Your User-Friendly Guide to Reverse Mortgages

Transcription

1 Your User-Friendly Guide to Reverse Mortgages Turn Your Home Equity into Tax-Free Cash Shawna Stephenson, M.S. in Gerontology University of Massachusetts Boston April 2008 Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 1

2 Part 1: Reverse Mortgage Overview Introduction Polly was 78 years old, widowed, and worried about how she would support herself on her monthly Social Security payment and the income from the small business that she owned. She did not want to leave her home, but what choice did she have? Even though her mortgage was paid for, she had a single income and could no longer afford homeowners taxes, insurance and the extensive repairs that her home was in desperate need of. In addition, she was worried about the cost of long-term care that she might need in the future. Faced with the decision to sell her home because she could no longer afford it, Polly sought advice from her children about a reverse mortgage loan. Such a loan allows seniors age 62 and older to tap into their home equity to access tax-free cash. After extensive research on reverse mortgages and with the help of reverse mortgage counselors, family and several local bankers, Polly decided that a reverse mortgage would give her the financial security, flexibility and most importantly the peace of mind to remain independent in her home. As a homeowner in Woburn, Mass., Polly used the money from her loan to upgrade the value of her home and upgrade the quality of her life. She repaired a leaky roof, replaced all of the pipes in the 118 year-old foundation, added a downstairs bathroom for future long-term care needs, and built a front porch. In addition, she was able to do something she could not afford in the past take a vacation with her best friend Barbara. Polly has had the reverse mortgage for five years now, and will never have to worry about leaving her home that she earned and worked so hard for. While a reverse mortgage is not for everybody, for Polly, a homeowner in Woburn, Mass., it was, the best thing she ever did. Everyone s financial needs are unique but the rising cost of healthcare and inflation is universal. Like Polly, many seniors today have little retirement savings and are living on fixed Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 2

3 incomes from Social Security, small private investments and possibly pensions if they are lucky. But despite the fact that these same seniors have little savings, most of them have a very high net worth. How can that be? Today, nearly 80 percent of seniors age 60 and above own their own home ( And with the dramatically escalating home values the United States as seen for the last decade, these homes are worth a great deal. In fact, Americans 62 or older hold a combined estimated $4.3 trillion of home equity (Index Gauges Reverse Mortgage, p. 23). In the early-to-mid 1900 s, buying a home signified more than just putting a roof over one s head. It was a rite of passage, a lifetime investment, and a personal expression. It was also one of the greatest expenses that people incurred, an expense that often took up to 30 years to pay off. So one cannot overlook the emotional bond seniors have to their homes and why they may never want to leave. According to a recent National Coalition on Aging paper, 92 percent of Americans age and 95 percent of those age 75 and older want to remain in their home as long as possible (Stucki, p. 41, 2005). Additionally, the cost of leaving the home for long-term care is astronomical, giving seniors one more reason to crave independence and want to stay put for as long as possible. Reverse mortgage loans are one option that can allow seniors to remain in their own home. A reverse mortgage is a loan that a senior age 62 years or older may take out on their home to turn a portion, typically 50 percent, of the home s equity into tax-free cash without having to sell the home or give up the title. The cash is paid directly to the homeowner in monthly payments, a lump sum, or a credit line, and no monthly payments are made to the loan as long as the borrower remains in the home. The loan amount depends on the value of the home, the age of the homeowner and the expected interest rates. Borrowers can use the money however they like and will never be forced to give up their home if they meet the basic requirements Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 3

4 such as up-keeping the property, paying insurance and real estate taxes. Generally, the more valuable your home is, the older you are, and the lower the interest the more you can borrow. Prior to the reverse mortgage loan there were only two ways a homeowner could tap into his or her home s equity; sell the home and use the cash to cover expenses, or borrow against the home and make monthly payments. But due to today s mortgage crisis, the reverse mortgage product stands out because it is not dependent on declining incomes or bad credit scores. In the lender s eyes it is viewed as a safe loan because reverse mortgages have so many consumer safety protections in place that are regulated by the Federal Government. These consumer protections include mortgage insurance, free counseling services, interest rate caps, and more. Now that reverse mortgages are becoming more common, seniors have the option to remain financially independent in the comfort of their home, without having to make monthly payments or give up the title. However, as promising as they sound, reverse mortgages do have limitations and need to be considered very carefully. Reverse mortgage analysis can be complicated and the strong ties seniors have to their homes can make it even more challenging to make the right choice about tapping into their home s equity. That s why candidates for reverse mortgages should consider both the pros and cons before jumping in. Risks may include having too little equity down the road to cover moving into a long-term care facility and leaving a smaller inheritance to your children than intended. Knowing all the obstacles you might face during your later years is very important when considering whether a reverse mortgage is the right fit for you. The bottom line is that you should consider all of your options such as downsizing to a something smaller and more affordable, shared housing with another senior, selling the home to your children and renting it back from them on a long-term lease. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 4

5 It is the position of this paper to provide comprehensive information about reverse mortgages that will enable potential candidates to determine if a reverse mortgage is the right fit for them. This Reverse Mortgage Guide is broken into two parts. Part one provides a high-level overview of the reverse mortgage industry and part two is a very detailed, user-friendly guide. The History of Reverse Mortgages The concept of reverse mortgages began in 1961 when Nelson Haynes, a local banker at Deering Savings & Loan in Portland, Maine, wanted to help out the widow of his high school football coach. However, it was not until the early 90 s that reverse mortgages took off. In the 70 s and 80 s reverse mortgages were viewed as a last resort mainly due to the equity share feature that allowed lenders to double dip. The bank made a profit in two ways: the interest charged on the loan and the equity share feature. The equity share feature allowed banks to receive a percentage of the appreciation of the home. If a reverse mortgage was given to a homeowner when the home was valued at $400,000 and at the payback time the home was valued at $600,000, the bank got a cut of the $200,000 appreciation on the home. And the cut was big up to 25 percent. In addition to the bank s double dipping, in some of the worst cases, the bank could take the title or force the homeowner out of his or her home. To top it off, some banks mandated that homeowners purchase other financial products such as annuities and bonds with their reverse mortgage loan. To better understand the equity share, see the chart below. $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Bank's Profit Start of Loan End of Loan Appreciation Bank's Cut Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 5

6 Despite all of its shortcomings in the early days, the momentum for the reverse mortgage industry picked up in 1987 when Congress created The Housing and Community Development Act. This Act included a new and very important feature, a federal mortgage insurance program that was provided by the Federal Housing Administration (FHA), a division of Housing and Urban Development (HUD). This insurance is called Mortgage Insurance Premium (MIP) and is critical to the program s success since it protects the borrower in several ways: 1. Borrowers would always receive the loan money even if the lender went bankrupt. 2. Lender would always receive the loan repayment when the borrower moves out of the house or passes away. 3. Borrowers would never owe more than the value of their home. 4. Borrowers would never have their home taken from them. Ken Scholen is credited with facilitating the insurance program for the reverse mortgage product. Mr. Scholen has specialized in reverse mortgage analysis and education since 1978 and has written several well known and widely used consumer guides, including AARP s Home Made Money guide. Additionally he has trained more than 4,000 consumer counselors and government official and received the Federal Housing Commissioner s Award in 1995 for his work on reverse mortgages. He also founded the National Center for Home Equity Conversion in 1981 and still serves as the director today ( In 1988, HUDs reverse mortgage product, the Home Equity Conversion Mortgage (HECM), was made official when it was signed into law by President Ronald Reagan. Today, it has a 90 percent market share over other similar products ( In addition to the HECM product, there are two other widely accepted reverse mortgage products available today. All three products are discussed in detail in the guide. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 6

7 1. HECM: The only government backed loan. The typical HECM borrower is in their mid 70s at loan origination and the maximum cash available to borrowers averages $159,000 (Mortgage Banking, p.14). 2. Fannie Mae Home Keeper: Proprietary-loan released in 1995 that is not backed by the government. It is important to note that in 1999 reverse mortgages became more popular as a result of Fannie Mae s work with FHA to reformulize the product to lower interest rates and closing costs and remove the equity share feature. 3. Financial Freedom Cash Advantage Account: Proprietary loan released in 1996 that is designed for high-value homes above $600,000. Gaining Momentum: Today s Reverse Mortgage Market As Baby Boomers (those who were born between 1946 and 1964) approach retirement, the reverse mortgage industry is anticipating strong growth. At 12 percent of the population today, the number of people age 65 and older increased from 2.3 million to 36.5 million between 2000 and These numbers will continue to rise as the oldest of the 79 million baby boomers turn 62 in 2008 and 65 in It is clear from these staggering statistics that the potential market for reverse mortgages is vastly larger than it was ever in the past or is even today ( But just a few years ago reverse mortgages weren t widely known or accepted. As the industry has informed consumers about the benefits of reverse mortgage loans, their popularity has grown tremendously in a short period of time. Today, FHA s reverse mortgage program is showing a 30 percent annual increase from 2006 to 2007 alone. And although the reverse mortgage industry is experiencing such growth, only a little more than 345,000 reverse mortgages have been originated since 1990, representing less than a one percent market Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 7

8 Reverse Mortgages Gaining Popularity FY 2008 FY 2007 FY 2006 FY 2005 FY 2004 FY 2003 FY 2002 FY 2001 FY 2000 FY 1999 FY 1998 FY 1997 FY 1996 FY 1995 FY 1994 FY 1993 FY 1992 FY 1991 FY ,218* 107,558 76,351 43,131 37,829 18,097 13,049 7,781 6,640 7,982 7,896 5,208 3,596 4,165 3,365 1,964 1, The federal fiscal year starts Oct 1st and runs through Sep 30th of the following year. * Thru March 2008 Statistics Source : HUD penetration (Index Gauges Reverse Market, p. 28). The chart to the left illustrates the number of HECM loans made in each federal fiscal year since the program began. In addition to the increasing number of eligible seniors, there are several other key reasons why the reverse mortgage program is experiencing rapid growth including government involvement (Medicare and Medicaid), a new and emerging generation of seniors and the influence of today s mass media. Additionally, as noted in a later section of this paper, reverse mortgages are playing a larger role in funding long-term care insurance and private investments such as annuities. The chart below illustrates the central role reverse mortgages may play in financing long-term care (NCOA Study, Barbara Stucki, p.3). Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 8

9 Fueling the Long-Term Care Debate The possibility of a senior using home equity to cover long-term care costs has attracted policy makers for years. And it s obvious why. Private and public spending for nursing facilities and home health care totaled $207 billion in Public spending, including Medicaid and Medicare, totaled $149 billion or 72 percent of this total amount ( The chart below illustrates the national spending for long-term care in On average, nearly 60 percent of people age 65 and over will need some long-term care for an average of three years. And as the boomers age, this number will only continue to rise ( This same group is demanding inhome consumer-directed services and supports. Medicaid, a state administered health care program for low-income seniors, carries a large burden of covering the costs of long-term care, both consumer-directed and nursing facilities. Funding this vast expense has fueled the government s involvement in making the reverse mortgage industry successful and it has also made them one of the largest stakeholders. States view reverse mortgages as a way for seniors to Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 9

10 use their home equity to cover the cost of preventive care or help with activities of daily living, which in turn will keep them out of nursing homes. In fact, in the Strategic Plan for Fiscal Years, HUD pinpoints its reverse mortgage product, HECM, as a means to achieve its goal of helping low-income seniors to remain independent in their homes (Kraemer & Kraemer, p. 6). Consider these staggering conclusions from a 2005 report by the National Coalition on Aging (NCOA) (Stucki, p. 9): Of the nearly 28 million American households with a member age 62 or older, almost half (48%) are candidates to use a reverse mortgage for long-term care. 9.8 million of these candidate households are dealing with an impairment that can make it hard to live at home. Payments from a reverse mortgage can help reduce dependence on Medicaid by lowering the likelihood of seniors who spend down all of their income so that they qualify for Medicaid. Increasing use of this financial option for long-term care could result in savings to Medicaid ranging from $3.3 to $5 billion annually. NCOA has concluded that $953 billion could be tapped through reverse mortgages to finance seniors in-home and long-term care requirements, a national average of $73,000 per household (based on a 2004 study). And while the argument stands that many older Americans are not on Medicaid today the exuberant cost of health care tells a different story. Prices for long-term care services will vary according to the type of service seniors will need, how often and for how long they need it, and where they live. These costs, on average, equal: $5,566 a month for a semi-private room in a nursing home $6,266 a month for a private room in a nursing home $2,968 a month for care in an assisted living unit $19 per hour for a home health aide Source: Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 10

11 These costs can add up quickly. For example, if seniors have to pay for a nursing home for one year it will cost them appromiately $75,000 for a private room and $67,000 for a shared room. With those facts alone, it is easy to see how a middle-income senior could easily run out of money when they are paying out-of-pocket for nursing home expenses. So what is the solution? While solutions vary from senior to senior, a reverse mortgage can help homeowners who are at risk of being placed in a nursing home cover long-term care support in the comfort of their own homes. Older homeowners who qualify for a reverse mortgage can on average receive $72,000 to immediately pay for services, home modifications and other long-term care supports (Stucki, p. 8). Let s take a typical scenario for in-home care and see how far a $100,000 home equity loan would get a senior who needs long-term care supports in the home. The average home health aide charges approximately $18 an hour for a visit. At four hours a day the total cost per month is $2,160 for daily home care. At these rates, a 75 year-old homeowner who has $100,000 in home equity would be able to use a reverse mortgage to cover the typical in-home care (health aide) expenses for about 2.5 years. On the flipside, if the homeowner sold their home and took the money to pay for nursing home or assisted living facility, the cost for 2.5 years could be a lot more at the tune of $187,500. $200,000 $150,000 $100,000 $50,000 Nursing Home In-home Care (4-hours a day) $0 2.5 years Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 11

12 The below chart shows the duration of funds to pay for home and community based care from a HECM credit line of $100,000 (Stucki, p. 32). Note in the below chart that the older you are the more money you will receive; therefore you can afford care for a longer duration of time. Additionally, this chart illustrates how flexible a reverse mortgage is because it allows a borrower to pay for their long-term care needs in a variety of ways. According to industry experts, seniors are catching on to the notion of using reverse mortgage monies to cover their long-term care needs. A recent study by HUD and American Association of Retired Persons (AARP) concluded that 67 percent of reverse mortgage borrowers are using their loan to cover health care costs (Kraemer & Kraemer, p. 126). This conclusion is strengthened further by an interview with Edward Barrett at Your Home For Life, a leading provider of reverse mortgages in New England. Mr. Barrett stated that the majority or the reverse mortgages that his company sells are purchased to cover long-term care costs. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 12

13 Using Home Equity to Purchase Long-Term Care Insurance For those seniors who are not able to afford long-term care insurance, reverse mortgages may offer them a solution. Using a portion of home equity to purchase a long-term care policy is becoming more common. But this can be a risky practice. Borrowers could be paying insurance premiums (on the reverse mortgage and the long-term care insurance policy) and interest for both programs. In addition, they might run out of their home equity money and not be able to pay the yearly LTC insurance premium. In order for programs like this to work, the government and private companies need to determine a way to make this product more attractive. And this might just be in the works. Genworth Financial, Inc., one of the leading long-term care insurance providers in the world, has recently purchased Liberty Reverse Mortgage, a leading reverse mortgage provider ( Government Involvement Today, FHA can only ensure up to 250,000 reverse mortgages per year (Kraemer & Kraemer, p. 5). In 2006, this cap was reconsidered when the U.S. House of Representatives and the U.S. Senate approved The Expanding American Homeownership Act of 2007, which was passed by the House in September 2007, , and by the Senate in December 2007, ( This Act is extremely important because it raises the HECM lending limit, which provides more seniors with greater access to the program and lowers the origination fees that can be very high. Today, the HECM lending limits vary by county and range from a low of $200,160 to a high of $362,790. Borrowers with expensive homes who live in counties with the lowest loan limit could get a lot less from a HECM loan than they would for a house of the same value in a area with the highest loan limit. For example, if you live in Iowa City, Iowa, and the loan limit is $200,160 but your home is worth $600,000 you are still only eligible for $200,160. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 13

14 However, if you live in Boston, Mass., and the loan limit is $362,790 but your home is worth $600,000 you get $362,790, a lot more than you would receive in Iowa City. Under the Act, a new simplified and increased proposal for a national limit of $417,000 would make reverse mortgages more attractive to lenders and borrowers. Another huge improvement brought on by the Act is that it lowers the origination fees, or fees that cover a lender s operating expenses, by 0.5 percent. Under the HECM program, the origination fee is equal to the greater of $2,000 or 2 percent of the value of the home or for more expensive homes the FHA lending limit (Stucki, p.20). For example, if you have a reverse mortgage loan for $150,000, your origination fee would be 2 percent, or $3,000. Under the new Act, the same loan for $150,000 would have an origination fee of 1.5%, or $2,250. And while the Bill that governs the Act has not passed just yet, the U.S. House of Representatives and the U.S. Senate have little differences to settle with reverse mortgages; therefore it is only a matter of time that the Bill will be signed by the president. Another important government feature of the reverse mortgage product is counseling. All borrowers must go through HUD approved counseling which is highly regulated. HUD counselors are trained to offer insight into whether the borrower is a good candidate for the reverse mortgage loan. The counseling program is independent of any lender and it is funded by the government. In September 2007, HUD distributed $3 million specifically for the HECM loan counseling program ( This counseling service is free to the borrower and they can have as many counseling sessions as they need in order to make their decision. Generational Differences When the U.S. stock market crashed in October 1929, it brought financial hardship to the nation and the world. For millions of people jobs and food were scarce. The Greatest Generation, those born between 1911and 1924, witnessed this financial hardship firsthand. For many, the Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 14

15 mere thought of taking the equity out of their hard-earned home was ridiculous. Simply put, in their minds, debt was a very bad thing. Additionally this generation relied on pensions and Social Security to cover the costs of retirement and aging; therefore they did not often require additional income. Fast forward to today, in a time where private pensions are scare and Social Security is dwindling and eligible seniors are more open to the idea of reverse mortgage since they can provide financial peace of mind. The idea of using home equity to finance retirement is becoming increasingly more mainstream even among the current generation of seniors who have been traditionally debt adverse, says Peter Bell, president of the Washington, D.C.-based reverse mortgage lenders association (National Mortgage News, p.28). Also, baby boomers have been around to see the likes of second mortgages loans where the residential property is used as the collateral to obtain a second loan that can be used however the homeowner wishes. Additionally, the baby boomer generation is accustomed to having multiple credit cards, making them not as adverse to a reverse mortgage. Because of the sheer number of baby boomers and the fact that they are not as debt adverse, the reverse mortgage market should see a substantial pickup in the years to come. Media Influence Even though the reverse mortgage industry has made great strides to improve the reverse mortgage products by enhancing consumer protection, many seniors will always remember a reverse mortgage for what it was in the early days when it featured equity share and was not regulated by the government not for what it has evolved to today. According to a small media survey conducted in March 2008 for this guide, 20 seniors age years were polled about the media s influence in the reverse mortgage market. Of the seniors polled, 85 percent had a negative view of reverse mortgages largely due to the media. Some of the things they had heard about reverse mortgages on T.V. or read in a newspaper were: your house can be taken Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 15

16 away, the banks always wins because there are too many restrictions, there is a lien on the home with a reverse mortgage, and it s too good to be true (Appendix C). To combat this negative thinking, some of the larger reverse mortgage companies such as Financial Freedom and the Senior Lending Network have hired James Garner and Robert Wagner, both famous actors, to be spokespeople for reverse mortgages and their company. Because these actors are the same age as the target market seniors can relate to them better and also may view them as trustworthy. Some companies like Golden Gateway in San Francisco are taking a different route by creating catchy and convincing slogans such as Reverse Mortgages: A tool so valuable, with a promise of security so strong that it was developed and insured by the United State Federal Government ( Although the reverse mortgage industry is seeking new ways through various media outlets to attract reverse mortgage program participants, seniors have to be careful about not taking media or advertising information at face value. Seniors have been subject to aggressive marketing through direct mail, celebrity endorsements, and free lunch seminars where the risks of reverse mortgage are glossed over and benefits are magnified, said Committee Chairman Sen. Herb Kohl (D-Wisc.), as part of a U.S. Senate Special Committee on Aging. Another committee member, Sen. Claire McCaskill, (D-Mo.), feels that seniors that take advantage of a reverse mortgage without the pressure of a sales pitch are in a better position to make a decision about whether a reverse mortgage is right for them (Theis, 2007). As the senior population continues to grow we will see heavy online media and print advertising as well as live and online seminars about reverse mortgages. If you haven t heard much about reverse mortgages yet, just wait for the media tidal wave to hit the public. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 16

17 Reverse Mortgage Limitations As promising as reverse mortgages sound, it s important to know and understand what its limitations are. While reverse mortgages can be a great alternative for seniors who want to remain in their home but need extra cash to do so, they are not for everybody. Here are the main reasons why. Reverse Mortgages are not free. In fact, they can be very expensive, with fees such as closing costs, monthly compounding interest, servicing fees, mortgage insurance and various other fees. All of these fees are discussed at great length in the second portion of this paper. Costs associated with a reverse mortgage are deferred so that your closing costs are automatically added to the original loan balance at the time the loan closes. According to Your Home For Life, the average closing costs for loans given to seniors in the New England area range from $6,000 to $17,000. Eric Schaeffer, a financial planner for Merrill Lynch in New York City, says he does not like the idea of a reverse mortgage mainly due to the compounding interest factor. Because there are no monthly payments on the reverse mortgage, the interest is building upon interest on a monthly basis. On another note, while the closing costs and other fees can be steep, that may not be a problem if you plan on staying in your home for a long time. Experts say it s important to stay for at least five to seven years to get your money s worth. But if you pass away or sell your home within a few years of taking out the reverse mortgage, those fees will have eaten up a decent piece of your home equity. The bottom line is that all costs are paid by the borrower, whether they actually use all of the money available to them from their reverse mortgage loan. For example, if your closing costs are $15,000 and you only stay in your home for two years, then you just paid a hefty fee for a small return on investment of only two years to remain in your home. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 17

18 Borrowers may run out of money. If borrowers are not careful and do not accurately forecast and plan for their long-term care needs, they may spend down the equity in a portion of their home and still not have enough money to cover the cost of high-level long-term care such as assisted living or nursing homes. Zoran Basich, an elder law attorney and operator of Nursing Home Solutions based in Pasadena, Calif., says that lenders make the reverse mortgage sound, too good to be true. In a recent interview for this paper, he said that the problem with reverse mortgage is that the lenders can t lend forever which could lead to the borrower running out of money. In addition, the lender criteria is not always good because the borrower could get ill and have to leave the home shortly after they received a reverse mortgage. For example, if the borrower falls ill and is placed in a nursing home, and is not able to come back to the home within a year, his/her home will have to be sold in order to pay back the reverse mortgage loan. To alleviate this problem, Mr. Basich recommends refinancing the home with a 30-year fixed second mortgage instead. Medicaid status could be affected. If a borrower is currently eligible for public assistance, such as Medicaid, a reverse mortgage loan could make them ineligible to receive monthly payments. Why? In order to be eligible for Medicaid, a borrower cannot have above a certain amount of money in their checking account on a monthly basis. For example, Mass Health, Massachusetts form of Medicaid, does not allow more than $2000 a month for a single person and $3000 a month for a couple in a Medicaid recipient s bank account ( If they take a reverse mortgage loan and opt for monthly payments, they must spend the money each month or if they opt for a lump sum, they money must be spent right away. However, if a borrower opts for a line of credit where the reverse mortgage asset remains with the lender until the cash is needed, it obviates the concern about having too much money in Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 18

19 the borrower s checking account. A Medicaid eligibility specialist can help older homeowners determine if a reverse mortgage would put them at risk for not being eligible for Medicaid. Reduces the home equity amount you leave to your children or grandchildren. Many seniors today want to leave an inheritance to their children. This inheritance will be notably smaller if a reverse mortgage loan is taken out and assuming the home never appreciates in value. However, on the flipside, selling the home and then using the proceeds to cover the cost of long-term care will take a huge chunk of an inheritance, too. In summary, if you do not need extra money to meet your expenses and you do not plan on staying in your home for at least five years, then you are probably not a good candidate for a reverse mortgage loan. However, it s important to remember that while reverse mortgage fees may be high, selling your home and downsizing can cost even more with closing fees and packing and moving costs. This is why it s so important to weigh all your options when considering a reverse mortgage loan. Industry Scams Recently, the Financial Industry Regulatory Authority (FINRA) issued an investor alert warning seniors who are approached by a financial adviser to do a reverse mortgage to fund another financial investment that they are selling, to steer clear. The investment could be very risky and your cost on the loan could outweigh any gain on the financial investment you purchase with it. The financial companies may profit from both the reverse mortgage loan and the sale of the financial investment, giving them twice the incentive to go after seniors who are eligible ( For example, according to a recent newspaper article in the Boston Globe on March 2, 2008, Erika Baker, who was 67 years old, divorced and worried about losing her job, took out a reverse mortgage from Senior America Funding, in San Diego, CA, for a little more than $200,000. The saleswoman that sold her the Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 19

20 reverse mortgage pressured Ms. Baker into putting the proceeds into complex investments that put the money out of reach. Because of this Ms. Baker only received about $33,000 in cash, far less than what she needed to cover expenses in her final years. Many industry experts also agree with FINRA. Mr. Schaeffer, of Merrill Lynch, highly discourages borrowers to take their reverse mortgage loan and purchase an annuity or other financial products with it. If a borrower spends his or her loan money on an annuity and it s a down market, he or she makes no money on the annuity and at the same time has to pay money for the reverse mortgage. Even in some cases where an annuity or another financial product earns interest, it still may not be enough to counteract the interest the borrower is paying on the reverse mortgage loan. In a recent Your Home For Life seminar in Woburn, Mass., at the Woburn Senior Center, Mr. Barrett stated at the beginning of the meeting that he does not agree in any way with a borrower using reverse mortgage money to purchase financial products. This was a relief to many of the 20 seniors that attended the seminar because they had heard negative things in the media about seniors losing everything because they purchased an annuity with their reverse mortgage loan. And lastly, because there are so many variables in helping seniors remain independent in their homes, it is very important for seniors to find a broker or lender that solely focuses on reverse mortgages, such as Your Home For Life. Reverse mortgages are complicated for many reasons, but especially because they crossover into the long-term care arena. Because of this organizations like the National Education Committee for the National Reverse Mortgage Lenders Association (NRMLA) are dedicated to promoting the understanding and use of FHA insured reverse mortgage programs through education. NRMLA acts as the national voice of the reverse mortgage industry, serving as an educational resource, policy advocate and public affairs center for lenders and related professionals. Their mission is to educate consumers about the pros and Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 20

21 cons of reverse mortgages, to train lenders to be sensitive to clients needs, to enforce their Code of Conduct and Best Practices, and to promote reverse mortgages in the news media ( What the Future Holds The projected increase in the 65-and-over population between 2000 and 2050 is 147% (About.com, US Government Info). Couple that with the recent Mortgage Bankers Association (of Washington D.C.) outlook that estimates that of the 10.7 million mortgages originated in 2007, only about seven-tenths of one percent was for reverse mortgages it seems that there is a huge gap for lenders to fill (Moore, bankrate.com). This raises the checkered flag to the government to help fund the long-term care crisis and lenders who may want to tap into the market share. Additionally the types of older Americans who are using reverse mortgages are changing. According to Richard Pittman, director of housing and counseling for ByDesign Financial Solutions located in Los Angeles, Calif., a HUD approved counseling agency, when reverse mortgages first came to market, the typical borrower was a 77-year-old widow who needed the money for medical bills and upkeep of lifestyle. But today, things are different with younger borrowers taking the money to pay off their first mortgage and repair their homes. After reviewing 15 counseling files, Mr. Pittman concluded that, the average client was 74, had an income of $1,618 per month and owed $106,000 on their mortgage. Not a single one had any savings, half had credit card debts, 25% needed major home repairs and 25% needed money for cars, vacations and helping families (Duffy, February 2008). Financial Companies Entering the Market A growing number of financial companies are jumping on the reverse mortgage bandwagon because they see the untapped potential and want a piece of the action. Until Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 21

22 recently, there were only two major wholesale reverse lenders, Seattle Mortgage and Financial Freedom Senior Funding Corporation that funded all of the reverse mortgages including the government based HECMs. However, today many financial companies are already in the market or will be entering soon. In 2007, Bank of America Corporation purchased Seattle Mortgage, a reverse mortgage broker in the Northwest. In February 2008, a spokesman for both JPMorgan Chase and Citigroup stated that the reverse mortgages are products they are researching and considering (Berry & Terris, 2008, p. 13). Merrill Lynch currently offers reverse mortgages on a limited basis in six states (California, Connecticut, Florida, New Jersey, New York and Texas). With some of the top banks in the world excited about potential of reverse mortgages the market is sure to expand. However, if property values continue to fall in the United States the largest reverse mortgage lenders will take a substantial hit. Why? Lower home values in the future mean less home equity and smaller loan amounts. Summary In spite of the reverse mortgage program s recent success, the government and private companies recognize that there are areas for improvement. Generally, in order for the market to explode like the statistics forecast, the products need to be more attractive to consumers. Two organizations that are working to make the reverse mortgage product better are the NRMLA and American Association of Retired Persons (AARP). Together NRMLA and AARP are working with FHA to reduce the transaction costs and to improve the availability of quality counseling across the United States. During the past year, there has been a lot of work in reevaluating the up-front fees, such as the origination fee and the mortgage insurance premium fee, so that in the future these products can be more affordable and attractive to older Americans ( Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 22

23 The bottom line is that home equity is often a homeowner s most valuable asset and if preserved it is also the most significant source of retirement strategy. A reverse mortgage can be very useful for certain older Americans who might face losing the homes that they worked so hard for. But for others, taking a reverse mortgage can be risky business since they are expensive and if not used properly can create a circumstance of a borrower running out of money that might otherwise have been spent on much needed long-term care supports. Therefore, it is imperative that homeowners consider all the pros and cons with industry experts, family and friends, lawyers, financial planners, before taking out a reverse mortgage. And even if a senior decides it is the right fit spending the money very wisely will save them grief down the road. The guide that follows can assist eligible homeowners in learning the basics about reverse mortgages and can propel them to take the next step in speaking with a reverse mortgage specialist. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 23

24 Part 2: Reverse Mortgage Guide Introduction There are several types of reverse mortgage products on the market today, however, among them there is a similar set of features. This guide outlines the core reverse mortgage features and provides an in-depth overview of the most popular reverse mortgage products. The purpose of this guide is to give seniors and their families a solid background on reverse mortgages. Please see a local reverse mortgage broker or your advisors for more information about how a reverse mortgage can work specifically for you. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 24

25 Table of Contents Use of this content is subject to the Consumer Disclaimer on this site. Section 1: The ABC s of Reverse Mortgages What is a reverse mortgage? 27 Why are reverse mortgages useful? 27 How is a reverse mortgage different than a forward mortgage? 27 Is a reverse mortgage different than a home equity loan? 28 How do I qualify for a reverse mortgage? 28 What are my responsibilities as a homeowner? 28 Can I get a reverse mortgage if I receive Social Security or Medicare? 28 Will a reverse mortgage affect my Medicaid status? 28 Do all properties qualify for a reverse mortgage? 29 If I get a reverse mortgage, do I still own my home? 29 Who is NOT a good candidate for a reverse mortgage? 29 Section 2: Reverse Mortgage Money What can I spend my reverse mortgage on? 30 How much money can I get in my reverse mortgage? 31 Is the reverse mortgage money tax free? 31 How is the money sent to me? 31 How will I receive the money from the reverse mortgage? 32 Am I charged interest on my loan? 33 Section 3: Reverse Mortgage Consumer Protection Is a Reverse Mortgage insured? 34 How does the insurance protect me? 34 How does a counselor protect me? Section 4: Costs and Repayment What fees are associated with a reverse mortgage? 36 When is the reverse mortgage due? 37 How do I repay the reverse mortgage? 37 What do I owe? 37 Section 5: Home Equity Conversion Mortgage (HECM) History 38 Eligibility 38 Lending Limits 39 Payment Options 40 Interest Rates 41 Costs 42 Paying Back the Loan 42 To Learn More 42 Section 6: Proprietary Reverse Mortgages Fannie Mae Home Keeper History 43 Eligibility 43 Lending Limits 43 Payment Options 44 Interest Rates 44 Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 25

26 Costs 44 Paying Back the Loan 44 Fannie Mae vs. HECM 44 To Learn More 44 Financial Freedom s Cash Account Advantage History 45 Eligibility 45 Lending Limits 45 Payment Options 45 Interest Rates 45 Costs 46 Paying Back the Loan 46 Financial Freedom vs Fannie Mae vs. HECM 46 To Learn More 46 Section 7: How do I get started? Section 8: Frequently Asked Questions Section 9: Appendix Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 26

27 Section 1: The ABC s of Reverse Mortgages What is a reverse mortgage? A reverse mortgage is a loan that allows seniors age 62 years or older to draw equity from a home that they already paid or for a home that has an existing mortgage. It is a tax-free loan that is typically 50% of the home equity. This cash is paid directly to the homeowner and no payments are made to the loan as long as the borrower remains in the home. To top it off, seniors can use the money however they like and there are no income, credit or health requirements! Read on to learn more. Why are reverse mortgages useful? Seniors in all different income brackets are getting reverse mortgages for a number of reasons. Some would like to supplement their monthly income to help pay for long-term care costs, repair the home, pay property taxes and insurance or give gifts to their adult children and grandchildren. Others want the extra money to live their dream retirement, buy a new car or take a vacation with their entire family. How is a reverse mortgage different than a forward mortgage? A forward mortgage helps you to purchase a home; a reverse mortgage helps you to generate cash from your home. Forward Mortgage 1. Increasing equity; decreasing debt 2. The bank owns the title with a forward mortgage 4. Monthly payments required 5. Your home can be taken from you if you do not make the payments Reverse Mortgage 1. Decreasing equity; increasing debt 3. You own the title 4. No monthly payments required 5. Your home cannot be taken from you The total cost of a getting a reverse mortgage is similar in cost a forward mortgage. The chart below depicts the average cost of moving into a new home vs. a reverse mortgage. Cost Features HUD Reverse Forward Mortgage Mortgage Fees (inspection, title, etc) 1% 1% Origination Fees 2% 0.5% FHA Mortgage Insurance 2% 0% Realtor Commission - 4-6% of sale price Total Cost 5% % Interest Rate (2008 Projected) 4.7% 6.0% * Chart by ReverseMortgageGuides.org Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 27

28 Is a reverse mortgage different than a home equity loan? Yes. A home equity line of credit (HELOC) is a line of credit, based on equity of the home that a homeowner can borrow money from. This is a good option for seniors who can make monthly payments but need additional money for other ventures, like home repairs. The chart below will explain the major differences between a HELOC and a reverse mortgage. Loan Features HELOC Reverse Mortgage Income Qualification Yes No Credit Verification Yes No Home Title & Home Ownership Yes Yes Monthly loan repayments Yes No Property Appraisal No Yes Insured Loan No Yes Subject to Higher Interest Rates Yes No Higher Closing Fees No Yes How do I qualify for a reverse mortgage? Following are the basic eligibility requirements to obtain a reverse mortgage. Age: You must be over 62 years of age. If your spouse is not 62 years of age, he/she cannot be listed on the title of the home. Your Home: You must own your own home and have at least 50% (this percentage fluctuates with each unique situation) equity in it. Your home must be your primary residence and must meet the minimum property standards. If you still have a mortgage on your home, that s all right. But you must use your reverse mortgage funds to pay off your first mortgage. Income: Because the bank does not expect you to pay back the loan each month, the amount of income you have and your credit score do not affect your eligibility. However, if you currently receive benefits for Medicaid you may be affected. See below for more details. Counseling: Before you obtain a reverse mortgage it is mandatory to speak with an approved counselor. What are my responsibilities as a homeowner? (Source: Your Home For Life) As a homeowner with a reverse mortgage, you must: Keep property taxes current Maintain homeowner s insurance Reasonably maintain the property, including utilities Live in home as primary residence. Can I get a reverse mortgage if I receive Social Security or Medicare? Yes. Your eligibility for a reverse mortgage will not be affected by Medicare or Social Security. Remember you earned this benefit. Will a reverse mortgage affect my Medicaid status? Yes. Medicaid is a public program and follows a lengthy list of its own eligibility rules; therefore your eligibility status for a reverse mortgage will be affected. The challenge is that your reverse mortgage payment may bump you over the Medicaid income qualification level and therefore you run the risk of being disqualified from the program. To avoid this Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 28

29 do not take a monthly payment from the loan, instead, use the line of credit option, which has the guaranteed growth rate feature. In addition, always refer to an attorney or local expert for assistance. For example, Mass Health, Massachusetts form of Medicaid, does not allow more than $2000 a month for a single person and $3000 a month for a couple in a Medicaid recipient s bank account ( Do all properties qualify for a reverse mortgage? No, but most do. Check the list below to see whether your home is eligible. Eligible Homes Single family homes Condominiums (must be FHA approved) Manufactured homes (built after 1976) Some two-to-four unit multifamily properties Town homes Detached homes Homes Not Eligible Mobile homes, trailers, barns Motor homes, house boats, yachts Multi-family properties with 4+units Manufactures homes built before 1976 Timeshares Impermanent structures Co-ops (except in New York City) Homes on leased land Second Homes If I get a reverse mortgage, do I still own my home? Yes. You and your family or your estate will continue to retain ownership of your home. You are simply drawing equity from a home that you already paid for. But it s important to remember that you are still responsible for property taxes, homeowners insurance, utilities and standard repairs. Who is NOT a good candidate for a reverse mortgage? If you meet all of the above eligibility requirements, but still are not sure if a reverse mortgage is right for you, here are a few things to consider. A reverse mortgage is not good for people who: (Lyons & Lucas, p. 36) Have low home equity (you own more than 70% of our home value) You do not plan to stay in your home Own a home that is beyond repair Rent out their primary home Are very wealthy, do not need extra cash or financial security Want to move out of their primary residence shortly after they receive the reverse mortgage Are terminally ill or have a chronic illness that may require skilled care outside of the home Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 29

30 Section 2: Reverse Mortgage Money What can I spend my reverse mortgage on? There are no restrictions on how you spend your reverse mortgage, but it is important to have a game plan. Your counselor and advisers can help you with these challenging decisions. However, no matter how you decide to use the money, you have to pay your first mortgage or any predetermined repairs with your reverse mortgage before you can spend it on anything else. Other than that, there are no restrictions on how you can spend your money! The federal government does not cover long-term care costs. It is important that you understand what costs might be associated with your own long-term care needs so that you can set money aside for this purpose. Some people are using reverse mortgages to fund long-term care insurance or life insurance. About half of the homes in the reverse mortgage program have required some form of home repair due to the average age of the applicants homes (Ballman, p. 63). There is a specific repair contract called a Repair Rider to the Loan Agreement which outlines the repairs the borrower must make once they receive their reverse mortgage. The borrower can find their own contractors to make the repairs. Uses of Reverse Mortgage HECM Loan 70% 60% 50% 40% 30% 20% 10% 0% Hospital/Health Care Repay Existing Mortgage Reduce Burden on Children Home Repair Pay taxes Pay daily expenses Travel Gift Giving *AARP in conjunction with HUD and FHA, surveyed reverse mortgage borrowers about how they used their proceeds (Kraemer & Kraemer, p. 126) Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 30

31 How much money can I get in my reverse mortgage? The amount of money that you are eligible for is referred to as the principle limit. The principle limit is based on five factors and is typically between 25 and 65 % of your homes appraised value (Ballman, p. 24). See appendix for real-life examples. Your age The appraised value of your home Your zip code Interest rates on the week you apply for the mortgage Ask your lender for a comparison sheet of all available reverse mortgage products. Don t feel bad about asking; they are required by law to provide this. Or you can go online and use a reverse mortgage calculator to get a ball park figure on how much you qualify for. See sample screenshot of the AARP calculator tool on their website: Is the reverse mortgage money tax free? Yes. You will never be required to pay taxes on your reverse mortgage money. After all, you already earned this money, it is yours! A reverse mortgage is not income, it is a loan. You are not deducting taxes on a yearly basis for the reverse mortgage because it is not income. However, when the loan comes due your estate can take a tax deduction on the interest paid on the lifespan of the loan. How is the money sent to me? You can either ask for a check or an automatic deposit. Or, if you have a line of credit, you can ask the lender if they have the option to set you up with you own check book and debit card. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 31

32 How will I receive the money from the reverse mortgage? Because everybody s needs are different, there are several ways to receive your money. Your counselor will help you to determine what option is best for you. Here are the four main options to consider. Keep in mind that some of the proprietary reverse mortgage products do not offer all four options. 1. Lump Sum: You can take the cash in one large payment that you can use however you like. This is the least common option and is typically used for very large purchases like a second home or medical expense. 2. Monthly Payments: This is a good option for seniors who need extra cash to live on a monthly basis. You can take the monthly payments in two ways: o Tenure: equal monthly payments as long as the borrower(s) remain in the home (these payments are guaranteed until you move out). o Term: equal monthly payments for a fixed period of months selected by you and your counselor. 3. Line of Credit: The money remains in the bank until you need to spend it. It is the most common payment option today because the unused portion of a line of credit earns interest at the same rate that the reverse mortgage loan is charged. See below chart for an example on how much money a borrower can make on interest over a ten year period. While this seems like an attractive offer, reverse mortgages are not meant to take the place of your financial investments. 4. Combination: You can take a portion as a lump sum, a portion as a line of credit and a portion as monthly payments. Or any combination of these 3 options that works best for you! You may change your payment plan at any time, but there will be a nominal fee associated with each change. And interest only accrues on the amount of money that you have taken out of the loan. That is why a lump sum can have a very high interest cost. Line of Credit Growth Rate Example Chart Interest rate: 6.72% Starting Loan Amount: $210,141 After 10 years your money is worth: $431, , , , , , , , ,000 50,000 0 Years Day 1 Yr 1 Year 3 Year 5 Year 10 Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 32

33 Am I charged interest on my loan? Yes. All reverse mortgage products are charged interest. As a general rule of thumb, the more money you borrow from your home (even if you own it) and the longer you borrow it for the more interest you will owe. The interest you will pay on your reverse mortgage is deferred. In other words, it will be accrued with the principle balance of the loan and will not be due until you move out or pass away. As time goes on you are paying interest on top of interest. For example, the below chart shows the interest accumulation for a $150,000 and $300,000 reverse mortgage at an average annual interest rate of 5% over 3 years. Loan Amount Accumulate Interest $150,000 $157,500 $165,375 $173,644 $23,644 $300,000 $315,000 $330,750 $347,287 $47,287 See section 5-6 for detailed interest information for the three most popular reverse mortgage products. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 33

34 Section 3: Reverse Mortgage Consumer Protection Is a Reverse Mortgage insured? Yes. All reverse mortgage products are insured and have built-in consumer protection features so that seniors are not taken advantage of. But it does cost you. For example, the cost of HUD/FHA reverse mortgage insurance is typically 2% of your home s value and that cost if financed into the reverse mortgage. In addition, it is not due until you permanently leave your home. See sections 5-6 to learn about the insurance on the three main reverse mortgage products. How does the insurance protect me? ( Reverse mortgage products product the borrower in several ways. 90% of the reverse mortgages today are insured by the Federal Government. The other 10% are insured by private entities. Payment Guarantee: If your lender fails to make a payment or worse goes out of business you will still get your reverse mortgage money. On the flipside, it also ensures that the lender will receive its payment when the homeowner no longer occupies the home. Non-recourse Loan: You will never be charged more than your home is worth at the time of move-out. In addition, your estate cannot be tapped to repay the loan. Capped Interest Rates: To combat rising interest rates, each reverse mortgage product has put a cap on their interest rates. Borrower protection: You can never outlive the loan. As long as the borrower continues to live in the home and keeps taxes and insurance current, you cannot be evicted, foreclosed or asked for repayment. Counseling: You must go through counseling to understand the pros and cons and the financial obligations of a reverse mortgage. The FHA/HUD counselors are independent of the lenders so they are unbiased and can help you determine if a reverse mortgage is truly the right choice for your unique circumstances. Total Annual Loan Cost disclosures (TALC): Your lender must provide you with the total annual cost of your reverse mortgage. This is the amount you will pay each year to the lender. The TALC includes: principle, interest, closing costs, service fees and mortgage insurance premiums. Your lender must also disclose the TALC of other reverse mortgage products that are on the market and available to you. But you must ask for this. Here is an example of how a non-recourse mortgage protects you. Twenty-five years ago, your home was appraised at $300,000 and you took out a reverse mortgage loan for $150,000. Over the 25-year lifespan of the loan, your home depreciated to $250,000 and your original reverse mortgage loan grew to close to $300,000 because of compounded interest. How much money will you owe on the reverse mortgage? The federal government will only charge you the amount your home is worth at the time you either move out or pass away. So the answer is $250,000. How does a counselor protect me? Reverse mortgages are complicated transactions, so the federal government requires borrowers to meet with HUD-approved counselors before obtaining a federally guaranteed loan. Proprietary companies also require that borrowers meet with an approved counselor. This is a one-time session and is free. Taking out a reverse mortgage is a huge decision that can be expensive and complicated. A counselor can help you determine if it s a good fit for Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 34

35 your unique circumstances. A lender cannot give you a reverse mortgage until you have completed counseling and show them a signed counseling certificate (valid for 180 days). If you are looking into a HUD/FHA approved reverse mortgage, you can contact the Housing Counseling Clearinghouse at to obtain the name and contact information of a HUD-approved counseling agency and a list of FHA approved brokers within your area. Counselors will often ask you to bring your family and friends to help you make this important decision. It s always nice to have a second opinion about what you heard in the counseling session. In addition to family, you can also bring your lawyer, financial adviser and/or accountant. Counseling is free and independent on the lender. Make sure to ask your counselor if they are receiving any funding from the lender or the mortgage industry. If they are, you should go to another counselor. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 35

36 Section 4: Costs and Repayment What fees are associated with a reverse mortgage? There are no up-front, out-of-pocket expenses for a reverse mortgage because the costs are deferred. You finance all of the fees in your reverse mortgage. The fees are simply added to the loan balance and you pay them back when you no longer occupy the home. Here are the five most common fees associated with a reverse mortgage: 1. Loan Origination Fee: This fee covers the lender s operating expenses for making the reverse mortgage. For the most popular loan available today, the HECM, the origination fee is 2% of the lesser value of either your home value or the FHA county limit. As a consumer, you should be aware that this is where the lender makes their money. You can negotiate this fee with your lender. 2. Mortgage Insurance Premium (MIP): This fee pays for the guarantee that you will get your money no matter what happens to your lender, and also ensures that you will never owe more than your home is worth. A MIP fee is only charged on the HECM Reverse Mortgage product that is outlined in a later section. You pay for this fee in two ways: 2% of your home s value (or 2% of the lending limit in your area, whichever is less) is charged upfront at closing. For example, if you are in Boston, MA, and your home is worth $500,000, then your FHA Mortgage premium insurance would be 2% of $362,790 the county limit. 0.5% is added to the interest rate charged on your rising loan balance. 3. Appraisal: This fee ranges from $300 to $400 and includes an appointed appraiser that certifies that your home is eligible for a reverse mortgage. 4. Closing Costs: There are many closing cost fees that are associated with different reverse mortgage products. Examples include: credit report fee, flood report, escrow fee, title insurance, pest inspection, and more. 5. Service Fees: This fee ranges from $30 to $35 a month and covers the lenders costs for servicing the loan each month. Reverse mortgages can be expensive if you do not plan on remaining in your home. They are not a short-term solution. To get the full benefits, it s best to stay in your home for at least five-to-seven years. Loan costs vary considerably depending on the type of reverse mortgage product you are looking into and what state you reside in. That is why it s very important to ask your lender to give you a reverse mortgage product comparison sheet that goes over the Total Annual Loan Cost (TALC), for each product. As mentioned above, the TALC includes the principle, interest, closing costs, service fees and mortgage insurance premiums. Source: /tabid/237/default.aspx Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 36

37 When is the reverse mortgage due? The reverse mortgage is due when you no longer occupy the home as your primary residence. Not occupying the home could be a result of several things, such as a borrower passed way or became ill and was placed in a nursing home. Or possibly the homeowner failed to meet their responsibilities, such as not paying the home taxes or repairing the property where needed and because of this the lender asked them to move out of their home. It is important to upkeep your home if you have a reverse mortgage. For example, if you have a faulty roof or excessive termite damage, the lender will make you repair it. The lender may become concerned that the property value will decrease extensively if you do not make these repairs; therefore they could ask you to repay your reverse mortgage. Read the fine print on your loan document very carefully! Make sure you understand what your responsibilities are as a homeowner with your particular reverse mortgage product. How do I repay the reverse mortgage? If the primary borrower moves out of the house, you have 30 days to notify your lender and up to six months to sell your home and repay the loan. However, you can get monthly extensions from your lender up to 12 months. Your reverse mortgage is paid in one payment from either the sale of your home or money from your estate. What do I owe? You owe the lender the total amount of money that you used from the reverse mortgage, accrued interest, servicing fees and any additional fees that were financed into your particular reverse mortgage. Remember your loan is non-recourse, which means you never owe the lender more than your home is worth at the time of sale. FHA/HUD reverse mortgage products also charge an insurance premium that becomes due with the above list. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 37

38 Section 5: Home Equity Conversion Mortgage (HECM) All reverse mortgage products have the same basic core criteria as described in sections one through four. The HECM is by far the most popular option and is highlighted in great detail in this section. History The Department of Housing and Urban Development (HUD) and Congress developed the HECM to help people over 62 stay in their home comfortably without the fear of going broke from inflated medical costs. The first HECM closed in the late 80 s and has only recently gained in popularity. ( Dennis Haber, 2008) The HECM is the most popular reverse mortgage available, largely due to the fact that the Federal Housing Administration (FHA), which is part of HUD, insures the loan. If your lender goes bankrupt or fails to make the payment for any reason, FHA will come to the rescue and make these payments for the lender. This way, the homeowner is guaranteed to receive the money. HECM loans are available in all 50 states and are the most common choice amount reverse mortgage takers. In fact, more than 90% of reverse mortgages given each year are HECM ( Another reason they are so popular is that they typically pay out more money than the other reverse mortgage products and charge lower fees. Eligibility HECM loans have the same common eligibility traits as all reverse mortgage products. 62 years of age Homeowner with equity in your home Home must be our primary residence Own a home that qualifies Home meets minimum property standards as defined in HUD s minimum property standards (MPS) guidelines. This is determined by a mandatory home appraisal. Discuss the program with a HUD approved counselor Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 38

39 Lending Limits HECM loans have strict lending limits that vary by county. They are not designed for highvalue homes such as those in New York City or San Francisco. Lending limits are called 203-b limits and originated from the National Housing Act. They are based on HUD s average housing prices statistics. The lowest amount you can receive is $200,160; the highest amount you can receive (as of 2007) is $362,790 (AARP Home Made Money, p. 9). Similar to the other products, HECM s factor in three variables when determining the lending limits: 1. The age of the youngest homeowner: The older you are the more money you will be eligible for. You get the same amount of money whether you are single or married. HUD assumes a 100-year life expectancy when calculating the lending limit. 2. Interest Rates: See section on interest rates below. 3. The value of your home: The county in which you reside affects the value of your home. If you live in Massachusetts, the value of your home will be a lot higher than a similar home in Iowa due to the high cost of living and property values in Massachusetts. Therefore Massachusetts will have higher lending limits than Iowa. The below chart outlines the maximum lending limits in Boston, MA, and Des Moines, IA. If the value of your home exceeds the county limit, you are still eligible for a HECM loan. But the amount of money you get is based on your county limit, not on your home s actual value. In the below table, if you live in Boston, MA, and your home is worth $650,000, the total amount you can get is still $362,790 or the cap on the HECM loan amount. MSA Name DES MOINES - WEST DES MOINES, IA BOSTON-QUINCY, MA METROPOLITAN County Name County Code State One-Family Last Revised GUTHRIE 077 IA $200,160 02/28/2008 NORFOLK 021 MA $362,790 01/01/2006 Visit: to see what the lending limits are in your county. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 39

40 Payment Options HECM loans provide the widest array of payment options. These options were outlined in section 2. However, this section takes it a step further by explaining the advantages and disadvantages of each payout. Payment Type Line of Credit Advantages - The most popular choice. - You are only charged interest on the portion you take out. - Your unused portion draws interest. - Credit line growth can be greater than money market or CD interest rates ( Lump Sum - Good for borrowers that know they need a lump sum right away for a large expense. - Good for people wanting to start a business, buy a 2 nd home or cover large medical expenses up-front. Tenure Monthly Payment Term Monthly Payment - You will receive a check each month guaranteed until the homeowner moves out. - This is good for borrowers that fear running out of money and don t foresee any large expenses in the future. - If you choose a shorter term you receive a larger check (good for borrowers that have high monthly costs at the time but expect to have fewer needs for the money in the future). - You can control how long you will receive the money (good for borrowers that know they only need the money for a specific time period). Combination - Borrowers get the best of both options. For example, monthly payments for ongoing bills and a lump sum or line of credit for unexpected emergencies. Disadvantages - Once your line of credit is spent you will receive no more money. - Borrowers have to be careful not to underestimate how much money they will need and for how long. - Higher interest rates because you take the money all at once and it starts accruing interest right away. - Interest on $50,000 taken as a lump sum and repaid in 10 years would be $40,969. Interest on $50,000 taken in monthly payments for 10 years could be $18, You only get your monthly allotment, even though an unexpected house repair or family emergency might arise. - You will not have the flexibility with monthly payments as you do wit the line of credit. - You may receive less overall loan amount because you are getting more money in each check - Once your term is up you will receive no more payments (borrowers have to be careful not to underestimate how much money they will need and for how long). - Same disadvantages as those listed for monthly payments, line of credit and lump sum. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 40

41 Interest Rates HECM interest rates are based on a one-year U.S. Treasury Constant Maturity Rate and are referred to as adjustable-rate mortgages (ARMs). ARMs change regularly so it s up to you to decide if you want to adjust your interest rate monthly or annually. Once you determine if your rate will be annual or monthly it is permanent. Make sure you work with your counselor to determine the best option for you. In addition to the one-year Treasury Bill rate, you are charged a margin from your lender and a Mortgage Insurance Premium of.5% on your rising loan balance. Interest Rate Equation = One-year T- Bill Rate Lender + Margin + Mortgage Ins. Premium (0.5%) Let s review your HECM interest rate choices: Monthly ARM This is the most popular choice because it typically gives out more cash up-front with lower interest rates. It is based on the one-year Treasury Bill + a 1.5% margin. For example, if your T-bill rate was 3.0%, your interest rate is 5.0% ( ). Your monthly interest rate will never go above 10% of the original rate. For example, if your closing rate is 3%, you can never be charged more than 13%. This is one of the consumer protection safeguards. Keep in mind that a low monthly ARM, when you get the loan, does not guarantee it will stay low every month. For example, if the monthly ARM is at 4.5% the first month, 6.0% the second month and 5.8% the third month, you would have been better off securing a locked-in annual rate of 5.5%. Annual ARM This is a more conservative choice and is good for those who don t want to watch the interest rate fluctuate each month, since it only changes once per year. It is based on a one-year Treasury Bill + a 2.10 margin. For example, if your T-bill rate was 3.0, your interest rate is 5.6% ( ). It has a 2% annual cap and a 5% lifetime cap. So if your interest rate is 5.6% the first year, it will not exceed 7.6% the second year and it will never exceed 10.6%. The downside to an annual rate is that if the rate goes lower than your fixed rate, you can t take advantage of that. Other Options In addition to the Treasury Bill, HECM reverse mortgages can be tied to the London Interbank Offered Rate (LIBOR). This became available in 2007 which signifies an opportunity for a more globalized funding stream for reverse mortgage products. In 2007 there was also a HECM fixed-rate product which allows a borrower to have a fixed-rate for the life of their reverse mortgage. However, you have to take the lump sum dispersal at closing. This is attractive for you if you are paying off your existing mortgage. You should contact your local reverse mortgage broker or approved counselor to learn more about current interest rates. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 41

42 Costs The costs to obtain a HECM reverse mortgage are listed below (Source: Your Home For Life) Loan origination fee Mortgage Insurance Premium* Attorney Fee Closing Costs Appraisal Fee Title Search Title Insurance Recording Fees Plot Plan Other standard and customary closing costs** *50% of the cost of a reverse mortgage is from the Mortgage Insurance Premium **See your reverse mortgage broker to get a complete list of closing costs. All reverse mortgage costs are deferred. You will not pay these costs when you pay back the loan. And although reverse mortgage closing costs can be high, but let s take a moment to consider what it might cost to sell a home. Keep in mind: Once you sell your home, you might have monthly rent or mortgage fees. Cost to Sell Your Home Home Price: $400,000 Realtor Commission: 5% $20,000 Packing & Moving Costs: $5,000 $25,000 Reverse mortgages are not a short-term solution. The high costs may be off-set if your home appreciates over a long period of time. Paying back the loan Like all reverse mortgage products, you are required to pay back the loan when you no longer occupy the home as your primary residence. To Learn More For more information, visit Supply Chain HECMs are the only reverse mortgages insured by the Federal Government. Consumer Broker Investor (Bank) Insured by FHA/HUD Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 42

43 Section 6: Proprietary Reverse Mortgages Proprietary reverse mortgages are developed, owned and insured by private companies, such as Fannie Mae and Financial Freedom, the two most popular proprietary options on the market today. This type of reverse mortgage is good for homes valued over FHA/HUD s 203-b county limit. Fannie Mae Home Keeper History Fannie Mae was created in 1938, under President Franklin D. Roosevelt, to help families who could not afford to become homeowners or risked losing their homes, because they did not have a good mortgage option. Since 1968, Fannie Mae has provided $5.7 trillion in mortgage financing for 58 million families (Ballman, p. 24). In addition to offering forward mortgages, in 1995, Fannie Mae launched its proprietary reverse mortgage product, called the Home Keeper Mortgage. Fannie Mae s product is similar to the HECM, but there are a few key differences that are outlined below. Keep in mind: Home Keeper is available in all states. Eligibility Home Keeper loans have the same common eligibility traits as the HECM, but you must meet with a Fannie Mae Approved counselor instead. Traits include: 62 years of age; with no more than 3 borrowers per property Homeowner with equity in your home Home must be our primary residence Own a home that qualifies Home meets minimum property standards. Discuss the program with a Fannie Mae approved counselor. Lending Limits Fannie Mae determines the lending limit by calculating the three variables. Unlike the HECM, interest rates are not calculated into the lending limits. 1. The age and number of borrowers: Unlike the HECM, loan payments to a single borrower will be more than to a couple because couples have a longer life expectancy (combined ages). 2. The value of your property: Determined by a Fannie Mae approved appraiser. 3. The adjusted property value: This is similar to FHA s minimum and maximum claim amount. The maximum loan amount is currently $417,000 and is based on the average home prices throughout the United States. For example, if your home is worth $600,000 (more than the maximum amount), your reverse mortgage money will be based on Fannie Mae s limit of $ Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 43

44 Payment Options Unlike the HECM, Home Keeper only offers three payment options listed below. It does not offer term monthly or combination payments. 1. Lump Sum 2. Line of Credit: Does not offer compounded interest on the unused portion. In other words, you cannot draw interest on your line of credit. 3. Tenure and modified Tenure (monthly payments) Interest Rates The Home Keeper interest rates are based on a 1-month secondary market CD index plus a margin. Because the rate changes monthly, your interest rate will change monthly and you are not given the annual rate option like with a HECM. There is a lifetime cap of 12% on the original interest rate. For example, if your interest rate at the loan closing was 7%, your total interest rate will never be greater than 19%. Associated Costs In addition to the standard costs outlined in the previous section, Home Keeper borrowers can also be charged other fees depending on your lender and where you reside. The main difference is that Home Keeper does not include a mortgage insurance premium. Loan origination fee same as the HECM Service Fees same as HECM Closing Costs similar to HECM Paying back the loan Like all reverse mortgage products, you are required to pay back the loan when you no longer occupy the home as your primary residence. Home Keeper vs. HECM The Home Keeper is very similar to the HECM, however, there are a few key differences (Kraemer & Kraemer, p. 53). Multi-family dwellings are not available with a Home Keeper Home Keeper has a single lending limit of $417,000 and is not based on county limits Does not include a Mortgage Insurance Premium Does not offer term or combination payments The unused line of credit does not draw interest Interest rates and lending limits are calculated differently To Learn More Visit: or call FANNIE Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 44

45 Financial Freedom s Cash Account Advantage History Financial Freedom is owned by Indymac Bank and is one of the largest providers of reverse mortgages in the United States. Financial Freedom offers HECM, Home Keeper and Cash Account loans. The Cash Account loan is the most expensive type of reverse mortgage and is good for people with expensive homes that exceed HUD s 203-b limit of $362,790 or Fannie Mae s $417,000 national limit. For example: If your home is more than $500,000, the cash account is a good option for you. It is available in many states, but not all and is commonly found in high-value home states such as California and New York. Eligibility Like the HECM and Home Keeper, the Cash Account Advantage has the same common eligibility traits, but you must meet with a Financial Freedom approved counselor. In addition, Financial Freedom allows more types of properties to be eligible than the HECM or Home Keeper. 62 years of age Homeowner with equity in your home Home must be our primary residence Own a home that qualifies (more types of homes qualify) Home meets minimum property standards. Discuss the program with a Financial Freedom approved counselor Lending Limits Cash Account Advantage determines the lending limit by calculating two variables. It does not consider the interest or the loan limit in the calculation. This allows a borrower to take a considerable amount of the equity in their home into tax-free cash. The age of number of borrowers The value of your property Payment Options The only payment option for a Cash Account Advantage is a line of credit. There are three ways you can access the line of credit: 1. Credit line option: This option has the highest fees, but is very flexible. You can take the money out whenever you need it. 2. Combo Option: Borrower must take out 75% of the line of credit right away (at least $200,000) and than take out at least $500 at a time for the remaining 25%. 3. Cash Out Option: Borrower must take out 100% of the line of credit right away. In exchange the origination fee and closing costs are free; however, the interest on this line of credit can be substantial. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 45

46 Interest Rates The Cash Account Advantage Plan interest rates are based on the London Interbank Offered Rate (LIBOR). The borrower s interest rate is based on the six-month LIBOR + a 3.5% margin determined by Financial Freedom. It is adjusted semi-annually (instead of annually like the Home Keeper and monthly/annually like the HECM). There is a lifetime cap of 6% on the original interest rate. For example, if your interest rate at the loan closing was 7%, your total interest rate will never be greater than 13%. Associated Costs The Cash Account Advantage fees are very similar to the HECM and Home Keeper plans. 1. Loan origination fee: 2% of maximum initial loan amount or $2500 (whichever is more) 2. Service Fees similar as HECM and Home Keeper 3. Closing Costs similar to HECM and Home Keeper Paying back the loan Like all reverse mortgage products you are required to pay back the loan when you no longer occupy the home as your primary residence. Cash Account Advantage vs. HECM and Home Keeper The Cash Account Advantage is very similar to the HECM and Home Keeper; however, there are a few key differences (Kraemer & Kraemer, p. 63). No lending limits Not available in every state Does not include a Mortgage Premium Insurance Only offers a line of credit payment option Origination and closing costs can be waived with one of the product options Interest rates are calculated differently To Learn More Visit: or call Supply Chain Proprietary reverse mortgage products are not insured by the Federal Government. However, they are insured by the private company selling them. Consumer Broker Investor (Bank) Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 46

47 Section 7: How do I get started? Education: Go to a free seminar on reverse mortgages. Use the Internet or buy books such as Reverse Mortgages for Dummies or The Complete Guide to Reverse Mortgages, to research the different options. Talk to your friends and neighbors your age and ask if they can put you in touch with someone who has a reverse mortgage. It s always good to speak with somebody who has had the actual experience of a reverse mortgage. Counseling: Part of the application process is going to an approved reverse mortgage counselor. This hour counseling session is free and is required for all reverse mortgage products. You can find a counselor by going online. You can also ask your friends and family for a referral. HUD: AARP: If you can t get to an approved counselor, the session is available over the phone. They might take two to three phone sessions to complete, but this is an option for the borrower. Applying: There are 15 separate documents totaling 41 pages (Lyons and Lucas, p. 141) in the application. Your broker will help you through the entire process, so don t be alarmed about the number of pages. Closing: After the broker (or person who completes your loan application) submits your final paperwork to the underwriting department, the underwriter will double check to make sure your application is 100 % complete. If everything is okay, the underwriter will tell the broker to prepare the final loan paperwork in conjunction with a lawyer or title company. Your Reverse Mortgage Team (Kraemer & Kraemer, p. 108) You, Family, Friends Re Reverse Mortgage Lender Counselor Broker Lawyer, Financial Planner Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 47

48 The broker is the person you would contact if you are interested in learning more about the reverse mortgage. This person will fill out your loan application paperwork. The lender is the bank. You will work indirectly with the lender, but they will not be onsite to help you complete your paperwork. They are just sending you the checks and keeping track of the interest and service fees you owe! Request a sample of the accounting statement that you will receive on a monthly basis. And ask questions to make sure you fully understand the charges. How do I find a list of reverse mortgage broker? If you are applying for the FHA/HUD approved HECM, you can contact the Housing Counseling Clearinghouse at to get a list of FHA approved brokers in your area. Look for a broker who is a member of the National Reverse Mortgage Lenders Association and HUD approved. Visit: and enter your city and state and checkmark HECM to see what lenders are in your area. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 48

49 Section 8: Frequently Asked Questions What are my other options? It is important to consider all of your options for taking money out of your home before choosing a reverse mortgage. Here are a few more things to keep in mind: Downsizing to a home that is more affordable, like a condo or town home. Renting a room to another person for additional income. Selling the home to adult children and renting it back from them on a long-term lease (this is tricky and requires legal assistance). Research other possible grants or no-interest loans from the government or contact your local council on aging to learn more. Consolidate your credit card debts. If you are having trouble paying for taxes or home repairs, there may be local government funding that can help. You can always contact your local state agency on aging to find out what other options are available to you to address your needs. Who might approach me to get a reverse mortgage? Reverse mortgages are becoming more popular which means you might be hearing more and more about then in the near future from the media, your financial planner, local mortgage companies, family/friends and your attorney. How can I find the current interest rate? There are a variety of different index/margin combinations available on the market today. And to make it even more confusing, different banks offer different rate programs. So it s best that you contact your local reverse mortgage broker or an approved counselor to learn more about current interest rates. Where can I find a Reverse Mortgage Calculator? Visit and click on Reverse Mortgage Calculator to get an estimate of how much you can expect. What if my first mortgage is not paid off? It is okay if your first mortgage is not paid off, however, your first obligation with your reverse mortgage funds is to pay off your first mortgage, make any repairs that the appraiser asked you to fix, and pay the closing costs. Is there a low income reverse mortgage option? Yes! The deferred payment loan (DPL) is offered by many local and state governments primarily for home improvements. You must be low-to-moderate-income and eligibility varies by county. To find out what is available in your area, contact your city or county housing department or area agency on aging for more information. Are there any other types of reverse mortgage products available? Some states such as Connecticut and Montana offer special reverse mortgage loans for those individuals who can no longer live on their own. In addition, there is a property tax deferral (PTD) loan. Contact your local government agency where you pay taxes for more information. How can I avoid scams? First of all, do not pay money for your counseling session. Make sure you understand all the terms and conditions in the loan paperwork. Consult with your lawyer and/or financial planner before signing the final paperwork. Do not purchase annuities or any other financial Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 49

50 products with your reverse mortgage until you have spoken with your counselor and/or lawyer. How do I terminate my reverse mortgage? By law you have three business days to cancel the loan. Business days include Saturdays, but not Sundays or legal public holidays. You must have a written cancellation letter. Keep in mind: You can t cancel over the phone. Is there a pre-payment penalty? No. There is no fee associated with pre-paying your reverse mortgage before you move out of your home. Should I reinvest the reverse mortgage loan? Reinvesting the proceeds from a revere mortgage is a risky practice and is not recommended. You need to make sure that the interest you are paying on the loan itself does not outweigh the interest you receive from your investment. Consult with your financial adviser or lawyer. Can I purchase Long-term Care Insurance with a reverse mortgage? Yes. Speak to your counselor about this option. Who can I speak with about a reverse mortgage? You can speak with your financial planner, lawyer, accountant, or contact a local reverse mortgage broker to learn more about reverse mortgage. You can also go to and your local senior center website to learn more. Will my estate be affected? No. None of your other assets will be affected by a reverse mortgage. When you sell your home or pass away, you or your estate will pay the cash you received from your reverse mortgage (plus interest and other fees) back to the lender. I want to leave my house to my children. Will they be forced to sell it when I pass away? No. They can either pay off the reverse mortgage with cash or refinance it with a traditional loan. If my house depreciates will I owe more money to the bank? No. All reverse mortgages are non-resource which means that you will ever owe more than what your house is worth. What if my spouse is under 62 years of age? If your spouse is below 62 years old and is on the house title with you you are not eligible for a reverse mortgage. Some reverse mortgage borrowers have solved the problem by taking the spouses name off the title using a quit claim deed. However, this can create complications if the older spouse passes suddenly, so it is always good to speak with a lawyer about your options. Can my home be taken away? No. As long as you are living in the home, it can not be taken from you. Can I refinance a reverse mortgage? Yes. Your children or heirs can refinance the home once you have moved out or passed away. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 50

51 Who appraises my home? Your home will be appraised by an approved program appraiser. The appraiser must adhere to strict guidelines, such as comparing your property to other similar properties in your neighborhood and ensuring that your home meets minimum property standards. For example, if our home has a leaky roof, you will be expected to fix that prior to getting your reverse mortgage. Can I buy another home with my reverse mortgage proceeds? Yes. You can speak to your loan broker or counselor about this option. Also, the Fannie Mae Home Keeper has a special program that allows borrowers to use their reverse mortgage funds to purchase a home. See your counselor for more details. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 51

52 Section 9: Appendix A Example Case Stories provided by Edward Barrett, Reverse Mortgage Advisor at Your Home For Life, one of the leading New England reverse mortgage providers. Edward serves on the National Education Committee for the National Reverse Mortgage Lenders Association, dedicated to promoting the understanding and use of the FHA insured reverse mortgage program through education. Age Comparison Chart Location: Dedham, MA Age: 62, 72, 82 Home Price: $350,000 Current Mortgage: $0 Interest Rates: 3.1% Product Age of youngest homeowner Monthly Lifetime Line of Credit Lump Sum HECM 62 $1021 $195,492 $195,492 HECM 72 $1307 $224,534 $224,534 HECM 82 $1867 $256,535 $256,535 The only difference in the above charts is the homeowner s age. Note that the older you are the more money you will receive in all of your loan options. Product Type Comparison Chart Location: Quincy, MA Age: 72 Home Price: $500,000 Product Interest Credit Line Monthly Tenure Lump Sum Rates HECM 3.1% $233,020 $1,357 $233,020 Fannie Mae 6.125% $139,714 $1,103 $139,714 Home Keeper Cash Account Advantage 5.63% $147,156 Not Available $147,156 Generally the more valuable your home is, the older you are, the lower the interest, and the more you can borrow. HECM loans pay out the most money for homes under $600,000. Homes over $600,000 benefit more from the Cash Account Advantage. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 52

53 Appendix B Use of this content is subject to the Consumer Disclaimer on this site. The following 3 pages show examples that were provided by: The Complete Guide to Reverse Mortgages, Kraemer & Kraemer. Home Value Comparison Charts Location: Scottsdale, Arizona Age: 72 Home Value: $350,000 Product Interest Credit Line (5 Monthly Tenure Lump Sum Rates yrs growth rate) HECM 7.26% $208,304 $954 $146,719 Fannie Mae 7.26% Growth rate $918 $116,160 Home Keeper option not avail. Cash Account Advantage 5% $186,268 Not Available $145,946 Location: Scottsdale, Arizona Age: 72 Home Value: $650,000 Product Interest Credit Line (5 Monthly Tenure Lump Sum Rates yrs growth rate) HECM 7.26% $208,304 $954 $146,719 Fannie Mae 7.26% Growth rate $1,101 $139,343 Home Keeper option not avail. Cash Account Advantage 5% $348,178 Not Available $272,807 The only difference in the above charts is the home value. Note the difference in the credit line between the HECM loan and the Cash Account Advantage loan. Remember HECMs are based on a county limit and do not lend any more than that limit. Cash Account Advantage does not depend on a county limit; therefore they can lend a lot more to a borrower that has a more expensive home. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 53

54 Age Value Comparison Chart Location: Santa Barbara, California Age: 62 Home Value: $250,000 Product Interest Credit Line (5 Monthly Tenure Lump Sum Rates yrs growth rate) HECM 7.26% $170,465 $716 $120,067 Fannie Mae 7.26% Growth rate $273 $32,470 Home Keeper option not avail. Cash Account Advantage 5% $95,464 Not Available $74,798 Location: Santa Barbara, California Age: 82 years old Home Value: $250,000 Product Interest Credit Line (5 Monthly Tenure Lump Sum Rates yrs growth rate) HECM 7.26% $244,964 $13,61 $172,541 Fannie Mae 7.26% Growth rate $1130 $123,509 Home Keeper option not avail. Cash Account Advantage 5% $156,342 Not Available $122,498 The only difference in the above charts is the homeowner s age. Note that the older you are the more money you will receive in all of your loan options. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 54

55 Location Comparison Chart Location: Scottsdale, Arizona Age: 72 Home Value: $650,000 Product Interest Credit Line (5 Monthly Tenure Lump Sum Rates yrs growth rate) HECM 7.26% $208,304 $954 $146,719 Fannie Mae 7.26% Growth rate $1,101 $139,343 Home Keeper option not avail. Cash Account Advantage 5% $348,178 Not Available $272,807 Location: New York City, NY Age: 72 years old Home Value: $650,000 Product Interest Credit Line (5 Monthly Tenure Lump Sum Rates yrs growth rate) HECM 7.26% $299,540 $1373 $210,982 Fannie Mae 7.26% Growth rate $1093 $138,339 Home Keeper option not avail. Cash Account Advantage 5% $345,444 Not Available $270,664 The only difference in the above charts is the homeowner s location. Note that the HECM takes into consideration where the homeowner lives. If you live in New York City, a highvalue home area, you will qualify for more money than in other parts of the country with low-to-mid value homes. Fannie Mae and Cash Account Advantage do not take into account where the homeowner lives. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 55

56 Appendix C Survey Results Number of Survey Respondents: Twenty Name Age Location Single/Married Barbara 62 Billerica, MA Single Beth 61 Bellevue, WA Single Carolyn 67 La Quinta, CA Single Diane & Andre 63 & 68 La Quinta, CA Married Doty 65 Arlington, MA Widowed Jeannie & Dennis 68 & 64 Arlington, MA Married John 64 Bellevue, WA Married Laura & Michael 46 & 48 La Quinta, CA Married Lorrayne & William 80 & 83 Northbrook, IL Married Lucille 75 La Quinta, CA Single Marc 81 Wilbraham, MA Widowed Marilyn 79 Lexington, MA Widowed Mary 61 Riverside, CA Married Neil & Mary 59 & 60 Bend, OR Married Patricia & Edward 80 & 82 Chicago, IL Married Peggy 68 Denver, CO Single Rachel 72 Palm Desert, CA Single Rose & John 76 & 74 Thomaston, CT Married Rosemary & Fred 70 & 77 La Quinta, CA Married Tom 72 La Quinta, CA Single Question 1: Prior to this survey, had you ever heard about reverse mortgages? If yes, how did you hear about it? (For example: media, friend, financial planner, lawyer, family member, etc.) Number of people that responded Media (TV, Newspaper, Mailings) 17 Family Member - 3 Financial Planning 3 Bank 1 Lawyer 1 Friends 1 Never heard - 1 Question 2: What positive or negative press (if any) have you heard about reverse mortgages? Negative Use of this content is subject to the Consumer Disclaimer on this site. Your house can be taken away. The brokers make millions of dollars on your home. Costly to acquire. Interest charged on loan is very high. Initial expense to enroll is quite high Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 56

57 Lots of scams on seniors with reverse mortgages. Advertisements make it sound too easy. The bank now has an interest (lien) on your home and you cannot sell it, rent it, without their permission. Rates and fees are too high. The bank always wins because there are too many restrictions. You will not be able to afford a long-term care center down the road because you spend all your money before you got sick. Seniors will probably get taken advantage of because the deal sounds too good to be true. Positive Reverse mortgages may augment social security income. Those we have read about having a reverse mortgage really like the extra monthly extra income. You get money up-front and then they own your house if you die. You can get a lump sum of money for any reason you choose. Allows people to stay in their home without payments. Question 3: Are you interested in learning more about reverse mortgages for yourself or a family member? 25% said yes 75% said NO Question 4: Do you know anybody that has a reverse mortgage? If yes, was it a positive experience for them? 25% said YES 75% said NO Question 5: Do you prefer to remain in your home should you require long-term care? 100 % said YES Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 57

58 References Books Ballman, T.E., The Reverse Mortgage Handbook, Kraemer & Kraemer, The Complete Guide to Reverse Mortgages, Lyons & Lucas, Reverse Mortgages for Dummies, Guides AARP, Home Made Money: A Consumers Guide to Reverse Mortgages (reprinted in 2006). The Plain English Guide: Reverse Mortgages, January 29, Reverse Mortgage Companies Your Home For Life, Massachusetts, Newspaper Articles Baccash, Lou. Reverse mortgages gain favor with longtime homeowners, Boston Herald, March 5, 2008, p.40. Duffy, Patrick, Reverse mortgages provide more seniors with a safety net. Los Angeles Times, February 4, Duhigg, Charles. Mortgage plan can be reversal of fortune for elderly, Boston Sunday Globe, March 2, 2008, A11. Journals Use of this content is subject to the Consumer Disclaimer on this site. Anderson, Mark. Genworth lures Liberty Reverse Mortgage with $50 million. Sacramento Business Journal, July 27, Berry, Kate & Terris, Harry. Pipeline. Reverse Mortgages. American Banker , February 21, 2008, p 13. Branson, Michael. The FHA Modernization Bill, What It Means To You. Dymi, Amilda. Market Eyeing Reverse Mortgages. Origination News 17.3, December 2007, p.5. Finkelstein, Brad. HECMs Eyed As Securities National Mortgage News 32.5, October 2007, p.8. HECM loans to increase as baby boomers retire. Mortgage Banking, 67.10, July 2007, p.14 National Mortgage News, p.28. Index Gauges Reverse Market. National Mortgage News 31.45, August 13, 2007, p.28. Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 58

59 Moore, Carole. Pros and cons of reverse mortgages. Bankrate.com. Reform plan could help two million more seniors access reverse mortgages. Real Estate Weekly, August 15, Theis, Laura. U.S. Senate Special Committee on Aging debating reverse mortgages. Long Island Business News, December 28, Research Papers National Council On Aging, Trends in Reverse Mortgages A New Option for Senior Homeowners, Stucki, Barbara. Use Your Home To Stay At Home - Expanding the use of reverse mortgages for Long Term Care: A blueprint for action, The National Council on Aging, January, January p. 8, 9, 20, 32, 41. Interviews Eric Schaeffer, Merrill Lynch in New York City, NY Zoran Basich, Nursing Home Solutions in Los Angeles, CA Websites Peter Miller, June Unofficial Guide to Reverse Mortgages Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 59

60 Your User Friendly Guide to Reverse Mortgages Shawna Stephenson 60