Reverse Mortgages for Reverse Mortgages for Senior HomeownersSenior Homeowners

Cindy StokesCindy Stokes

Utah State UniversityUtah State University

(adapted from AARP information)(adapted from AARP information)

A Little HistoryA Little History

19791979Federal Home Loan Bank creates Federal Home Loan Bank creates Reverse Mortgage conceptReverse Mortgage concept

19891989HUD/FHA introduces HECMHUD/FHA introduces HECM 19891989Fannie Mae agrees to purchase Fannie Mae agrees to purchase

HECM loansHECM loans 19961996Fannie Mae creates Fannie Mae creates

HomeKeeperHomeKeeper®®

19981998HECM becomes permanent HECM becomes permanent programprogram

Home Equity Conversion MortgageHome Equity Conversion Mortgage

Designed by HUDDesigned by HUD Insured by FHAInsured by FHA Payments continue as Payments continue as

long as one homeowner long as one homeowner remains in homeremains in home

Loan balance not due Loan balance not due until borrowers die or until borrowers die or leave the homeleave the home

Total due lender cannot Total due lender cannot exceed value of home at exceed value of home at time of saletime of sale

HECM Basic RequirementsHECM Basic Requirements Borrowers must be at least 62 years oldBorrowers must be at least 62 years old Home must be FHA approvedHome must be FHA approved Borrowers must live in home as principal Borrowers must live in home as principal

residence residence At least one homeowner must reside in home at At least one homeowner must reside in home at

time of closingtime of closing Home must be free of debt or nearly paid offHome must be free of debt or nearly paid off Borrowers must receive reverse mortgage Borrowers must receive reverse mortgage

counselingcounseling Owners must not be in, or filing for, bankruptcy. Owners must not be in, or filing for, bankruptcy. Owners can be in foreclosure.Owners can be in foreclosure.

HECM Counseling RequiredHECM Counseling Required

2-hour session2-hour session HUD-approved HUD-approved

counseling agencycounseling agency Free of chargeFree of charge Includes discussion of Includes discussion of

other alternativesother alternatives Certificate of HECM Certificate of HECM

Counseling issued, Counseling issued, good for 180 daysgood for 180 days

SafeguardsSafeguards Loan never becomes due until last Loan never becomes due until last

homeowner leaves the homehomeowner leaves the home Payments continue even if payments Payments continue even if payments

exceed value of the homeexceed value of the home No repayment required of amount paid out No repayment required of amount paid out

in excess of value of the homein excess of value of the home If lender fails, FHA will make paymentsIf lender fails, FHA will make payments FHA covers any shortfall if amount due FHA covers any shortfall if amount due

exceeds value of the homeexceeds value of the home

Forward vs. ReverseForward vs. Reverse

Forward Mortgage Forward Mortgage

on $100,000 loanon $100,000 loan

Each payment Each payment

from borrowerfrom borrower

to lender:to lender:

Principal decreasesPrincipal decreases

Reverse Mortgage Reverse Mortgage with $100,000 loanwith $100,000 loan

Each payment to Each payment to borrower from borrower from lender:lender:

Principal increasesPrincipal increases

“Up the Down Staircase”

Reverse Mortgage FeaturesReverse Mortgage Features

No income-qualifying requirementsNo income-qualifying requirements Title to property remains in borrower’s Title to property remains in borrower’s

namename Borrower remains responsible for payment Borrower remains responsible for payment

of taxes and insuranceof taxes and insurance Total loan balance not due until last Total loan balance not due until last

homeowner leaves the propertyhomeowner leaves the property Total amount due lender cannot exceed Total amount due lender cannot exceed

value of home at time loan is repaidvalue of home at time loan is repaid

HECM Eligibility RequirementsHECM Eligibility Requirements

All owners must be at All owners must be at least 62 years oldleast 62 years old

Home must be their Home must be their principal residence at principal residence at least 6 months of yearleast 6 months of year

At least one homeowner At least one homeowner must reside in home at must reside in home at time of closingtime of closing

Borrowers must receive Borrowers must receive reverse mortgage reverse mortgage counseling counseling

The Homeowners

HECM Eligibility RequirementsHECM Eligibility Requirements

Can be single-family, Can be single-family, 1 to 4 unit owner 1 to 4 unit owner occupied, FHA-occupied, FHA-approved approved condominium, PUD, condominium, PUD, or manufactured or manufactured homehome

Must meet minimum Must meet minimum FHA property FHA property standardsstandards

The Home

HECM Eligibility RequirementsHECM Eligibility Requirements

Any existing mortgage Any existing mortgage must be paid off at must be paid off at closingclosing

HECM must be first HECM must be first mortgage but can be mortgage but can be used to pay off existing used to pay off existing debtdebt

FHA mortgage FHA mortgage insurance requiredinsurance required

Origination and Origination and Servicing fees Servicing fees

The Loan

How Much Can Be BorrowedHow Much Can Be Borrowed

Total amount available is based on:Total amount available is based on:

Age of borrowersAge of borrowers

Value of propertyValue of property

Average interest rateAverage interest rate

““How Much Can I Get?”How Much Can I Get?”

Location, Location, LocationLocation, Location, LocationMarket value at time of closingMarket value at time of closingMaximum loan limitsMaximum loan limitsEquity in the homeEquity in the homeAge of borrowersAge of borrowers Interest rateInterest rate

Reverse Mortgage CalculatorReverse Mortgage Calculator When were you born?When were you born?

When was your spouse When was your spouse or co-owner born?or co-owner born?

How much is your house How much is your house worth?worth?

Your ZIP CodeYour ZIP Code

http://www.rmaarp.com/http://www.rmaarp.com/

Four Basic PlansFour Basic Plans

Tenure -Tenure - Monthly payments for lifeMonthly payments for life

Term -Term - Monthly payments for set Monthly payments for set number number of yearsof years

Line of Credit -Line of Credit - Draws in amount and time of Draws in amount and time of borrower’s choosingborrower’s choosing

Lump Sum -Lump Sum - Total amount available drawn Total amount available drawn at at closingclosing

Tenure PlanTenure Plan

Monthly payments for life Monthly payments for life Advances are secured by mortgage or Advances are secured by mortgage or

deed of trust deed of trust Amount of payment remains fixed Amount of payment remains fixed Interest, insurance, and servicing fees Interest, insurance, and servicing fees

added each monthadded each month Total loan balance increases every monthTotal loan balance increases every month No payment due until last homeowner dies No payment due until last homeowner dies

or leaves the property or leaves the property

Term PlanTerm Plan

Amount available calculated same as for Amount available calculated same as for Tenure Plan Tenure Plan

Payments made for set number of yearsPayments made for set number of years Borrower designates number of yearsBorrower designates number of years At end of term, payments stopAt end of term, payments stop Repayment of total loan balance not due Repayment of total loan balance not due

until last homeowner leaves the homeuntil last homeowner leaves the home Monthly amount received depends on Monthly amount received depends on

length of time payments are desiredlength of time payments are desired

Amount of Monthly PaymentAmount of Monthly Payment

Actual amount to be Actual amount to be received monthly is received monthly is based on: based on:

Location of homeLocation of home Value of homeValue of home Equity in homeEquity in home Age of youngest Age of youngest

homeownerhomeowner Interest rate at time of Interest rate at time of

closingclosing

Line of Credit PlanLine of Credit Plan

Line of credit established based on equity Line of credit established based on equity Homeowner can draw any amount at any Homeowner can draw any amount at any

time until available principal is depletedtime until available principal is depleted Interest is charged only on amount drawnInterest is charged only on amount drawn No repayment is required until last No repayment is required until last

homeowner either dies or leaves the homehomeowner either dies or leaves the home Amount of cash available increases Amount of cash available increases Needs to be used to be cost-effectiveNeeds to be used to be cost-effective

Lump Sum PlanLump Sum Plan

Calculated same as Tenure or TermCalculated same as Tenure or Term One lump sum of all available funds drawn One lump sum of all available funds drawn

at closingat closing Can be combined with tenure or term planCan be combined with tenure or term plan Interest is calculated and charged each Interest is calculated and charged each

month along with insurance and servicingmonth along with insurance and servicing Total balance becomes due whenever Total balance becomes due whenever

property is soldproperty is sold

The ProcessThe Process

Step 1:Step 1: CounselingCounseling 2-hour session2-hour session Certificate of HECM Certificate of HECM

Counseling good for Counseling good for 180 days180 days

Step 2: Find a LenderStep 2: Find a Lender www.hud.gov www.fanniemae.com www.aarp.org

Things to ConsiderThings to Consider

Cost -Cost - Origination & Servicing FeesOrigination & Servicing Fees

Experience -Experience - Number of Reverse MortgagesNumber of Reverse Mortgages

Servicing -Servicing - Administrative CostsAdministrative Costs

Commitment - Commitment - Professional RelationshipsProfessional Relationships

Closing Costs for RM LoanClosing Costs for RM Loan

Total Annual Loan Cost (TALC)Total Annual Loan Cost (TALC) Application FeeApplication Fee

• Appraisal and Credit CheckAppraisal and Credit Check Origination FeeOrigination Fee

• Preparation and ProcessingPreparation and Processing Closing Costs/3Closing Costs/3rdrd Party Closing Costs (varies) Party Closing Costs (varies)

• Title search and insurance, survey, inspection, recording Title search and insurance, survey, inspection, recording fees, property taxfees, property tax

Mortgage Insurance PremiumMortgage Insurance Premium• HECM loanHECM loan

2% of value or $2000 – can be financed2% of value or $2000 – can be financed

Monthly Costs for RM LoanMonthly Costs for RM Loan Adjustable Rate InterestAdjustable Rate Interest

Adjust monthly or annually Adjust monthly or annually U.S. Treasuries plus marginU.S. Treasuries plus margin

Mortgage Insurance Mortgage Insurance HECM: ½% of loan amount charged monthlyHECM: ½% of loan amount charged monthly HomeKeeperHomeKeeper®®: averages .8% annual, charged monthly: averages .8% annual, charged monthly

Service FeeService Fee Ranges from $25 to $35 per monthRanges from $25 to $35 per month

All costs charged monthly and added to principal loan balance.All costs charged monthly and added to principal loan balance.Periodic status statements sent out every 3 months.Periodic status statements sent out every 3 months.No payment is due until mortgage loan is paid off. No payment is due until mortgage loan is paid off.

Additional CostsAdditional Costs

Homeowner Homeowner Insurance and Insurance and Property TaxProperty Tax

Maintenance and Maintenance and RepairsRepairs

Due & PayableDue & Payable

When last homeowner dies, sells the When last homeowner dies, sells the home, or permanently moves outhome, or permanently moves out

Failure to pay Property TaxesFailure to pay Property Taxes Failure to pay Homeowners Insurance Failure to pay Homeowners Insurance Failure to Maintain and Repair homeFailure to Maintain and Repair home

Other Default ConditionsOther Default Conditions

Declaration of BankruptcyDeclaration of Bankruptcy Perpetration of fraud or misrepresentationPerpetration of fraud or misrepresentation Eminent Domain or condemnation Eminent Domain or condemnation

Renting out part of the homeRenting out part of the home Trying to add a new owner to the titleTrying to add a new owner to the title Trying to take on new debt against homeTrying to take on new debt against home

RepaymentRepayment

Pay off loan balance and keep homePay off loan balance and keep home Sell home and pay off loan balance and Sell home and pay off loan balance and

keep any differencekeep any difference Hand over the home to the lender to sellHand over the home to the lender to sell Time frame:Time frame:

6 months 6 months two 3 month extensions two 3 month extensions

Key DecisionsKey Decisions

Who else should I involve in considering this Who else should I involve in considering this loan?loan?

Which counselors should I choose?Which counselors should I choose? Have I given due consideration to all my Have I given due consideration to all my

choices?choices? When would be the best time to take out a When would be the best time to take out a

reverse mortgage?reverse mortgage? What interest rate should I choose?What interest rate should I choose? Which lender should I choose?Which lender should I choose? How should I use this loan?How should I use this loan?

AARP Booklet: AARP Booklet: Home Made MoneyHome Made Money

To order a complimentary copy by To order a complimentary copy by phone:phone: Call 1-800-209-8085.Call 1-800-209-8085.

To order a complimentary copy onlineTo order a complimentary copy online:: http://www.aarp.org/money/revmort/http://www.aarp.org/money/revmort/

revmort_basics/a2003-04-07-revmort_basics/a2003-04-07-homemademoney.htmlhomemademoney.html