Reverse Mortgages

Reverse mortgages (also called Home Equity Conversion Mortgages) enable elderly homeowners to tap into their equity without selling their home or taking out a front end mortgage which requires monthly payments. In fact, depending on the amount of equity in your home and your age, the lender could pay you money. You might receive a lump sum, a monthly payment or a line of credit. Repayment is not necessary until the borrower sells the property, moves into a retirement community or passes away. This is where the TOP TEN MYTHS (see below) about reverse mortgages have found their roots.  The misunderstandings regarding the loan repayment after the last borrower leaves the home permanently have caused much confusion regarding the Reverse Mortgage.

Background:

A special loan for homeowners who are age 62 or older, reverse mortgages were first established by the Housing and Community Development Act of 1987, as part of the U.S. Department of Housing and Urban Development (HUD).

In there original form, Reverse Mortgages received a bad rap, deservedly.  Things have changed dramatically.

Basics:

A reverse mortgage is a loan borrowed against your property's value and does not have to be repaid at a predetermined date. The loan continues (without any payment from you) as long as you:

• Live in the home as your primary residence.
• Make necessary home repairs.
• Pay your property taxes and homeowner's insurance premiums.

In short, it's a loan in reverse, where the lender or bank pays you, enabling you to turn the value of your property (single family home, condos and manufactured homes , etc.) into cash. You or your estate will pay the money back plus interest when you permanently move out of your home.

Important notes:

• You always retain title and own your home. The bank or lender does not own your property. You continue to own and hold title to your home.
• You don't have to have your home paid off to qualify. There are no income or credit criteria, like there are with refinancing a home mortgage, or taking out home equity lines.

When you move out of your house, the maximum amount that you will owe is the current market value of the house. If the amount advanced plus accrued interest is less than that value, then that is all you will pay. The last step of our Reverse Mortgage Cash Calculator will show you the entire picture of your reverse mortgage and home value. You can also adjust home appreciation rates in the calculator to reflect trends in your part of the country. Even if the money you have received has exceeded the value of your home, the insurance premium protects you from paying more than the current market value of the home. This protection is guaranteed by the Federal Housing Administration (FHA) and paid by you and other reverse mortgage borrowers.

Loan Amount:

Your cash amounts will be determined by the following factors:

• The appraised value of your home - or the maximum lending limit. Since you are borrowing against the property, your home's appraisal is a critical part of the process.
• Your age: a higher age will allow you to access a higher loan amount.
• The current interest rate, and whether you select a monthly or annual rate feature.
• The federally insured home equity conversion loans offered through HUD will have a lower lending limit than those offered by private reverse mortgage lenders, such as Financial Freedom or Everbank.

How you get your money:

Reverse mortgages enable you to turn the value of your home into cash to fund your retirement. Reverse mortgages can be custom tailored to your needs. Our Reverse Mortgage Cash Calculator allows you to do that in the privacy of your own home without the hassle and intrusion of meeting in person with a broker, before you're really ready.

You can take cash out of your property:

• In a single lump sum upfront amount.
• As a regular monthly cash advance.
• Held in reserve as a credit line account that lets you customize when and how much is paid to you - changing over time as your needs change.
• As a combination of these three payment methods.

Costs:

All mortgages have costs, but since the lender makes payments to you, the cost structure of a reverse mortgage is slightly different than with a forward mortgage. However, the cost categories are the same: interest rate, closing costs (similar to forward mortgages), and lender servicing costs.  It is important that you ask the questions you feel are important of our Reverse Mortgage specialist when you meet with him or her.

Property Value:

The more your property is worth--subtracting your exisiting mortgage balance and subtracting any repair costs--the more cash you can receive.

Take a look at this example of a $400,000 home:

$400,000	Appraised property value. This is critical since you are borrowing against the property's value. The appraised value is what your lender actually appraises and underwrites (believes) your property is worth. For federally insured reverse mortgages there is also the county lending limit to consider (the highest limit is currently $362,790).
-$40,000	Subtract existing mortgage balance which must be paid off before you get a reverse mortgage.
-$10,000	Subtract the cost of any required repairs (those that affect health and safety).
$350,000	Maximum amount available to borrow. There are basically two different broad varieties of reverse mortgages, with two different maximum amounts that you can borrow. One, U.S. Government federally insured reverse mortgages through the Department of Housing and Urban Development (HUD), Federal Housing Agency (FHA). These FHA reverse mortgages have lending limits that are currently set at the county level; the maximum amount that you can borrow through this variety of a reverse mortgage is $362,790. The law annotation is FHA 203(b) and since the lending limit, or maximum amount you can borrow, is set at the county level, your amount could be lower depending upon property values and trends in your county. The lowest lending limit is $200,160, typically in rural areas. A similar reverse mortgage is offered by Fannie Mae, a U.S. Gov't sponsored lending agency that has a higher reverse mortgage lending limit of $417,000 for 2007. Second, many other lenders and banks offer their own reverse mortgages that let you borrow against your appraised home value above and beyond the maximum FHA 203(b) limit of $362,790. As a result, the amount of money that you could borrow with this kind of reverse mortgage is generally substantially greater than with the FHA/HUD option or Fannie Mae. It is very important to be aware of the costs and fees with this variety of reverse mortgages, which tend to be greater.

Impact of Your Age:

The older you are and the more your home is appraised for, the more cash you can get. (Remembering, less your existing mortgage, costs and repairs)

You must be at least 62, but look at this example of a HUD reverse mortgage of $350,000 to see the impact of age. The HUD/FHA amortization table basically subtracts your current age, from 100 years, and divides the maximum loan amount by your expected life span. The other reverse lenders also factor your age in the same way, although each one has a slightly different forecast of your expected life span.

An appraised home value of $350,000:

Age	Amount You Can Borrow
70	$197,000
80	$236,000
90	$273,000

2. When You Want Your Money

Lump Sum Now

and/or Monthly Amounts

and/or Credit Line

The basic rule of borrowing applies to reverse mortgages:

The more money you borrow (even if it's from your own property), and the longer you borrow it for...the more interest you will owe.

Interest on $50k taken as a lump sum, and repaid in 10 years would be: $40,969.

Interest on $50k taken in monthly amounts for 10 years would be: $18,283.

* At an interest rate of 6%

And the Length of Your Reverse Mortgage

The length of time that you'd like to have your loan will also affect the amount you receive; here are the two choices:

A set number of years, called "term"

• You must repay the reverse at the end of the specified number of years.
• It's good if you know how long you'd like to stay in your home.
• Allows you to get more cash.

OR

An estimated number of years, called "tenure"

Tenure payments:

• Based upon your current age, less 100 years
• Less than "term" because the money you receive must stretch out over your forecasted life expectancy
• Continue for as long as you remain in your home

3. Cost to Borrow

• Your Total Annual Cost (TALC) as defined by the US Federal Government Regulation Z, is the single rate that includes all the loan costs. We use it to compare reverse mortgage options (call us for a comparison).
• Your interest rate adjusts monthly or annually, your choice. Unlike refinance or home equity loans, your rate is not based on your credit, loan amount or negotiating skills--it is based Upon Treasury Dep't Ten Year T-Bill, published weekly in the Wall Street Journal.
• "Non-Recourse" insurance -- Even if a catastrophe strikes and the value of the home is reduced, you or your estate can never owe more than the current market value of the home.

Putting it All Together

These factors determine what kind of loan and how much money we can offer you. If you call us for a consultation we can also discuss other factors such as your lifestyle, budget, and personal financial goals. To get more information, check out "Compared to Other Loans" and "The Reverse Mortgage Cash Calculator".

Misconceptions About Reverse Mortgages

Top Ten Myths:

Myth #1: The lender will own your home

False - You and your family or your estate continue to retain ownership of your home. The lender does not take control of the title. The lender's interest is limited to the outstanding loan balance.

Myth #2: The reverse mortgage requires that I make monthly payments

Not True - There are never monthly payments. The borrower is responsible for payment of property taxes, insurance, and general upkeep of the home and nothing more.

Myth #3: My children will be held responsible for repayment

False - The reverse mortgage is a non-recourse loan. This means that the lender can only derive repayment of the loan from the proceeds of the sale of the property. Even if a catastrophe strikes and the value of the home is reduced, you or your estate can never owe more than the value of the home.

Although your heirs will not be responsible for repayment, they will have the option of repaying the loan and buying the house for themselves.

Myth #4: You need a certain level of income, credit, or health to qualify

False - A reverse mortgage has no income, credit, or health requirements

Myth #5: To qualify, my home must be debt free and paid off "Free & Clear"

Not True - You may have a mortgage or other debt on your home. The mortgage or debt however, must be paid off first with the proceeds of the reverse mortgage In fact, many people get a reverse mortgage just for this reason: to get rid of their monthly payments forever.

Myth #6: Reverse mortgage lenders just want to sell your house

False - Our lenders are in the business of helping you keep your home and meet whatever financial needs you may have in order to help you maintain financial independence. reverse mortgage borrowers may remain in the home for as long as they wish. However, should they decide to sell the home for any reason, the loan would then become due and payable.

Myth #7: If I do a reverse mortgage I will have nothing for my kids

False - "Retained Equity" is a very important concept to grasp. Realize that your property will continue to appreciate (the whole value of the estate) and you pay interest on only the smaller amount borrowed. Please consult your representative for amortization tables that might apply to your specific situation.

Myth #8: If I get a reverse mortgage, I cannot sell my home

False - If you decide to sell your home, the reverse mortgage is like any other loan that must be paid off at closing. There are no restrictions on prepayment or penalties for paying off your loan or selling your home.

Myth #9: If my lender changes, my loan terms can change

Not True - A reverse mortgage is secured by two Deeds of Trust. Once executed, the terms are defined and cannot be changed as long as the deeds remain in force.

Myth #10: My Social Security, Medicare/Medicaid benefits will decrease

Not True - Generally the money from a reverse mortgage is considered borrowed money and not income. For some programs, monthly draws must be spent and not accumulated, but for most the money is not considered disqualifying. Please consult with an advisor or your local Agency for Aging for your specific situation.

("Top Ten Myths" Reprinted with permission of www.SeniorJournal.com)

Compare Reverse vs Forward Mortgages

Links to Further Information

Evaluation of HECM.pdf

Fannie Mae Booklet on Reverse Mortgages.pdf

Although we have absolutely no affiliation with AARP, their website is full of helpful information.       

 http://www.aarp.org/money/revmort/      

 The US Department of Housing and Urban Development also has very helpful information

 http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm