Reverse Mortgages for Senior Homeowners

1. Reverse Mortgages for Senior Homeowners Cindy Stokes Utah State University (adapted from AARP information)

2. A Little History • 1979 Federal Home Loan Bank creates Reverse Mortgage concept • 1989 HUD/FHA introduces HECM • 1989 Fannie Mae agrees to purchase HECM loans • 1996 Fannie Mae creates HomeKeeper® • 1998 HECM becomes permanent program

3. Home Equity Conversion Mortgage • Designed by HUD • Insured by FHA • Payments continue as long as one homeowner remains in home • Loan balance not due until borrowers die or leave the home • Total due lender cannot exceed value of home at time of sale

4. HECM Basic Requirements • Borrowers must be at least 62 years old • Home must be FHA approved • Borrowers must live in home as principal residence • At least one homeowner must reside in home at time of closing • Home must be free of debt or nearly paid off • Borrowers must receive reverse mortgage counseling • Owners must not be in, or filing for, bankruptcy. • Owners can be in foreclosure.

5. HECM Counseling Required • 2-hour session • HUD-approved counseling agency • Free of charge • Includes discussion of other alternatives • Certificate of HECM Counseling issued, good for 180 days

6. Safeguards • Loan never becomes due until last homeowner leaves the home • Payments continue even if payments exceed value of the home • No repayment required of amount paid out in excess of value of the home • If lender fails, FHA will make payments • FHA covers any shortfall if amount due exceeds value of the home

7. Forward Mortgage on $100,000 loan Each payment from borrower to lender: Principal decreases Reverse Mortgage with $100,000 loan Each payment to borrower from lender: Principal increases Forward vs. Reverse “Up the Down Staircase”

8. Reverse Mortgage Features • No income-qualifying requirements • Title to property remains in borrower’s name • Borrower remains responsible for payment of taxes and insurance • Total loan balance not due until last homeowner leaves the property • Total amount due lender cannot exceed value of home at time loan is repaid

9. HECM Eligibility Requirements • All owners must be at least 62 years old • Home must be their principal residence at least 6 months of year • At least one homeowner must reside in home at time of closing • Borrowers must receive reverse mortgage counseling The Homeowners

10. HECM Eligibility Requirements • Can be single-family, 1 to 4 unit owner occupied, FHA-approved condominium, PUD, or manufactured home • Must meet minimum FHA property standards The Home

11. HECM Eligibility Requirements • Any existing mortgage must be paid off at closing • HECM must be first mortgage but can be used to pay off existing debt • FHA mortgage insurance required • Origination and Servicing fees The Loan

12. How Much Can Be Borrowed Total amount available is based on: • Age of borrowers • Value of property • Average interest rate

13. “How Much Can I Get?” • Location, Location, Location • Market value at time of closing • Maximum loan limits • Equity in the home • Age of borrowers • Interest rate

14. Reverse Mortgage Calculator • When were you born? • When was your spouse or co-owner born? • How much is your house worth? • Your ZIP Code • http://www.rmaarp.com/

15. Four Basic Plans • Tenure - Monthly payments for life • Term - Monthly payments for set number of years • Line of Credit - Draws in amount and time of borrower’s choosing • Lump Sum - Total amount available drawn at closing

16. Tenure Plan • Monthly payments for life • Advances are secured by mortgage or deed of trust • Amount of payment remains fixed • Interest, insurance, and servicing fees added each month • Total loan balance increases every month • No payment due until last homeowner dies or leaves the property

17. Term Plan • Amount available calculated same as for Tenure Plan • Payments made for set number of years • Borrower designates number of years • At end of term, payments stop • Repayment of total loan balance not due until last homeowner leaves the home • Monthly amount received depends on length of time payments are desired

18. Amount of Monthly Payment Actual amount to be received monthly is based on: • Location of home • Value of home • Equity in home • Age of youngest homeowner • Interest rate at time of closing

19. Line of Credit Plan • Line of credit established based on equity • Homeowner can draw any amount at any time until available principal is depleted • Interest is charged only on amount drawn • No repayment is required until last homeowner either dies or leaves the home • Amount of cash available increases • Needs to be used to be cost-effective

20. Lump Sum Plan • Calculated same as Tenure or Term • One lump sum of all available funds drawn at closing • Can be combined with tenure or term plan • Interest is calculated and charged each month along with insurance and servicing • Total balance becomes due whenever property is sold

21. The Process • Step 1: Counseling • 2-hour session • Certificate of HECM Counseling good for 180 days • Step 2: Find a Lender • www.hud.gov • www.fanniemae.com • www.aarp.org

22. Things to Consider • Cost - Origination & Servicing Fees • Experience - Number of Reverse Mortgages • Servicing - Administrative Costs • Commitment - Professional Relationships

23. Closing Costs for RM Loan • Total Annual Loan Cost (TALC) • Application Fee • Appraisal and Credit Check • Origination Fee • Preparation and Processing • Closing Costs/3rd Party Closing Costs (varies) • Title search and insurance, survey, inspection, recording fees, property tax • Mortgage Insurance Premium • HECM loan • 2% of value or $2000 – can be financed

24. Monthly Costs for RM Loan • Adjustable Rate Interest • Adjust monthly or annually • U.S. Treasuries plus margin • Mortgage Insurance • HECM: ½% of loan amount charged monthly • HomeKeeper®: averages .8% annual, charged monthly • Service Fee • Ranges from $25 to $35 per month All costs charged monthly and added to principal loan balance. Periodic status statements sent out every 3 months. No payment is due until mortgage loan is paid off.

25. Additional Costs • Homeowner Insurance and Property Tax • Maintenance and Repairs

26. Due & Payable • When last homeowner dies, sells the home, or permanently moves out • Failure to pay Property Taxes • Failure to pay Homeowners Insurance • Failure to Maintain and Repair home

27. Other Default Conditions • Declaration of Bankruptcy • Perpetration of fraud or misrepresentation • Eminent Domain or condemnation • Renting out part of the home • Trying to add a new owner to the title • Trying to take on new debt against home

28. Repayment • Pay off loan balance and keep home • Sell home and pay off loan balance and keep any difference • Hand over the home to the lender to sell • Time frame: • 6 months • two 3 month extensions

29. Key Decisions • Who else should I involve in considering this loan? • Which counselors should I choose? • Have I given due consideration to all my choices? • When would be the best time to take out a reverse mortgage? • What interest rate should I choose? • Which lender should I choose? • How should I use this loan?

30. AARP Booklet: Home Made Money • To order a complimentary copy by phone: • Call 1-800-209-8085. • To order a complimentary copy online: • http://www.aarp.org/money/revmort/revmort_basics/a2003-04-07-homemademoney.html