Reverse Mortgage Beginner's Guide
By now, most folks have heard about reverse mortgages and may have already formed their own opinion about them or for some, they don't know a thing about them and some may not care one way or the other. These opinions could have been formed through various means: someone knows someone who got a reverse mortgage, someone heard about it from a TV commercial or saw their local news station talk about them or they read about it on the internet on in their weekend Home section of their local newspaper.
One thing is for sure, there are no shortages of opinions on reverse mortgages and there are no shortages of definitions of what they are and how they work according to the supposed references noted above. Credible resources such as AARP, the Federal Trade Commission, the National Council on Aging, HUD's website and others give a bird's eye view of the program but are quick to point out that extensive research is suggested and to consider all alternatives while at the same time giving their take on costs and warnings but little about real world uses for the reverse. There are many websites dedicated to reverse mortgages as well including www.omnireversemortgage.com, and there are often articles printed in news resources around the country kicking in their own opinion and looking for "that" story when they aren't doing what AARP and the FTC suggested: do your research use the resources to make a qualified decision.
Getting the real scoop on reverse mortgages
This article is going to take all of that into consideration using the many capabilities of the reverse mortgage, in an updated fashion.
You just don't stumble on a reverse mortgage. You would most likely have something going on in your own financial situation and life to begin to consider a solution in the first place. Maybe you've been running short on money after paying the bills each month or as they say, "there's too much month left at the end of the money." It's possible that you are still paying for a regular mortgage each month that you took out to put a sunroom on the place 3 years ago when money was cheap and your home value was skyrocketing. Now that payment each month is keeping you from doing more of the things you had dreamed about when you were considering retirement. Maybe you've considered moving from the home and downsizing into something more affordable. That's a smart move in this economic downturn, right? Will you get for your home what you think its worth and even though you may have your eye on a better deal somewhere else, unless you get the right amount for your current home, it may not always be the best solution for someone monitoring monthly cash flow. After prepping and staging your home, paying the real estate sale commission, getting rid of the things you've accumulated over the many years and then going through the moving process, in your 70's mind you, did it all make that much of a difference? Maybe you lost a spouse and were depending on both of your social security checks each month and are now living off of just one fixed income. You have decisions to make and none of them are easy or pleasant.
Right now, cash is king. Pick up the paper, turn on the TV. Banks are not lending money to anyone, including themselves. They're looking for direction from either the Fed or the Treasury to give them incentive to begin to lend again. Maybe it will or maybe it won't but we all have to hope it will come around, but it could and can get much worse before improving. Do you risk being overly optimistic and think it's all going to play out by mid 2009 like I read in one article or could this be the beginning of a long and painful bear market that sees massive unemployment and inflation or hyperinflation where everything costs more, even money. A reverse mortgage allows a homeowner access to that cash, now, in a HUD insured way and it does so without a whole lot of requirements that other programs would require. You don't need a perfect credit score, in fact your credit even taken into consideration, nor is your income or even your assets like with other loans. As long as you and/or your spouse is 62 and have sufficient equity (roughly 45% or more) in your well maintained and typical home you qualify for a reverse mortgage.
As mentioned, HUD insures 95% of all reverse mortgages. There were some so-called, private or proprietary reverse mortgages available but they have all gone by the wayside until the credit markets open up again so there's no telling when or if that will happen again. Because HUD provides the homeowner the capability of converting equity from their home into cash and they guarantee that you maintain title of your home through the entire life of the loan, there are many, and reasonably so, requirements connected to this transaction. FHA, a branch of HUD controls most of these rules and at first glance they are a bit confusing but after you take a long hard look at them you can see it was a very well thought out program or plan designed back in the late 80's. Part of the protection is the security of knowing that the borrower can NEVER owe a penny more than the home's market value. For example, if someone with a reverse mortgage were to use $200,000 of the available cash from the home over the life of the loan and their home was valued at $150,000 at the time of their death, their heirs or estate would not owe the $50,000 difference. They would owe nothing. If the borrower were to decide or had to move into assisted living for medical reasons and the usage of the proceeds exceeded the home's market value, the homeowner would not owe a penny back to HUD or the lender. Conversely, if the home was worth $200,000 and they used $150,000, the heirs would have the choice of paying back the $150,000 or selling the home for market value and after paying a real estate commission they would get all of the remaining money. HUD also ensures that the loan will stay in place and all proceeds will continue to be accessible to the borrower in the event the lender is no longer in business.
Some reverse mortgage facts
There are limits and caps on certain parts of reverse mortgages, all in the spirit of regulation and control and ultimately to ensure the Senior borrower is protected at as many places as possible before, during and after the loan is put in place. The rates, the fees, the values all have either floors or limits, as outlined below:
- The new nationwide lending limit is $417,000 meaning regardless of the home's value, if the value is more than $417,000, they will base how much equity you can access from that amount. If the home is worth less than the new limit, they will base their information on that value, so a $200,000 home will be the base point for all fees and available equity access.
- The origination fees are based on 2% of the first $200,000 and then 1% of the remaining amount up to a cap of $6000 total. A $500,000 home will incur an origination fee of $6000 because the first $200,000 at 2% equals $4000 and the remaining $300,000 at 1% will be $3000, but because the fee is capped at $6000, the remaining $300,000 at 1% will be just $2000. On the opposite side, the floor is set at $2000 with talk of it going to $2500 so for a home valued at $50,000, the origination fee will not be $1000 or 2% of $50,000, it will be $2000 or $2500 if changed.
- HUD MIP or the Mortgage Insurance Premium is capped at 2% of the lesser of the National Lending Limit or the home value. The most the MIP can be is $8340.00. The 2% fee is set, nothing more, nothing less and it is required on every reverse mortgage loan and this fee, almost all by itself, keeps the reverse mortgage program going. A $200,000 home would have an MIP fee at $4000 or 2% of $200,000. There is also a .50% additional MIP interest rate added to the Initial Rate (see below) each month that also contributes to the security of the loan. The reverse mortgage program through HUD is not taxpayer funded, it is user funded. Now, of course there are taxpayer components, the borrower is a taxpayer and HUD is funded by taxpayer money but the insurance components are covered by the MIP and up to this point in time, 98% of all reverse mortgages have NOT needed to use any of the MIP funds to protect the homeowners. With more than 107,000 reverse mortgages originated last year alone, that puts more than $375 million into the mortgage insurance fund to protect the homeowner in a reverse mortgage (using an average of $175,000 home value).
- The rate that is used to determine how much equity they will let you have access to is called the Expected Rate and its based on 1 of 2 indexes, either the 10 Year Treasury yield (CMT) or the 10 Year Swap which is a LIBOR term. The Expected Rate is the index plus a lenders margin which can vary from 1.50 to 2.25 on the CMT or 1.25 to 1.75 on the LIBOR. The higher the Expected Rate, the less equity you have access to and conversely, the lower the Expected Rate, the more equity you would have access to. There is a floor level of 5.5% for the Expected Rate and even if the index and margin are below floor level, 5.5% will be the number used to determine equity access.
- The rate at which interest accrues on any money used by the reverse mortgage is based on 1 of 2 indexes, either the 1 Year Treasury Yield (CMT) or the 1 month LIBOR. This rate is oddly called the Initial Rate and you add the same margin you used for the Expected Rate to calculate the Initial Rate and this is only for monthly adjusting reverse mortgages. The reason it's odd that it's called the Initial Rate is because it is used every month for the life of the loan to calculate how much interest accrues on the loan balance. Maybe they should call it the Ongoing Rate. There is no floor for this since the 1 Year CMT could go to zero or it could go much higher. The cap on the Initial Rate is 10 points more than when it starts. An initial rate of 3.5% would have a cap of 13.5% which means that if the 1 Year CMT increased to 15%, the borrower would only incur interest at 13.5%.
- There is a fixed rate and annual rate reverse mortgage. No one uses the annual rate but some are starting to look at the fixed rates since they just came down to 5.81% and are providing equity access yields close to monthly adjustables. The downside to the fixed rate reverse mortgage is they require the borrower to take the entire amount in a lump sum instead of other options and that would result in your entire amount accumulating interest from day one of the loan process. This would be more likely to eat up any remaining equity for your heirs or estate and it doesn't have a way to create credit line growth like the monthly would.
- All HUD reverse mortgages require the borrower undergo independent housing counseling either over the phone or in person from a qualified and recognized HUD counseling agency. The borrower pays for that counseling up front or can request it be paid at closing using the borrower's equity to pay that fee and this is capped at $125.00.
- Only FHA approved loan officers and organizations can originate reverse mortgages. Non-FHA approved organizations cannot get involved with them.
- Only FHA approved appraisers can be used to appraise homes in this transaction.
This is all important information to consider but after digesting it all, most folks are so overwhelmed by all the caps and limits and terms they have to walk away. In fact, it's so confusing to some that it's a perfect excuse to NOT DO IT! It can be argued by other family members, especially children, that it's all a scheme to take the remaining equity from the home and leave nothing behind for the kids. Here's something to think about, an argument could be made that Social Security and Medicare is also confusing but you don't hear about too many folks walking away from either of them now do you? You may not read this or hear this anywhere but it was one of the intentions of HUD to build this program so that it takes some of the pressure off the Medicare and Social Security system without draining other public resources. The Baby Boomer crowd is growing at leaps and bounds and when you combine the Silver Tsunami with a global economic slowdown like we are in the middle of right now, you almost have the perfect storm for reverse mortgages. Stay tuned!
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