverse mortgage proceeds can be used,)

Occupancy requirements: The property used as collateral for the reverse mortgage must be your primary residence.

Taxes and Insurance: You must remain current on your real estate taxes, homeowners insurance, and other mandatory obligations, including condominium fees, or you are susceptible to default.

Property Condition: You are responsible for completing mandatory repairs and maintaining the condition of your property.

Conveyance of the mortgaged property by will or operation of law to the estate or heir after mortgagor’s death: When a HECM loan becomes due and payable as a result of a mortgagor’s death and the property is conveyed by will or operation of law to the mortgagor’s estate or heirs (including a surviving spouse who is not on title and therefore not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property.

Features of Reverse Mortgages

With a reverse mortgage, you always retain title to or ownership of your home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.

The amount of funds you receive depends on the age of the youngest borrower, the value of the home, the interest rate and upfront costs. The older you are, the more proceeds you can receive.

There is a limit on the amount of money that can be withdrawn in the first year. If you are eligible to withdraw $100,000, for example, you would be allowed to get only $60,000, or 60 percent of that sum, in the first year. There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, exceed the 60 percent limit. You must pay off these “mandatory obligations” as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount — in which case that’s an extra $10,000, or 10 percent of $100,000.

The funds can be delivered to you as a lump sum, as a line of credit or as fixed monthly payments, either for a fixed amount of time or for as long as you remain in the home. You can also combine these options, for example, taking part of the proceeds as a lump sum and leaving the balance in a line of credit.

Fees can be paid out of the loan proceeds. This means you incur very little out-of-pocket expense to get a reverse mortgage. Your only out-of-pocket expense is the appraisal fee and maybe a charge for counseling depending on the counseling organization you work with. Together, these two fees will total a few hundred dollars. Very low-income homeowners are exempted from being charged for counseling.

Your final loan balance is comprised of the amount borrowed, plus annual mortgage insurance premiums, servicing fees and interest. The loan balance grows as you live in the home. In other words, when you sell or leave the house, you owe more than you originally borrowed. Look at it this way: A traditional mortgage is a balloon full of air that loses some air and gets smaller each time you make a payment. A reverse mortgage is an empty balloon that grows larger as time passes.

With a Home Equity Conversion Mortgage or HECM (see Types of Reverse Mortgages), the government insured reverse mortgage option, no matter how large the loan balance, you never have to pay more than the appraised value of the home or the sale price. This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which you as a borrower pay into on a monthly basis.

You are responsible for paying your property taxes, homeowners insurance, condo fees and other financial charges. Any lapse in these policies can trigger a default on your loan. To help reduce future defaults, HUD will require lenders to conduct a financial assessment of all prospective borrowers as of January 13, 2014.

Lenders will analyze all income sources — including pensions, Social Security, IRAs and 401(k) plans — as well as your credit history. They will look closely at how much money is left over after paying typical living expenses. If a lender determines that you have sufficient income left over, then you won’t have to worry about having any funds set-aside to pay for future tax and insurance payments. If, however, a lender determines that you may not be able to keep up with property taxes and hazard insurance payments, they will be authorized to set-aside a certain amount of funds from your loan to pay future charges.

 

Types of Reverse Mortgages

What is a HECM

HECM is the commonly used acronym for a Home Equity Conversion Mortgage, which is a reverse mortgage created by and regulated by the U.S. Government Department of Housing and Urban Development.

A HECM is not a government loan. It is a loan issued by a private bank, but insured by the Federal Housing Administration, which is part of HUD. Each year the borrower is charged an insurance fee of 1.25% of the loan balance. Your loan balance thus increases by the amount of this fee. The insurance purchased by this fee protects the borrower (1) if and when the lender is not able to make a payment; and (2) if the value of the home upon selling is not enough to cover the loan balance. In the latter case, the government insurance fund would pay off the remaining balance.

Currently, HECMs make up 99% of the reverse mortgages offered in America. HECMs come with rules and regulations that include a requirement that the borrower receive third-party counseling.

Proprietary Reverse Mortgage

Right now, very few proprietary reverse mortgages exist. However, it’s important to mention them, because market conditions may change in the foreseeable future when property values stabilize.

Proprietary reverse mortgages are non-FHA insured reverse mortgages offered by private sector banks and mortgage companies. They are not subject to all the same regulations as HECMs. There are no limits on the fees or on the amount of money you can receive. In some states, no counseling is required, though it is always recommended.

Proprietary reverse mortgages are sometimes called “jumbo” reverse mortgages, because they are taken on higher-valued homes, generally $750,000 or more.

 

HECM Options

Single Product Option

There is one product option available to consumers. The maximum amount of loan proceeds you may access during the first 12 months after closing is equal to 60 percent of the full loan amount. For example, if you are eligible for a $100,000 loan, you may only access $60,000. After the initial year has expired, you may use and much or as little of the loan proceeds as you wish.

There are exceptions. You can withdraw a bit more if you have an existing mortgage, or other liens on the property, exceed the 60 percent limit. You must pay off these “mandatory obligations” as the government calls them, before qualifying for the reverse mortgage. You can withdraw enough to pay off these obligations, plus another 10 percent of the maximum allowable amount — in which case that’s an extra $10,000, or 10 percent of $100,000.

 

A new upfront Mortgage Insurance Premium (MIP) structure has been created. The fee is based on the amount of funds withdrawn during the initial year.

As long as you don’t take more than 60 percent of the available funds in the first year, you will be charged an upfront MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the upfront MIP will be 2.50 percent.

 

On a $200,000 home, 2.5 percent is $5,000 versus $1,000 if you were paying 0.50 percent. (Previously, the upfront fees were 2 percent for “Standard” loans and 0.01 percent for “Saver” loans.

The Annual MIP remains at 1.25 percent of the outstanding loan balance.

 

Single Payment Disbursement Option

Historically, HECM borrowers had to take all of the loan proceeds available to them.

As of September 30, 2013, lenders will begin offering a HECM “mini” option that allows you to take less money at closing. If you are eligible for a $100,000 loan, for example, but don’t want that much money, you can choose a single disbursement equal to 60 percent or less of that sum.

Unfortunately, if you wanted more money at a later time, you would not be able to access any additional funds. However, this is a great option for someone who wants to preserve the equity in his home by utilizing a smaller amount of funds.

For Purchase

While the typical retiree uses a HECM to eliminate debts, pay for healthcare and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their 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.

While study after study reveals that an overwhelming percentage of seniors want to continue living in their current home for as long as possible, for some people that isn’t the best, or safest, option. HECM for Purchase offers a solution to downsize into a place that’s more easily navigable, possibly more energy efficient, with lower maintenance costs, or which is closer to friends and family.

 

Advice for Children of Seniors

Should My Mom and Dad Get a Reverse Mortgage?

You are referred to as the “Sandwich Generation.”  You’ve got kids in or heading for college as well as retired parents.  Wherever you look, all you can see is additional expenses.

In the rough economy of the past few years–with home values and retirement savings down, government benefit programs threatened and longer life expectancy–many children of seniors are concerned about their parents being able to finance the remainder of their lives, even if they have been diligent about retirement planning.  Recent research conducted for NRMLA by Marttila Strategies shows that there is an emerging intergenerational consensus that your parents should spend whatever they have to live as well as they can for as long as they can.

The vast majority of America’s seniors have their wealth in their home equity.   And if your parents are struggling to meet their month-to-month expenses or to pay for additional health expenses, tapping into that equity may be the best solution for all of you.  A Reverse Mortgages is a financial product that allows them to do just that.

Whether or not a reverse mortgage is the right financial option for your parents is a very personal decision and based on many factors.  In most cases, your parents will discuss this option with you before making their decision.  You want to be prepared to give them the best advice. Here are some questions you most likely will want answered:

What is a reverse mortgage?

A reverse mortgage is a loan available to people over 62 years of age that enables borrowers to convert part of the equity in their home into cash.

The loan is called a reverse mortgage because the traditional mortgage payback stream is reversed.  Instead of making monthly payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower.

What do people use reverse mortgages for?

Reverse mortgages were conceived as a means to help people in or near retirement who have limited income use the money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care.  There is no restriction on how a borrower may use their reverse mortgage proceeds.

Will a reverse mortgage increase my parents’ monthly expenses?

No. Borrowers are not required to pay back the loan until the home is sold or otherwise vacated.  As long as they live in the home, they are not required to make any monthly payments towards the loan balance, but they must remain current on tax and insurance payments.

If my parents take a reverse mortgage, does the bank then own their home?

No. With a reverse mortgage, the borrower always retains title to or ownership of the home.  The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.

How much money can my parents expect?

The amount of funds received depends on the age of the youngest borrower, the value of the homes, the interest rate and upfront costs.  The older the borrower is,  the more proceeds he or she can receive.

The funds can be delivered to the borrower as a lump sum, as a line of credit or as a fixed monthly payment for as long as the loan is maintaine. The borrower can also use more than one of these options, for example, take part of the proceeds as a lump sum and leave the balance in a line of credit.

How much will the loan cost my parents?

Loan fees can be paid out of the loan proceeds.  This means a borrower incurs very little out-of-pocket expense to get a reverse mortgage.  The only out-of-pocket expense is the appraisal fee, usually a few hundred dollars.

The loan balance is comprised of the amount borrowed plus fees and closing costs plus interest.  The loan balance grows as the borrower continues to live in the home.  In other words, when the borrower sells or leaves the house, he or she will owe more than originally borrowed.  Look at it this way:  A traditional mortgage is a balloon full of air that loses some air and gets smaller each time a payment is made..  A reverse mortgage is an empty balloon that grows larger as time passes.

If when my parents move or die and the balance is more than the value of the home, am I then responsible?

No matter how large the loan balance, your parents or you never have to pay more than the appraised value of the home or the sale price.  This feature is referred to as non-recourse. If the loan balance exceeds the appraised value of the home, then the federal government absorbs that loss. The government pays for it with proceeds from its insurance fund, which the borrower pays into on a monthly basis.

If my parents get a reverse mortgage, what are their responsibilities?

Primary lien: A reverse mortgage must be the primary lien on a home.  Any prior mortgage must be paid in full to acquire the reverse mortgage.  (Reverse mortgage proceeds can be used for this purpose,)

Occupancy requirements: The property used as collateral for the reverse mortgage must be your parents’ primary residence.

Taxes and Insurance: Your parents are required to remain current on their real estate taxes, home insurance, and, if applicable, condo fees or they are susceptible to default.

Property Condition: Your parents are responsible for completing mandatory repairs and maintaining the condition of their property.

Rights of Non-Borrower Residents at Time of Loan Termination: If there is a non-borrower resident (living in the home but not on title), it’s important that you understand what happens when the owner on title permanently vacates the property, either by death or move out, and the loan becomes due and payable. Either arrangements need to be made ahead of time to pay back the loan when it becomes due, or the property will have to be vacated.

But my parents want to downsize.  How can a reverse mortgage help them?

While the typical retiree uses a reverse mortgage to eliminate debts, pay for healthcare and/or cover daily living expenses, a growing segment of the senior population is using it to purchase a home that better suits their needs.

The advantage of using what is known as a 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 the homeowner with no monthly mortgage payments.

 

4. Application, Fees, and Disclosures

In safe handsIf you decide to proceed with the loan, you now select a lender and fill out a loan application. The person you deal with will be called a loan originator or reverse mortgage consultant.Filling out an application does not obligate you to take the loan. You will have opportunities to change your mind. You will be asked to select a loan payment plan. Payment plans can be fixed monthly payments, a lump sum payment, a line of credit, or a combination of these.

Beginning January 13, 2014, lenders will begin conducting financial assessments of every prospective reverse mortgage client during the application process to make sure you have the financial means to continue paying property taxes, homeowners insurance and other property charges.

Lenders will analyze all income sources — including pensions, Social Security, IRAs and 401(k) plans — as well as your credit history. They will look closely at how much money is left over after paying typical living expenses. If a lender determines that you have sufficient income left over, then you won’t have to worry about having any funds set-aside to pay for future tax and insurance payments.

If, however, a lender determines that you may not be able to keep up with property taxes and hazard insurance payments, they will be authorized to set-aside a certain amount of funds from your loan to pay future charges. The amount of the set-aside will be based on the life expectancy of the youngest borrower. If set-aside funds run out, you must continue paying property charges using whatever funds are at your disposal. Even if you don’t need a set-aside, you can still elect to have one established voluntarily. The lender can pay your property charges either from a line of credit or by withholding monthly disbursements.

The lender discloses the estimated total cost of the loan, as required by the federal Truth in Lending Act. The Truth in Lending disclosure specifically designed for a reverse mortgage is called a TALC, or Total Annual Loan Cost disclosure. It illustrates all of the costs of the loan based upon the loan being outstanding for three different durations of time.

The costs that the lender will describe to you are capped and may be financed as part of the reverse mortgage. They can include the following:

Origination Fee

The origination fee covers a lender’s operating expenses associated with originating the reverse mortgage.

Under the HECM program, which accounts for most reverse mortgages made in the U.S. today, the maximum origination fee allowed is 2% of the initial $200,000 of the home’s value and 1% of the remaining value, with a cap of $6,000.  Some lenders waive or reduce the origination fees on certain products.

(Note: Many of the calculations and fees on a HECM are based on the Maximum Claim Amount, which is the value of the home at the time of loan origination, but which currently has a maximum limit of $625,500.)

Mortgage Insurance Premium

The Mortgage Insurance Premium (MIP) is a fee paid by the borrower to the Federal Housing Administration (FHA), an agency of the federal government, to provide certain protections for both the lender and the borrower in a HECM reverse mortgage.

If the company servicing the loan is interrupted, FHA assumes responsibility for the loan, providing the borrower with uninterrupted access to proceeds from his or her reverse mortgage.

In cases where the sale of the home is not enough to pay back the reverse mortgage, the insurance protects the borrower or estate from owing more than the sale price by covering losses incurred by the lender.

 

As of September 30, 2013, a new upfront Mortgage Insurance Premium (MIP) structure is being adopted. The fee will be based on the amount of funds withdrawn during the initial year.
As long as you don’t take more than 60 percent of the available funds in the first year, you will be charged an upfront MIP of 0.50 percent of the appraised value of the home. If, however, you take more than 60 percent, the upfront MIP will be 2.50 percent.

 

On a $200,000 home, 2.5 percent is $5,000 versus $1,000 if you were paying 0.50 percent. Previously, the upfront fees were 2 percent for “Standard” loans and 0.01 percent for “Saver” loans.

The Annual MIP will remain at 1.25 percent of the outstanding loan balance.

Appraisal Fee

An appraiser is responsible for assigning a current market value to your home. Appraisal fees vary by region, type and value of home, but average $450.

This is the one fee generally paid in cash, often before the loan is made, and not with the loan proceeds. In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety  and local building codes, in order for the reverse mortgage to be made. If the appraiser uncovers property defects, you must hire a contractor to complete the repairs.

Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. Appraisers generally charge $125 dollars for the follow-up examination.

If the estimated cost of the repairs is less than 15 percent of the Maximum Claim Amount, the cost of the repairs may be paid for with funds from the reverse mortgage loan and completed after the reverse mortgage is made. A “Repair Set-Aside” will be established from the reverse mortgage proceeds to pay for the cost of the repairs. The homeowner will be responsible for getting the repairs completed in a timely manner.

Closing Costs

Other closing costs that are commonly charged to a reverse mortgage borrower, which are the same for any type of mortgage, include:

  • Credit report fee. Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: Generally between $20 to $50;
  • Flood certification fee. Determines whether the property is located on a federally designated flood plane. Cost: Generally about $20;
  • Escrow, settlement or closing fee. Generally includes a title search and various other required closing services. Cost: can range between $150 to $800 depending on your location;
  • Document preparation fee. Fee charged to prepare the final closing documents, including the mortgage note and other recordable items. Cost: $75 to $150;
  • Recording fee. Fee charged to record the mortgage lien with the County Recorder’s Office. Cost: can range between $50 to $500 depending on your location;
  • Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: Generally under $50;
  • Title insurance.Insurance that protects the lender(lender’s policy) or the buyer (owner’s policy) against any loss arising from disputes over ownership of a property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance;
  • Pest Inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites. Cost: Generally under $100;
  • Survey. Determines the official boundaries of the property. It’s typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower’s property. Cost: Generally under $250

(Note: Cost estimates can change over time. For most current costs, consult a lender. Also, some states may have local fees that are not included here.)

Servicing Fee & Set-Aside

A lender typically earns monthly fees, known as servicing fees, for its administration of the loan. These can be a fixed monthly amount or calculated into the interest rate on the loan. If a fixed monthly amount is to be charged, an amount of funds will be “set-aside” from the loan proceeds, to be used to pay this monthly fee.

The service fee set-aside is deducted from the available loan proceeds at closing to cover the projected costs of servicing your account. Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that is no higher than $35. The amount of money set-aside is largely determined by the borrower’s age and life expectancy. Generally, the set-aside can amount to several thousand dollars.

Many lenders have either eliminated the servicing set-aside or included it in the interest rate. (Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which is typically $35 per month or less.)

Interest

With a reverse mortgage, you are charged interest only on the funds(loan proceeds) that you receive. For example, if you take your loan proceeds as a line of credit, you are only charged interest on the portion of the line of credit you have withdrawn.

The interest is compounded, which means you pay ongoing interest on the principal, plus accumulated interest.

Reverse mortgage products are available with both fixed interest rates and variable interest rates. The variable rate is tied to an index, such as the 1-Yr. Treasury bill or the 30-Day LIBOR (London Interbank Offered Rate), plus a margin determined by yield requirements in the financial markets. The margin is set at the time of loan origination and does not change over the life of the loan. During the life of your loan, the loan balance increases by the amount of compounded interest accrued.

Because there are no payments made by the borrower during the life of a reverse mortgage, interest is not paid on a current basis. It does not have to be paid out of your available loan proceeds either, but instead accrues, at a compounded rate, through the life of the loan until repayment occurs at the end.

Beginning April 1, 2013, the HECM Standard product option is only available with an adjustable interest rate.

Other Disclosures

Your lender will supply you with a large package of additional disclosure documents that are designed to help make the process as transparent as possible.

One such document is the Total Annual Loan Cost (TALC) Disclosure, a form required by the Federal Reserve Board on all reverse mortgage transactions, that illustrates the cost of the loan if it is outstanding for different durations of time.

The Good Faith Estimate clearly discloses line-by-line the various fees that are being charged. Other disclosures, like an amortization table, illustrate the amount of interest that will accrue, so that you are fully informed about the costs associated with getting a reverse mortgage.

The application process formally begins after counseling, once you provide the lender with your loan application and the signed disclosures as well as required information, including verification of a Social Security number, a copy of the deed to your home, information on any existing mortgage(s), and a signed counseling certificate (signed by both the homeowner and counselor).

Eligibility
To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age and must occupy the property as their principal residence. In addition, any mortgage on the property must be low enough that it will be paid off with the reverse mortgage proceeds. There are no minimum income or credit requirements because no payments are required on the mortgage. The proceeds from the loan may be used at the discretion of the borrower and are not subject to income tax payment. While credit is not part of the qualification process a current or pending bankruptcy will require court approval prior to closing. Reverse mortgages follow FHA standards for property types, meaning most –4 family dwellings, FHA approved condominiums and PUD’s will qualify. Manufactured housing qualifies based on standard FHA guidelines.
Before starting the loan process for an FHA/HUD reverse mortgage, applicants must take an approved counseling course. This counseling is available at no or low cost.5 The counseling is meant to serve as a safeguard for the borrowers, to ensure they completely understand the reverse mortgage. The counselor will explain the legal and financial obligations of a reverse mortgage. The borrower will receive a certificate of completion that is required before the loan application can be processed.
Loan size
The maximum lending limit varies by county, but may not exceed $65,500.00. Reverse mortgages for homes valued over the maximum limit are called “Jumbo” reverse mortgages, and are generally offered as proprietary reverse mortgages. For owners of higher-valued homes, a Jumbo loan can provide a larger loan amount; however, these loans are currently uninsured by the FHA and their fees are often higher.
The amount of money available (the loan size) is determined by the borrower’s age, the lesser of the value of the home or county lending limit, and the interest rate of the program the senior selects. The primary factors are:
The appraised value of the property; this includes any health or safety repairs that need to be made, plus the value of any existing liens on the house.
The interest rate, as determined by the U.S. Treasury year T-Bill, the LIBOR index or Year CMT.
The age of the senior; the older the owner is, the more money will be received
Whether the payment is taken as a line of credit, lump sum, or monthly payments; see below more discussion of the options.
All these factors contribute to the Total Annual Lending Cost (TALC) – the single rate, including all the loan costs – as defined by the US Federal Government in Regulation Z. The specific formulas to calculate the impact of the factors listed above can be found in Appendix of the HUD Handbook 45..6
Costs and interest rates
The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. For the most popular type of reverse mortgage in the U.S., the FHA-insured Home Equity Conversion Mortgage (HECM), there will be the following types of costs:
Mortgage Insurance Premium (MIP) = % of the appraised value5
Origination fee, depending on the home’s appraised value5
appraised value under $5,000 = $,500
appraised value over $5,000 = % of the first $00,000 plus % of the value over $00,000, with a $6,000 cap
Title insurance = varies by location
Title, attorney, and county recording fees = varies by location
Real estate appraisal = $00–$500
Survey (may be required) = $00–$500
In all of these cases, except the real estate appraisal, the costs of a reverse mortgage can be financed with the proceeds of the loan itself.
In addition, there are costs during the life of the reverse mortgage. A monthly service charge (between $5 and $5) is usually added monthly to the balance of the loan. An annual Mortgage Insurance Premium is levied every year, equal to .5% of the mortgage balance5 – note that this is in addition to the MIP paid at settlement.
Interest rates on reverse mortgages are determined on a program-by-program basis. Because the loans are secured by the home itself, and backed by HUD, the interest rate should always be below any other available interest rate in the standard mortgage marketplace for an FHA reverse mortgage.citation needed Prior to 007, all major reverse mortgage programs had adjustable interest rates. Such adjustable rate reverse mortgages are still being offered, in programs that are adjusted on a monthly, semi-annual, or annual rate up to a maximum rate. Several lenders now offer FHA HECM reverse mortgages that have fixed interest rates.7 Some fixed rate reverse mortgages limit the cash proceeds to half of that offered by adjustable rate reverse mortgages. The borrower(s) will be required to take out the entire amount offered at closing. A mortgagee who has selected a variable rate HECM can change the loan’s payment plan at any time for a $0 fee.8
Some state and local governments offer low-cost reverse mortgages to seniors. These “public sector” loans generally must be used for specific purposes, such as paying for home repairs or property taxes,9 but most of them often have more favorable interest rates and fewer or no fees associated with them. These programs are typically very restrictive in terms of qualification and location, and many regions, states, and areas do not have such programs at all.0
Proceeds from a reverse mortgage
Cash from a reverse mortgage
The most common reverse mortgage is one in which the owner receives cash or a credit line from an existing home. The money from a reverse mortgage can be distributed in several different ways:5
in a lump sum, in cash, at settlement; this provides the cash immediately, but the interest fees are the highest
as a cash payment (cash advance) every month, applied for a fixed term or for the owner’s life; monthly payments may be set up by HUD
as a line of credit, similar to a home equity line of credit; this maximizes the money available, which can be withdrawn only as needed
some combination of the above, as selected by the borrower.
Once the reverse mortgage is established, there are no restrictions on how the funds are used. The borrower can move money into investments or spend it as they wish. If a borrower wishes interest-bearing instruments, the money can be kept with the lender (in which case the account grows by the same percentage as the interest rate of the loan), the funds can be moved to a directed account with a financial specialist (an option that is risky unless the borrower directs the specialist’s investment options), or the money can be invested and managed by the borrower.citation needed
Purchase of a new residence with “HECM for Purchase”
The Housing and Economic Recovery Act of 008 provided HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds — the so-called HECM for Purchase program, effective January 009. The “HECM for Purchase” applies if “the borrower is able to pay the difference between the HECM and the sales price and closing costs for the property.5 The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs (i.e., handrails, one-level properties, ramps, wider doorways, etc.). Texas is the only state that does not allow for reverse mortgages for purchase.Kiplinger
Taxes and insurance
It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. Unlike common practice in a standard mortgage, funds for taxes and insurance are not typically paid out of an escrow fund; they are paid directly by the homeowner. A lapse in either taxes or insurance could result in a default on the reverse mortgage. Borrowers are given the option of creating a separate account specifically for paying future taxes and insurance costs; known as a Lifetime Expectancy SetAside. Additionally, borrowers can authorize their lender to withhold a portion of their line of credit for such payments.4
The American Bar Association guide5 advises that generally,
The Internal Revenue Service does not consider loan advances to be income
Annuity advances may be partially taxable
Interest charged is not deductible until it is actually paid, that is, at the end of the loan.
The mortgage insurance premium is deductible on the 040 long form.
The money received from a reverse mortgage

is considered a loan advance. It therefore is not taxable and does not directly affect Social Security or Medicare benefits. However, an American Bar Association guide5 to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as “liquid assets” if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received; the borrower could then lose eligibility for such public programs if total liquid assets (cash, generally) is then greater than those programs allow.9
When the loan comes due
The loan comes due when the borrower dies, sells the house, fails to keep the taxes or insurance current, or moves out of the house for more than consecutive months. Once the mortgage comes due, the borrower or heirs of the estate have an option to refinance the home and keep it, sell the home and cash out any remaining equity, or turn the home over to the lender. Once a reverse mortgage is called due and payable, the borrower (or their heirs) can possibly be granted time extensions by the lender to give them up to one year to make this decision.
If the property is turned over to the lender, the borrower or the heirs have no more claim to the property or equity in the property.
The lender has recourse against the property, but not against the borrower personally and not against the borrower’s heirs. Thus the mortgage is within the category known as “non-recourse limit”.
Volume of loans Home Equity Conversion Mortgages account for 90% of all reverse mortgages originated in the U.S. As of May 00, there were 49,85 active HECM loans.6 As of 006, the number of HECM mortgages that HUD is authorized to insure under the reverse mortgage law was capped at 75,000.7 However, through the annual appropriations acts, Congress has temporarily extended HUD’s authority to insure HECM’s notwithstanding the statutory limits.8

Program growth

in recent years has been very rapid. In fiscal year 00, 7,78 HECM loans were originated. By the fiscal year ending in September 008, the annual volume of HECM loans topped ,000 representing a ,00% increase in six years. For the fiscal year ending September 0, loan volume had contracted in the wake of the financial crisis, but remained at over 7,000 loans that were originated and insured through the HECM program.9
Loan volume is expected to grow further as the U.S. population ages. The U.S. senior population is expected to increase from 5 million in 000 to 64 million in 05, and seniors are expected to make up a larger share of the population.
Loan program options
HECM Plus 60 – Allows the borrower to take out the most equity in the home, but comes with a Upfront Mortgage Insurance, by the FHA, at a cost of .5%. As of April , 0, HUD eliminated the HECM Standard fixed rate product, currently the HECM Standard only comes as a variable rate loan.
HECM Minus 60 – FHA allows the Upfront Mortgage Insurance cost to be just .50%, but the borrower has access to less equity in the home. The HECM Minus 60 comes as a fixed rate or variable rate loan.
Other options
A drawback to reverse mortgages is the high upfront costs. Upfront cost, however, is tempered by the lower interest rate as time goes by, but some seniors choose other options to draw on their home equity, particularly if they don’t plan to remain at the property more than five years.
Other options which can free up home equity but avoid the high upfront costs of a reverse mortgage include: ) intra-family loan or sale-leaseback and, ) selling and moving to a less expensive dwelling or location. However, when selling, the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling. Also, there is the issue of capital gains taxes (though the first $50,000 of gain is usually exempt from taxation for a single person who has lived in the house for at least two years). Currently, there is a coordinated government program called “Aging in Place” intended to assist homeowners wishing to remain in their homes and/or neighborhoods. Studies conducted by various agencies and organizations, including AARP, show that over 80% of elderly homeowners do not want to move.9
No-cost and low-cost mortgages are available for those homeowners who anticipate moving from the home in the near future. For example, they may select a home equity line of credit, commonly called a “HELOC”, requiring interest-only payments for 0 years. These loans typically have very low (or zero) upfront costs, but the interest rates are usually slightly higher than those of a reverse mortgage. Since monthly payments are required on a HELOC, borrowers need to qualify based on their incomes and credit scores. Often, seniors who may be on a limited fixed income can’t get approved for a HELOC for this reason. Reverse mortgages do not require monthly payments and, as a result, income and credit score are not considered as part of the approval process.
Criticism

Reverse mortgages have been criticized for several major shortcomings:
High up-front costs make reverse mortgages expensive. In the U.S., entering into a reverse mortgage will cost approximately the same as a traditional FHA mortgage.
The interest rate on a reverse mortgage may be higher than on a conventional “forward mortgage”.
Interest compounds over the life of a reverse mortgage, which means that “the mortgage can quickly balloon”. Since no monthly payments are made by the borrower on a reverse mortgage, the interest that accrues is treated as a loan advance. Each month, interest is calculated not only on the principal amount received by the borrower but on the interest previously assessed to the loan. Because of this compound interest, the longer a senior has a reverse mortgage, the more likely it is that most or all of the home equity is depleted when the loan becomes due. That translates to “less cash for your estate or to pay your bills.” That said, with the FHA-insured HECM reverse mortgage, the borrower can never owe more than the value of the property and cannot pass on any debt from the reverse mortgage to any heirs. The sole remedy the lender has is the collateral, not assets in the estate, if applicable.
Reverse mortgages are confusing.

Many seniors entering into reverse mortgages don’t fully understand the terms and conditions associated with the loans, and it has been suggested that some lenders have sought to take advantage of this.56 But in a 006 survey of borrowers by AARP, 9 percent said their reverse mortgage had a mostly positive effect on their lives, compared with percent who said the effect was mostly negative. Some 9 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with the counselors that they were required to see.7

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