Mr and Mrs Smith - Age in Place with a REverse Mortgage

The Smith’s

Mr. Smith retired from a government job and had a meager pension.  In order

To pay off debt and make their lives more comfortable Mr. Smith took out a reverse mortgage.  At the time Mrs. Smith wasn’t 62 so she couldn’t be a part of the loan. 

Once she turned 62 it would be important for her to be put on the loan so that if something happened to Mr. Smith she wouldn’t have to settle the loan.

Last year Mr. Smith was diagnosed with terminal lung cancer and Mrs. Smith hadn’t applied for a reverse mortgage to put her name on title.

The Smith’s called me to see if I could help because if Mr. Smith passed away Mrs. Smith would have to sell her home.  She wasn’t working and couldn’t afford a house payment. I did an application with Mrs. Smith and all went well and the loan closed.  Now Mr. Smith and Mrs. Smith can enjoy their remaining time together without worrying about Mrs. Smith having to sell their home and find a new place to live. 

The reverse mortgage was a wonderful tool for the Smiths to get the money they needed to live while never having to make a payment on their fixed, limited income.

This is why I do what I do and love it.  I improve the quality of life for seniors and help them to Age in Place.

Frequently Asked Questions about HUD's Reverse Mortgages

Frequently Asked Questions about HUD's Reverse Mortgages

The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program, which enables you to withdraw some of the equity in your home.  The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement Social Security, meet unexpected medical expenses, make home improvements and more.  You can receive additional free information about reverse mortgages in general by contacting the National Council on Aging at (800) 510-0301 or downloading their free booklet, "Use Your Home to Stay at Home," a guide for older homeowners who need help now. It is smart to know more about reverse mortgages, and decide if one is right for you!
1. What is a reverse mortgage?
A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you.  However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage.  You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.
2. Can I qualify for FHA's HECM reverse mortgage?
To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are also required to receive consumer information free or at very low cost from a HECM counselor prior to obtaining the loan. You can find a HECM counselor online or by phoning (800) 569-4287.
3. Can I apply for a HECM even if I did not buy my present house with FHA mortgage insurance?
Yes.  You may apply for a HECM regardless of whether or not you purchased your home with an FHA-insured mortgage.
4. What types of homes are eligible?
To be eligible for the FHA HECM, your home must be a single family home or a 2-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.
5. What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must have adequate   income to qualify for the loan, and they make monthly payments on the principal and interest.  A reverse mortgage is different, because it pays you – there are no monthly principal and interest payments.  With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.
6. Will we have an estate that we can leave to heirs?
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid.  All proceeds beyond the amount owed belong to your spouse or estate.  This means any remaining equity can be transferred to heirs.  No debt is passed along to the estate or heirs.
7. How much money can I get from my home?
The amount you may borrower will depend on:

• Age of the youngest borrower
• Current interest rate
• Lesser of appraised value or the HECM FHA mortgage limit of $625,500 or the sales price; and
• Initial Mortgage Insurance Premium--your choices are HECM Standard or HECM SAVER

In addition, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow.  If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow.  For an estimate of HECM cash benefits, select the online calculator from the HECM Home Page. Many online reverse mortgage calculators can provide you with an estimate of the amount of funds you can borrow.
8. Should I use an estate planning service to find a reverse mortgage lender?
FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA-approved lender.  You can locate a FHA-approved lender by searching online at www.hud.gov or by contacting a HECM counselor for a listing.   Services rendered by HECM counselors are free or at a low cost.  To locate a HECM counselor Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you
9. How do I receive my payments?
You can select from five payment plans:

• Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term- equal monthly payments for a fixed period of months selected.
• Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
• Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home.
• Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

 10. What if I change my mind and no longer want the loan after I go to closing?  How do I do this?

By law, you have three calendar days to change your mind and cancel the loan.  This is called a three day right of rescission.  The process of canceling the loan should be explained at loan closing.  Be sure to ask the lender for instructions on this process.  Mortgage lenders differ in the process of canceling a loan.  You should ask for the names of the appropriate people, phone numbers, fax numbers, addresses, or written instructions on whatever process the company has in place.  In most cases, the right of rescission will not be applicable to HECM for purchase transactions.

Move Forward in Reverse - lock in home values

What if home values continue to decline? Reverse mortgages have helped people capture the value of their home during a declining market. People that took out a reverse mortgage three or more years ago received equity from their homes that has now evaporated. So if a reverse mortgage makes sense for someone today it might be time to move forward to lock in the value.
While several large banks have left the reverse mortgage industry and many people are misinformed about the product now might be a good time to investigate how this program can be a valuable tool.
Often times the most valuable asset people have are their homes. For people over 62 the reverse mortgage allows them to tap into this asset. Home equity has been falling since its peak in 2007. Despite this decline the National Reverse Mortgage Lenders Association estimates there is $3.2 trillion in equity sitting out there that is untapped.

The Time is RIGHT
While reverse mortgages continue to be used by a tiny percentage of eligible homeowners it might be a good idea to talk to your financial planners or family members and lock into the program.
1. If you have a home that's worth more than $417,500 the temporary loan limit of $625,000 is set to expire at the end of 2011.
2. The future of the program is uncertain, all government programs are subject to deletion.
3. The reverse mortgage can provide funds necessary for anyone who is laid off or having financial difficulty in this weak economy.
4. Look at the reverse mortgage as a way to lock in the home's current value and protect the equity

Earlier this year Ginnie Mae, which purchases reverse mortgage-backed securities, tightened the standards for these loans. Loan volume has continued to fall since it's peak in 2008.

With the introduction of the new financial assessment due out in the coming weeks it is going to become more difficult for those "in need" seniors to receive a reverse mortgage. This assessment will try to evaluate whether or not the borrower will be able to continue to pay their property taxes, homeowners insurance and maintenance on their homes before they grant the loan.

Who Qualifies?

The homeowner(s) must be at least 62 or better and the home must be their primary residence. They can not be delinquent on any federal debts but can have a small mortgage on the home that will be paid at closing. All the criteria for the loan is based on home value so the guidelines for this loan are not the same as a conventional loan. However, HUD counseling or reverse mortgage education is a mandatory requirement for the loan. This helps the borrower understand the loan and avoid being taken advantage of by an unethical lender.

There are two types of loans to choose from. The fixed rate provides the largest amount of equity you can receive from the reverse mortgage but all the proceeds must be taken at closing. Thus you begin paying interest on that amount as soon as the loan funds. This loan makes sense if you have a large mortgage or other debts that need to be paid. The second is the adjustable rate loan that provides you with many options such as tenure (a dollar amount for the rest of your lift) term (a set amount for a number of years) a line of credit that actually grows in value or a combination of any of the programs. The line of credit is a great way to have money accessible to pay taxes, medical bills etc. without having to pay it back. It also grows by 4% which is the opposite of the market value of the home. All the proceeds from the reverse mortgage are TAX FREE!!!!

As long as one of the homeowners remain in the home the loan is not due and payable. Not until the last borrower leaves the home by death or disability does the family need to start looking into selling or refinancing the home. Once that event occurs the loan must be repaid, with interest. Any money remaining after the loan is satisfied goes to the borrowers or their heirs.

An example of the application of this product was a 77 year old lady in Arizona that took out a reverse mortgage to purchase a home for her daughter down the street from her so that she could help take care of her. The daughter now had a mortgage -free home and lives near enough to care for her mother.

Recently FHA introduced the Saver Loan. The good news is that the upfront costs of the loan are greatly reduced but so is the amount you can borrow. In some cases you will also pay a slightly higher interest rate. The volume of these Saver products has more than doubled since January. They are now about 10% of all new reverse mortgages according to John Lunde, president of Reverse Market Insight. It seems borrowers are getting younger and utilizing the product for retirement planning.

While home equity may have declined from it's peak, smart planning can allow people to fund their retirement by tapping into it.