Mortgage: Everything you need to know....and more!

What is a Reverse Mortgage?

A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care).

In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g., 30 years) the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.

If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. But in certain countries (including the United States), a reverse mortgage must be the only mortgage on the property.

Reverse mortgages in the United States

Requirements

To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. There are no minimum income or credit requirements, but there are other requirements and homeowners should make sure that they qualify for the loan before they invest significant time or money into the process. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. A pending bankruptcy which has not been finalized may, however, slow the process. Some types of dwellings do not qualify, while others (like mobile homes) have special requirements (such as being on an approved permanent foundation and built after 1976) in order to be approved. Before borrowing, applicants must seek third party financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is a safeguard for the borrower and his/her family, to make sure the borrower completely understands what a reverse mortgage is and how one is obtained. The current lending limit (the maximum the home can be appraised for, no matter how much it's worth) is $625,500. This was increased in 2009, after being raised from $200,000 to $417,000 in 2008. The maximum an originator can charge for a loan origination fee on a reverse mortgage is $6,000.

The older the individual is, the more lenient the qualifications become, as the mortality rate increases with age. Once you make application and have been given the proper information and consultation with a seasoned professional, you will be required to attend a counseling session given by a HUD approved counselor (in the US). These sessions cost anywhere between $ 100 - $ 125 (in the US). This allows another opportunity to ask all the necessary and proper questions. During the loan and the remainder of its life, you cannot be asked to leave the property, as you still are the owner and deed holder. This is the case whether you outlast the performance of the loan or not. As far as your heirs go, they are still entitled to the property upon your passing. The estate will be settled in the normal way, the property will be passed on to the heirs, and they can refinance out of the reverse mortgage. If they decide not to reside in the property, they can sell the unit, pay off the reverse mortgage, and keep the balance of the monies of the estate. They have one year, from the passing of the note holders, to settle the mortgage.

Reverse mortgage proceeds

The amount of money available to the consumer is determined by five primary factors:

  • The appraised value of the property, whether any health or safety repairs need to be made to the house, and whether there are any existing liens on the house.
  • The interest rate, as determined by the U.S. Treasury 1 year T-Bill, the LIBOR index or 1 Year CMT.
  • The age of the senior (The older the senior is, the more money he/she will receive).
  • Whether the payment is taken as line of credit, lump sum, or monthly payments. Line of credit will maximize the money available, while lump sum provides the cash immediately, but the interest fees are the highest. Monthly payments are set up as a "Tenure" payment. Borrowers receive them for the rest of their lives no matter how long they live.
  • The value of the property, and whether that value is higher than the national loan limit set by HUD.

All these factors contribute to the Total Annual Lending Cost (TALC) as defined by the US Federal Government Regulation Z, the single rate which includes all the loan costs. The specific formulas to calculate the impact of the factors listed above can be found in Appendix 22 of the HUD Handbook 4235.1.

There are reverse mortgages for homes valued over the maximum limit. These are called "Jumbo" reverse mortgages, and are generally offered as proprietary reverse mortgages. For homeowners 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 money received (loan advances) from a reverse mortgage is not taxable and does not directly affect Social Security or Medicare benefits. However, an American Bar Association guide 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 his or her total liquid assets (cash, generally) is then greater than those programs allow.

It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. If either taxes or insurance lapse, it could result in a default on the reverse mortgage.

Once the reverse mortgage is established, there are no restrictions on how the funds are used. In addition to the tenure monthly payments, the borrower has the option of moving the entire amount of money into investments, or they can simply take the money and spend it as they wish.

Among the options of interest bearing instruments, the borrower can keep them with the lender and (These accounts grow by the same percentage as the interest rate of the loan), move the funds to a directed account with a financial specialist (This option is risky unless you direct the investment options of the financial specialist), or withdraw the funds and manage their investment themselves.

HECM for Purchase

The Housing and Economic Recovery Act of 2008 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 2009. 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.

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:

1) Mortgage Insurance: 2% (of the appraised value) 2) Origination Fee: The cap is 2% of the first $200,000 and 1% thereafter, with an overall cap of $6000. 3) Title Insurance 4) Title, Attorney, and County Recording Fees 5) Real Estate Appraisal $300–$500 6) Survey (may be required) $300–$500

In addition, a monthly service charge (between $25 and $35) is usually added monthly to the balance of the loan.

In all of these cases, the costs of a reverse mortgage can not be financed with the proceeds of the loan itself. Borrowers need to show proof of sufficient funds to close the loan.

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. Prior to 2007, all major reverse mortgage programs had adjustable interest rates. Such adjustable rate reverse mortgages are still being offered which 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. Some of these mortgages have interest rates that are similar to the current FHA/VA rate plus the mandatory mortgage insurance premium. 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.

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, 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.