Reverse Mortgage Specifications
The maximum amount that you can borrow is based on the following factors:
- The age of the youngest homeowner.
- The appraised value of the home.
- The current interest rate.
In general, the more your home is worth and the older you are, the more you’ll be able to borrow. However, FHA sets a limit on the value of the home. On February 18, 2009, President Obama signed into law The Housing and Economic Recovery Act of 2008. Perhaps the most significant piece of housing-related legislation we have seen in recent years, the new bill implemented necessary consumer protections along with several positive changes to the FHA reverse mortgage program.
One of these positive changes included the implementation of a new national limit of $625,500. (Prior to this, the national limit was $417,000). If your home is worth more than the $625,500 national limit, you are still eligible for a HECM loan. But, the amount of money you can get is based on the national FHA limit, not on the home’s actual value. For example, if your home is valued at $700,000, then your available cash from a reverse mortgage is the same as it would be if your home were valued at $625,500.
Costs and Fees.
“Some people will say reverse mortgages are expensive while others will tell you they are the greatest deal on earth. What all the years of talking to seniors about reverse mortgages has taught me is that you can show somebody what something costs, but you cannot tell them what it’s worth to them,’’ said Ken Scholen, founder of the nonprofit National Center for Home Equity Conversion.
It’s important to note that all fees associated with obtaining a Reverse Mortgage are regulated by HUD and most of the fees can be financed into the loan. These costs include:
- ORIGINATION FEE: One critical item of the new housing bill is a reduction in the amount of origination fees lenders can charge on the country’s most popular reverse-mortgage program. The new calculation reduces the origination fee to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of your home’s value or the FHA limit, whichever is lower. This pays the lender for preparing the paperwork and processing the loan.
- THIRD PARTY FEES: Completing your Reverse Mortgage requires a variety of services preformed by companies other than your lender. These people are called “Third Parties”. These services include, but are not limited to, the appraisal, title insurance, mobile notary fees, recording fees, escrow fees, etc. Third party closing costs on a Reverse Mortgage vary with the value of the home and from one county to another, but tend to range from $1500-$2500.
- FHA MORTGAGE INSURANCE PREMIUM: Considered by many to be the most important feature of the loan, the FHA mortgage insurance serves two significant purposes. 1) From the borrower’s perspective, it guarantees that no matter what might happen to the lender or the home’s value, the borrower will receive every penny of their money, directly from the U.S. Government, if necessary. 2) From the lender’s perspective, the FHA insurance guarantees that if the balance due exceeds the value of the home at loan termination, FHA will cover all or part of the shortfall to the lender on behalf of the borrower. This feature, which eliminates the risk to the lender, enables them to offer a much lower interest rate to be charged on HECMs in comparison to other types of reverse and conventional mortgages. (This could save the senior homeowner tens of thousands of dollars in accumulated interest over a long period of time.) In addition, because of this lower interest rate, lenders are able to offer a much larger cash benefit on HECM reverse mortgages than on other non-insured reverse mortgages. For this insurance requirement, two percent of the home value, or FHA national limit (whichever is less) is financed into the closing costs. In addition, .5% is added to the interest rate charged on the outstanding loan balance on a monthly basis.
- SERVICING FEES: Servicing happens after your loan has closed and funded. This includes sending you your payments, making or changing loan advances at your request and sending out account statements regularly. The servicing fee is not considered a closing cost and ranges from $30-$40 per month.
FHA reverse mortgages can be based on either a fixed or adjustable rate loan. Adjustable Rates are linked to the LIBOR plus a margin. For the adjustable rate program, the change in the interest rate has no effect on the amount of or the number of loan advances you can receive, but causes the loan balance to grow at a faster or slower rate. The adjustable rate program does have a 10% cap on the initial interest rate. However, since the programs inception in 1989, the cap has never been reached. (Over the last 25 years, the average interest rate for FHA HECM reverse mortgage is 6.11%).
The loan becomes due and payable when the last borrower no longer occupies the property as their primary residence, whether that is by selling or by death. There is no pre-payment penalty. The amount ultimately due is simply the amount you borrowed plus the interest that had accumulated. Just like a traditional mortgage, heirs to your estate have the option of selling the property to payoff the loan balance or they can keep the home and payoff the loan via a conventional mortgage, savings, etc.
To be eligible, you must be 62 or older. If you are 62 and your spouse is not, then as a “couple” you cannot obtain such a loan. (Only under certain circumstances should the younger spouse be removed from the title so the older spouse can obtain the reverse mortgage.)
You must live in a home that is owned free and clear or have a remaining mortgage balance that can be paid off by the reverse mortgage. For example, if you owe $100,000 on a mortgage or home equity loan, you would have to qualify for at least $100,000 and use it to pay off this debt at closing.
A home that is a primary residence can be owned individually, jointly, in trust or with a life estate. If you set up a revocable trust, a reverse mortgage can still be an option provided that you are the beneficiary. Your children can be beneficiaries upon the death. Title to the property must be in the trustees and the trustees do not have to be the borrowers. The trust will be reviewed during loan processing. Therefore, a copy of the trust will need to be provided at application signing.
Important Note: Since you continue to own your home, you are still responsible for property taxes, homeowners insurance and repairs.
Alternatives to the Reverse Mortgage. One option is to sell your current residence and downsize. AARP, in survey after survey, states that a majority of our elders do not want to move. It is ideal to be able to stay in the environment that contains much of their family and personal history. Usually they want to remain in an area that is familiar. Your home is the story of your life and stores so many of your precious memories. If the home is sold, you then have to find a place to live. Often a smaller home will cost more than the home you just sold, so a sale often becomes financially impractical.
A second option is to go to your neighborhood bank to get a conventional mortgage. Now days, when you apply for a mortgage, income and assets are reviewed. All sorts of financial ratios are determined. Credit scores are carefully analyzed. While some seniors may be able to qualify for a conventional loan, they do not want the headache or the responsibility of paying it back on a monthly basis. Making those monthly payments is something they can do without.
Closing Comments. A reverse mortgage is the only way you can turn your home equity into cash while staying in the home that you love and while not having to pay a current interest payment on the loan.
A reverse mortgage is nothing short of a life-changing event. The look on the face of the borrower tells the whole story. For some, the weight of the world has been lifted from their backs. They are ready to take on the world again. They get the best of both worlds: their equity is transformed into cash AND they can still stay in their home as the sole owner(s) on title.
Because we are living longer, we must be preparing for the unique challenges that all of us will eventually face. We are past the time for depending on the government to take care of us. It is a time for becoming proactive. Beginning in the year 2012, 10,000 Americans per day will be turning 65. In the ‘good old days’, one would get old, sick and die. That is no longer happening. There is a new paradigm. Now we grow old, get sick and survive….for many years.
A National Council on Aging study shows that reverse mortgages will keep millions of our seniors in their homes. Not only will it free up funds for in-home care but will also allow millions of our elders to make needed improvements to the home. This will enable seniors to stay in the home.
Seniors do not buy long-term care insurance because it is too expensive. Let us not forget that Social Security is the largest source of funds for people over the age of 65. A reverse mortgage will make that which was not affordable very affordable.
There are about 22 million senior households in this country. About 17 million of these households own their home free and clear. The home will continue to represent the biggest untapped source of equity. Many of our elders are literally sitting on a gold mine. By showing our seniors how they can easily and safely extract this gold, convert it into cash and use the proceeds for any purpose while never having to make a mortgage payment, their lives will be changed forever… for the better!