1 REVERSE MORTGAGE SURVIVAL GUIDE
2 Table of Contents Chapter 1-Introduction... Chapter 2-Tax-Free Income... Chapter 3-A Senior Moment... Chapter 4-Mortgage Counseling... Chapter 5-How Reverse Mortgages Work... Chapter 6-A Plan of a Lifetime... Chapter 7-What is the Cost?... Chapter 8-How Would You Like Your Money?... Chapter 9-Moving in Reverse... Chapter 10-Should I Stay or Go?... Chapter 11-Reverse Mortgage Scams... Chapter 12-Reverse Mortgage Myths...
3 Introduction Until recently, seniors 62 years of age and older have not had the best choices when it came to getting cash from their homes. Traditional home loans only offered the options of either selling one s house or borrowing against it s equity. Obviously, this meant moving into a new home or taking on monthly payments; not exactly the most appealing choices for those who have put down permanent roots and are often on a fixed income. With the increased popularity of reverse mortgages, seniors are now finding themselves with increased options, and questions. The first FHA-insured reverse mortgage was taken out by Marjorie Mason of Fairway, Kansas, in 1989; but the popularity of reverse mortgages has exploded over the past ten years. The first private reverse mortgage was issued in Michigan in the mid-1970 s by Nelson Haynes of Deering Savings & Loan. Interestingly enough, this product was born out of Mr. Haynes desire to help the widow of his high school football coach. Upon the death of her husband, she found herself not only mourning her losss, but struggling financially. Nelson Haynes crafted a reverse mortgage for her, out of thin air, and the rest is history. Doug and Sharon Jones have called their house home for over 30 years. Now, in their late 60 s, after spending more than 15 years enhancing and improving their home; uprooting is the last thing they want to do. With all of their financial investments behind them, Doug and Sharon have now decided that they want to spend some time traveling the world. Doug has always wanted to visit the United Kingdom, while Sharon dreams of warmer, drier climates like Bora Bora. Doug and Sharon are also interested in supplementing their retirement income in order to help offset the costs of their prescription medications. By using some sound financial planning with their reverse mortgage, they are able to accomplish all three of these goals. World travel, additional income, and prescription medication assistance; and they achieve everything without giving up the home they love so much.
4 Tax-Free Income With reverse mortgages coming on the scene, couples like Mr. and Mrs. Jones now have some appealing cash flow alternatives that didn t exist before. These loan plans will allow the couple to convert their home equity into tax-free income, in most cases, and without being forced to sell their home or take on new monthly mortgage payments. Of course the term Tax-Free Income which we hear so much is actually a misnomer. Simply put, reverse mortgage income is tax-free because it isn t considered income by the Internal Revenue Service; reverse mortgage income is actually loan proceeds, which are not taxed. One very popular strategy, that some don t consider, is to use a reverse mortgage to offset withdrawals from tax deferred retirement vehicles. This strategy not only allows seniors to reduce their annual tax burden, but it also allows them to keep their tax deferred investments untouched and growing. They can also receive cash payments and credit lines without incurring monthly mortgage payments or having to prove an existing income; nice options traditional home loans do not offer. For seniors and maturing Baby Boomers, the idea of staying put while collecting monthly advances can be very attractive. Many of them have no desire to relocate. Instead they prefer cash advances to pay off debts, improve and repair their homes, or travel the world.add to this not having to repay the debt until a future time and having no monthly payments; and a reverse mortgage becomes an ideal option for those in their golden years. Carlos spent his entire life working hard and making the right choices. He had never been a lavish spender, and his investment decisions were always prudent and well thought out. Carlos reached the golden age of 65 with plenty of money in his investments, and a free and clear home to live in; with the exception of Carlos and his financial planner, no one would have thought Carlos a good reverse mortgage candidate. Carlos receives $77,000 in annual income, $33,000 from social security and $37,000 from his investments. Of course, 100% of his investment income is taxable as ordinary income; which results in Carlos now paying taxes on an adjusted gross income of $66,050. Carlos decided to replace $12,000 of his annual income with reverse mortgage proceeds, and something remarkable happened. Carlos adjusted gross income dropped by $22,500, or 33.14%, and he saved over $3,300 in annually in income taxes. Not only did he save money in taxes, he is now able to add to his qualified accounts instead of subtracting from them; and these investments continue to grow tax deffered.
5 A Senior Moment In order to apply for a reverse mortgage, you must be at least 62 years of age or older. All owners who are on the title deed must meet this age requirement, as well as apply for the mortgage and sign the loan documents. Lastly, the home must remain the borrowers principle place of residence; reverse mortgages are not available for vacation homes, investment properties or second homes. One of the most attractive benefits of a reverse mortgage is that there are no income or medical requirements a borrower must meet in order to qualify. Because you end up receiving money from your reverse mortgage, instead of paying monthly payments, income plays no part in your eligibility for a reverse mortgage. Single family residences are most commonly eligible for reverse mortgages, although some programs do accept other types of property; such a manufactured homes and condominiums. The only exception would be mobile homes and co-ops, which generally do not qualify for reverse mortgages. According to an AARP study from 2007, 93 percent of reverse mortgage borrowers report that these loans have had a positive effect on their lives, and 89 percent would recommend a reverse mortgage to a friend or family member. Most seniors have heard of a reverse mortgage, but few feel that they really understand this loan. As she watched the stock market tumble in the fall of 2008, the grim reality began to sink in for Betty. By the time the bleeding had stopped, nearly half of her life savings was gone; vanished in a barely a blink. Betty quickly realized that her funds weren t going to last as long as she d hoped, or as long as she d planned; and that was barring any unforseen problems arising. When her husband Sam was alive, he was not someone who believed in taking on debts, and she could still hear his voice in her mind as she thought about a reverse mortgage. They had owned their home free and clear many years before he passed, and her biggest fear was losing it now. But, as she looked into the future and saw her nest egg dwindling, even paying the property taxes and insurance was going to be an eventual burden. Betty s daughter, Judy, suggested she look into a reverse mortgage. The thought of her mother having such a big asset, but no access to it in the event of an emergency, was troubling for her. By wisely planning her reverse mortgage, Betty was able to have the best of both worlds. She used her reverse mortgage to open a line of credit, so she had funds available any time she needed them; but at the same time she wasn t technically in debt, nearly all of her home equity was still intact.
6 Pre-Mortgage Counseling In order to ensure that homeowners are fully aware of the financial ramifications of obtaining a reverse mortgage, applicants must participate in counseling with an unbiased third party before completing their reverse mortgage application. Many seniors have voiced concerns over this process, feeling that it is a bother or a burden; not to mention paying the typical $125 fee involved. It is important to remember that, unlike the reverse mortgage lender, this counselor has no skin in the game; meaning it really doesn t effect your counselor if you decide against a reverse mortgage. This third party counselor will walk with you through any and all alternatives to a reverse mortgage, as well as discussing the reverse mortgage process, pros and cons of a reverse mortgage, and your counselor can also help alert you to potential scams in the marketplace. HUD and AARP oversee a network of counselors who can provide this service, and it is offered for a nominal fee. Your conselor may even offer up options you hadn t previously considered, maybe selling the home is a better alternative, or even moving to Costa Rica! Bill s Story I had to buy a pair of hearing aids, and the ones that I wanted to buy costs $4,200, and I need I need to have some dental work done, which, as you know, can get expensive. So I m able to do that. I can t really afford to go into one of these 3,500 or $4,000 a month nursing homes and I feel like I can stay here for a lot less money, and this this reverse mortgage is going to help me do that. I ll be able to afford somebody to come in and stay with me, and I could never do that before. It was such a relief to have that problem solved because it s been worrying me quite some time. Ever since my wife passed away, I ve been wondering how I was going to manage by myself, and of course, my doctor told me that I was going to need some help and not to be alone, and so that really took a load off my mind, have the capability to have somebody come in and stay with me when I need it, and I ll be home, know where everything is, have all my things to play with.
7 How Reverse Mortgages Work Reverse mortgages are probably best understood when compared side-byside with a traditional forward mortgage. The following table compares the differences between the two loan programs. Forward Mortgage Uses income to pay debt Monthly mortgage payments required Falling debt, building equity Reverse Mortgage Uses home equity to get cash or credit No monthly payments required Rising debt, reducing equity As you can see, both loans incur debt against your home, and both affect equity in the home; but they do so in very different ways. With a traditional home mortgage, you would be making monthly payments to a lender. By using a reverse mortgage you make no monthly payments, and in many cases the lender will be making payments to you. In essence, the two loans work in the complete opposite fashion from one another. Benefits You re allowed to tap into your home s equity without having to repay the loan, as long as your home is your principal residence. In most cases, the loan doesn t have to be paid back until the last surviving borrower dies, sells the home or permanently moves out. The payout advances are not taxable and bring no risk of losing Social Security or Medicare benefits. With most programs, there are no restrictions on how you use the money.
8 A Plan of a Lifetime There are basically three different reverse mortgage plans being offered today; uninsured, lender insured and FHA insured. Uninsured. This type of reverse mortgage differs dramatically from an FHA-insured or lender insured loan. With this plan, you will receive monthly loan advances for a fixed term only; you select the number of years that you wish to receive payments for when you first take out the loan. The second important difference to note with an uninsured reverse mortgage is that it will be due on a specific date, as opposed to when the last surviving borrower leaves the home. This type of reverse mortgage only fits with an extremely limited type of borrower, someone looking for substantial cash with an exact repayment schedule. Lender Insured. This type of reverse mortgage offers monthly loan advances with or without a line of credit, for as long as you live in your home. This type of reverse mortgage typically offers a larger loan amount than an uninsured or FHA insured plan would allow. You may also be allowed to mortgage less than the full value of your home, thus preserving a portion of your equity for later use. Home Equity Conversion Mortgage (HECM). This is the federally insured reverse mortgage, and the most common loan program in the marketplace. This is the only reverse mortgage program that is backed by the U.S. Department of Housing and Urban Development (HUD). Home Equity Conversion Mortgages share some very attractive features that make them a popular choice among reverse mortgage candidates. Here are a few: Choose Your Own Interest Rate. The HECM is the only reverse mortgage that lets you choose your own interest rate. You can select an adjustable interest rate that changes either annually or monthly, or you can choose an interest rate that is fixed for the life of the loan. Several Payment Options. You may choose to receive monthly loan advances for a fixed term, or for as long as you live in your home. You may also choose a line of credit, a lump sum payment, or whatever combination of the three suits you. A HECM also allows you to change your payment options at little cost.
9 Use the Proceeds for any Purpose. Unlike many other reverse mortgages, a HECM does not require a borrower to designate the loan to one specific use. Instead, you may apply the funds to anything you choose. Protection. Most important of all, this plan protects you by guaranteeing continued loan advances for as long as you live in the home, even if your lender defaults. A HECM also guarantees that you will never owe more on your reverse mortgage than the appraised value of your home. Robert & Christina So often, when people think about reverse mortgage, they immediately think, Well, they re going to drain all of the equity out of the house, there s not going to be anything left. What we found, though, is that they actually did an evaluation of increased equity in the home based on how you care for it, the zip code you re in, and that property values could still increase 4% or so a year; which more than outpaces the interest charges. In the long run, the way the program is structured, financially, I felt it was a very sound business plan. We keep telling our friends, this is a fabulous program, you need to look into it. But they say you re going to lose this and that. There needs to be a lot of education for people about what this program is, because fears are built up, and actually it should be just the reverse. There is security there for both the husband and wife to know the other is taken care of in case something happens in the future. That s the nice part of that. Two of the other things that people always worry about when you talk about getting a loan from your financial institution, you have to worry if you qualify. Do I have the income to show the loan officer, what is the security and what does my credit report look like? And that is just something you just don t have to worry about!
10 What Does a Reverse Mortgage Cost? In addition to not having any payments or having to qualify for the loan, reverse mortgage interest rates are typically lower than those for traditional home equity loans. This is another valuable benefit for those considering a reverse mortgage. The loan fees and closing costs incurred in obtaining a reverse mortgage can typically be offset by the money you receive from the loan. These costs will be added to the balance of the loan and must be repaid, with interest, once the loan terminates. Many of the same costs that someone pays to obtain a home purchase loan, or to refinance their existing mortgage, apply to reverse mortgages too. You can expect to be charged an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain other standard closing costs including title insurance, endoresements, settlement fees and credit reports. In most cases, these fees and costs are capped and may be financed as part of the reverse mortgage. Below is a more in-depth explanation of each type of fee. Origination Fee The origination fee covers a lender s operating expenses including office overhead, marketing costs, etc. for making the reverse mortgage. Under the HECM program, which accounts for most reverse mortgages made in the U.S., the origination fee equals 2% on the initial $200,000 of maximum claim amount (lesser of the home value or county lending limit) and 1% on the balance thereafter with a cap of $6,000. Mortgage Insurance Premium Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to 2 percent of the maximum claim amount, or home value, whichever is less, plus an annual premium thereafter equal to 0.5 percent of the loan balance. The MIP guarantees that if the company managing your account commonly called the loan servicer goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.
11 Appraisal Fee An appraiser is responsible for assigning a current market value to your home. Appraisal fees generally range between $500-$700. In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety codes, in order for the reverse mortgage to be made. If the appraiser uncovers property defects, you must hire a contractor to complete the repairs. Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs have been completed. The cost of the repairs may be financed in the loan and completed after the reverse mortgage is made. Appraisers generally charge $50-$75 dollars for the follow-up examination. Closing Costs Other closing costs that are commonly charged to a reverse mortgage borrower, include: Credit report fee. Verifies any federal tax liens, or other judgments, handed down against the borrower. Cost: Generally under $20 Flood certification fee. Determines whether the property is located on a federally designated flood plane. Cost: Generally under $20 Escrow, Settlement or Closing fee. Generally includes a title search and various other required closing services. Cost: $150-$450 Document preparation fee. Fee charged to prepare the final closing documents, including the mortgage note and other recordable items. Cost: $75-$150 Recording fee. Fee charged to record the mortgage lien with the County Recorder s Office. Cost: $50-$100 Courier fee. Covers the cost of any overnight mailing of documents between the lender and the title company or loan investor. Cost: Generally under $50 Title insurance. Insurance that protects the lender (lender s policy) or the buyer (owner s policy) against any loss arising from disputes over ownership of a property. Varies by size of the loan, though in general, the larger the loan amount, the higher the cost of the title insurance. Pest Inspection. Determines whether the home is infested with any wood-destroying organisms, such as termites. Cost: Generally under $100 Survey. Determines the official boundaries of the property. It s typically ordered to make sure that any adjoining property has not inadvertently encroached on the reverse mortgage borrower s property. Cost: Generally under $250
12 Service Fee Set-Aside The service fee set-aside is an amount of money deducted from the available loan proceeds at closing to cover the projected costs of servicing your account. Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that ranges between $30-$35. The amount of money set-aside is largely determined by the borrower s age and life expectancy. Generally, the set-aside can amount to several thousand dollars. (Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which ranges from $30-$35.) Total Annual Loan Cost (TALC) In order for borrowers to gain a better understanding of the true cost of a reverse mortgage, the Federal Truth-in-Lending Act (TILA) requires lenders to disclose a Total Annual Loan Cost for the loan, also known as TALC. TALC displays the total transaction cost over the life of the loan, which helps to make seniors fully aware of the cost of incurring the loan. The TALC is also extremely helpful when comparing various types of reverse mortgages, as described above. Debt Limit Reverse mortgage debt is determined by adding all of the loan advances, including those used to pay off prior debt or to finance the loan costs, plus the interest on your loan balance. In the end, if the total amount equals less than the value of your home when you repay the loan, you or your heirs will be entitled to keep the remaining balance. Should the balance of your loan ever equal or exceed the appraised value of your home, then your total debt will be limited by your home s appraised value. You or your heirs will never be required to repay more than your home s appraised value when your loan comes due. This creates a situation where seniors can have the best of both worlds; if home values deteriorate, you are protected against owing more on your home than it is worth, while at the same time if home values continue to appriciate you get to keep 100% of the appriciation.
13 consultant. Repayment Reverse mortgages do not require any payment at all, as long as the borrowers remain in the home. Should the borrowers become deceased, sell the home or relocate to a different home; the loan will become due in full along with interest and any additional costs. Typically there is a grace period before the loan becomes due, and you should discuss this period with your reverse mortgage In the event that there are two borrowers on the reverse mortgage, and one of them passes away; the loan will not come due until the second borrower ceases to occupy the home. In this case, the surviving spouse can continue living in the home with no mortgage payments for as long as they are able. Although reverse mortgages are not due until one of the above criteria occurs, they may be repaid at any time with no penalties or additional fees. The past two winters had taken a terrible toll on Carol s 125-year-old, two-bedroom, ranch-style home. The roof had begun to leak and the gutters were barely containing any of the Seattle rains. She turned to her local bank for help, considering she owed less than 20% of the home s value, but they couldn t help. Four years ago, after Carol s husband passed away, she was forced to file for bankruptcy. A couple of Carol s friends had been talking about reverse mortgages months earlier as they were volunteering at the Great Figgy Pudding Caroling Competition at Pike Place Market, so she gave one of them a call. One of her closest friends, Roger, suggested a reverse mortgage would not only solve her roof problems; but with Seattle property values she could probably change her way of life. However, there was one complication. Carol had 3 children and wanted to make sure they got something when she was gone; and the house was really all she had left. So, Carol sat down with the kids and the decision was unamimous; the reverse mortgage would repair the roof and gutters, and the asset would still be in place. The kids agreed that it was much more important that Carol had a good quality of life right now; and they would handle the rest when the time came. Within a week after closing, there was a new roof and gutters, and the back door, which had also deteriorated, was replaced. As Carol went through the process with her reverse mortgage advisor, a new thought occurred to her; she would rather she her kids and grandkids enjoy their inheritance right now instead of when she was gone. The house had appraised for $750,000, she had plenty left over to last her; and the look on her children s faces when she handed them checks for $200,000 each was priceless.
14 How Would You Like Your Money? The amount of money you receive from a reverse mortgage will depend on several criteria, including: The reverse mortgage plan you choose The type of cash advance you choose The age of the youngest borrower The value of your home The amount of equity in your home This is why older borrowers typically receive higher loan amounts. There are several ways that you can draw your equity out of a reverse mortgage, some programs even allow you to combine the choices. Below are five options to keep in mind. 1. Tenure-Equal monthly payments for as long as at least one borrower is living and occupies the property as a primary residence. 2. Term-Equal monthly payments for a fixed period of months. This period is determined by the borrower when the loan is originated. 3. Line of Credit-This would be used in the same way as a credit card or checkbook. You would draw against the line of credit in any amount you see fit up to the credit limit, and at any time you desire. 4. Modified Tenure-A combination of a line of credit and monthly payments for as long as you continue to live in the home. 5. Modified Term-This combination of a line of credit and monthly payments differs from the plan above in that the monthly payments are based on a specific time period, chosen by the borrower. In the summer of 2009, Oscar and Phyllis escaped the heat of Lacy, TX and spent three months on a lake in Cranbrook, British Columbia. They both agree that without their reverse mortgage, they would have spent the summer sweltering in the Texas humidity. We had the most amazing time in Canada said Phyliss. We intended to stay on Kootenai Lake for 30 days, but we enjoyed it so much we stayed for three months. We met so many nice people who are now our friends, we love Canada. Oscar retired eight years ago on a very modest pension and social security. Phyllis continued working full-time until her job was outsources, and she was searching for a job at 66. I first heard about reverse mortgages back when they first came out, but I always thought you had to own your home completely and not have a mortgage. Oscar and Phyllis were surprised that they could qualify for a reverse mortgage, even though they had a sizable first mortgage; and that once they got a reverse mortgage they would never have a mortgage payment due again. When they closed on their reverse mortgage, they were able to pay off their existing mortgage of $111,000 and also took a lump sum payment of $45,000. Paying off the existing mortgage freed up about $957 a month, which allowed the Alexanders to start enjoying themselves more; including the trip to Canada.
15 Advantages of Moving in Reverse A reverse mortgage can help you gain financial independence and maintain an adequate standard of living; all without ever having to leave your current home. In addition to this, the money you receive from a reverse mortgage is tax free and, depending upon the type of program you choose, may be used for a variety of purposes. income; Besides the traditional uses of a home equity loan, such as paying off old debt or making home improvements, here are some other ways borrowers are utilizing their tax free Traveling and taking vacations Obtaining in-home health care Paying for prescription medications Supplementing retirement income Purchasing an annuity Paying for grandchildren s education However you choose to use the income, reverse mortgages provide you with the freedom to do so without adding any financial stress. In fact, most seniors discover that obtaining a reverse mortgage actually relieves or eliminates financial stress. After all, you can t take it with you, so you might as well enjoy it while you re here! Marilyn and Ed Conner are much happier now that they ve paid off their two mortgages and credit cards with their reverse mortgage. For the past several years they ve been coming up just a little short every month, and putting the balance onto credit cards. Marilyn started investigating a reverse mortgage when the monthly payments started to be too much for them. They never considered bankruptcy as a way to solve their problems; Ed always said that they created the debts and would have to pay them off. I didn t know anything about reverse mortgages, but she did, Ed said. When she suggested that we get a reverse mortgage, I trusted her completely. We set up an appointment and we got the loan. Marilyn and Ed closed on their reverse mortgage in May of 2008, and used the proceeds to completely pay off both mortgages and all of their credit card debt. The credit cards were quickly destroyed. There was enough money left for a $3,500 line of credit, plus an extra $100 a month in supplemental income for the next 10 years. Looking back on their experience, Marilyn said she s happy now that her debts are paid off. I m glad I don t have to make all those monthly payments anymore she said. There seems to be a lot more money left at the end of the month!
16 Should I Stay or Should I Go? Most home owners generally choose reverse mortgages so that they can remain in their current homes. The best way to decide if a reverse mortgage is for you is to compare it to the alternative of selling your home. When you make this evaluation, ask yourself these three very important questions: 1. How much cash can I get by selling my home? 2. How much will it cost to buy or rent a new place to live? 3. Is it worth the move at this point in my life, or are there other things I d rather do with my money? It is critical to realize that even after selling your home, if that is your choice, it will be necessary to replace your living quarters. Whether that takes the form of a smaller home, a rental home or apartment, or buying a different home; there is going to be a cost involved. The replacement costs are obviously going to eat into any proceeds you receive from the sale of your home, and you might find yourself downsizing into a home that doesn t fit your needs; which is not a good realization to come to after selling a home that you ve grown to love. That brings us to the other point, the things that are more important than money. Sometimes the intangibles of a home far outweigh it s value on paper. Living the rest of your life, comfortably, in the home you possibly raised your children in, or the home that you and a spouse shared so many great memories in, can often be worth much, much more than the appraised value of the structure. Rick and Sharon thought about selling the house, downsizing the real estate agent called it. The problem was, they loved their big family home up on the hill. They had spent the past 38 years making everything exactly as they wanted it, down to the last detail. They had raised all 6 of their children in this home, and they could still hear the echoes of countless slumber parties and holiday get-togethers in the walls. The day they sign went up, Sharon cried. Later in that same week, Sharon was volunteering at the hospital and the subject of selling her beloved home came up again. It was all she could do not to burst into tears again at the thought. One of the P.A. s happened to hear what they were talking about and suggested a reverse mortgage. Coincidentely, her parents had just closed on their reverse mortgage a month or two earlier; and they had been in the same situation. Not enough money to stay comfortable for life, but they didn t have the heart to leave. Rick and Sharon ended up taking out their reverse mortgage in the fall of Now, they have plenty of cash available to enjoy their lifestyle; and they are now able to live even longer with their cherished memories.