Myth - The Reverse Mortgage can only be used for refinances...

This used to be true, but in 2009 the HECM (Home Equity Conversion Mortgage) insured by FHA was approved to be used for purchases...

This allows seniors to downsize without having to utilize all of the proceeds from the sale of their previous home and still have a home with no monthly mortgage payments.

Another option this is being used for is for seniors who have enough savings that they can buy a home with 40-50%+ down and get a Reverse Mortgage for the difference, having no monthly mortgage payments. This can also come into play if the senior wants to keep their existing home as a rental.

The Reverse Mortgage is expensive...right?

All Reverse Mortgages are expensive…right?

Many people have the assumption that all Reverse Mortgages(RM) have very high initial costs. This is not true.

With a Reverse Mortgage (RM) there are standard closing costs just as with a conventional mortgage. These include title, escrow, appraisal etc. Generally the two most significant costs on an RM on top of these costs are the origination fee and the upfront FHA insurance.

The origination fee has a maximum amount of $6,000 and the FHA insurance is 2 percent of the Maximum claim amount. This would be capped at $12,500 based on current maximum claim of $625,500. So on a deal that has all the maximums, the total closing costs could be around $20,000. This is rare as the FHA insurance would only be that high on properties that are worth $625,500 or more.

In 2010, the “Saver” program was introduced. On these programs, instead of the FHA fee being in the thousands, it can be more like $60. Also on some programs the origination fee can get down to as low as $0. So if you had a Saver program with $0 origination fees, the overall closing costs could actually be a little lower than on a conventional loan. In some cases, there can even be an additional
credit to go towards the closing costs.

So why doesn’t everyone just do the “Saver” program? The drawback on the Saver program is that the client receives less funds than on a standard program. This can make a difference for some who need every penny they can get. For those that do not need all of the funds they qualify for, the “Saver” program is a great option.

The costs involved with an RM are generally not out of pocket costs other than maybe the counseling fee (which can be around $120) and maybe sometimes the appraisal fee (Could be around $500). I always try to have the appraisal fee collected at closing. The other costs would just be added to the loan balance.

The closing costs being paid are really based on the program and funding needs of the client. A client needing maximum income and funds would most likely benefit by the loan with the higher initial costs. A client consolidating existing debt and not needing all the funds they qualify for would benefit by the “Saver” low-cost option.

Many senior homeowners have used the "Saver" option along with a line of credit option as a financial planning tool, utilizing these funds and not touching current investments or deferring Social Security income.

The RM is for senior homeowners (62+) who may have a need for additional income, debt consolidation, remodelling costs, in home assisted living etc...The decision on costs can be secondary to what is the best solution for the challenge.

Good News - $625,500 extended through 2012

December 2nd, 2011  |  by Alyssa Gerace Published in News, Reverse Mortgage

The current maximum claim amount of $625,500 for Home Equity Conversion Mortgages (HECMs) has been extended through 2012, according to the Department of Housing and Urban Development (HUD).

When President Obama signed the Transportation, Housing, and Urban Development (THUD) spending bill into law on Nov. 18, effectively re-raising FHA-insured forward loan limits from $625,500 to $729,750, lenders were left wondering the plight of reverse mortgage loan limits.

Although they had previously been extended through the end of December 2011, the possibility remained that the limits would revert back to their former ceiling of $417,000.

Now, however, it looks like some lenders, especially those in high-cost areas, have gotten an early Christmas present. A Nov. 23 FHA update reminds lenders that the maximum claim amount for HECMs is not affected by the THUD spending bill (HR 2112), and says the limit remains at $625,500 as stated in Mortgagee Letters 10-40 and 11-29.

“This loan limit will remain the same for 2012 and will be included in the pending Mortgagee Letter,” says the update.

Reverse "Myth" - The home needs to be Free and Clear...

The borrower(s) can have existing financing on the property. The Reverse Mortgage can payoff the existing liens and remaining funds could come in a lump sum or income/line of credit. This consolidation can save the senior homeowner significantly as they will no longer have the monthly mortgage payments.

Reverse "Myth" - The borrowers can owe more than the property is worth

The Reverse Mortgage is a Non-Recourse loan. The borrowers can not owe more than the property is worth

Reverse "Myth" - Funds from Reverse can effect Social Security income and Medicare

Funds from the Reverse Mortgage are loan proceeds and not considered income. There might be certain affects on Medicaid. Discuss this with your advisor..

NOT a Last Resort....

When people ask me about Reverse Mortgages,  a lot of the time they will say something to the effect of "That’s just a last resort thing, right?" or " I would never want to have to get one of those."

These kind of statements are usually a result of misunderstanding of the Reverse Mortgage (RM)

In reality, for many senior homeowners their true last resort is having to sell the house that they have been living in for a significant portion of their life. In many cases the only reason to do either (Sell or get a reverse mortgage) is to access the equity (difference between the value and any liens) to be able to live more comfortably.

Selling may make more sense if the homeowner must go to an assisted living community for services. If in-home assisted living is possible, the RM can help, allowing the senior to remain at home. If needs are income based, and the senior needs to sell the house so they can live off the proceeds, the RM may do the same, but allowing them to stay in the home they are comfortable in.

If costs are a concern, the costs of selling a home could be much greater than that of doing the RM..Using an example of a $400,000 home, a sales commission might be between $20-25,000. However, closing costs on an RM can be as low as $2-3,000 and upwards of $18,000 depending on program.

Many senior homeowners still have financing on the property. This may have been done when they were fully employed, but are now depending on Social Security and whatever retirement savings they have. The economy has hit the retirement savings pretty hard for a good number of people, with it no longer lasting a lifetime. These seniors may be in a position that they look at selling the house as they can no longer are able to keep up with the mortgage payments.

If the equity in the property is enough, the RM can payoff the existing loan(s) allowing the senior to stay at home and not have monthly payments. To them selling would have been a last resort, which would have put them in a position of having to move into a place with no memories etc.

Recently I helped a couple who had already packed their boxes, thinking selling was their only solution. He had been laid off and was not finding work. They had a mortgage over $350,000 with payments of $1,900+. They were finding it very tough to make the payments each month, and thought selling was the only answer. This was a home that was her parents' before they lived there. We discussed the RM options and it was an incredible discovery for them. An RM was done that paid off the existing financing leaving them with a mortgage with no monthly payments. There were also funds which allowed them to do some home improvements.

Another last resort that could come up is having to move to an assisted living community as there is no income for in-home assisted living. With the right amount of equity, an RM can be done where the lender actually sends the borrower funds each month. Depending on the age of the borrower(s), the value of the home, and current interest rates, this monthly amount could be
significant. Again, this option allows the senior homeowner to stay at home
where they are comfortable.

Aside from these uses, the RM has been used many ways as discussed before. These can include purchasing a home, purchasing investments, helping family, or just having fun…I have spoken and worked with many people who did not see it as a last resort, but one for opportunity and to extend a quality of life..