Reverse Mortgage Basics. Norma P. Garcia Senior Attorney Consumers Union May 28, 2012

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1 Reverse Mortgage Basics Norma P. Garcia Senior Attorney Consumers Union May 28, 2012

2 What is a reverse mortgage? It s a loan against the equity in an elder s home Instead of making monthly payments to the lender, the lender advances sums to the elder against the future sale of the property To qualify, the elder must be 62 years or older The home must be paid off or nearly paid off.

3 An attractive option for many Reverse mortgages allow homeowners who need cash to get access to the equity in their homes while allowing them to continue to live there, rather than selling the home.

4 Money matters A reverse mortgage converts home equity into tax-free cash. The amount the elder can borrow depends upon age, the current interest rate, the fees charged and for FHA insured loans, the federal loan limit which is $625,500. The borrower can elect to receive payment in a number of ways

5 When does a reverse mortgage become due? Upon death of the borrower Upon permanently leaving the home Upon the failure to: Maintain property Pay home insurance Pay property taxes Pay off: generally the borrower or her estate then sells the home in order to pay the debt.

6 Reverse Mortgage vs. Traditional Mortgage Even more complicated than a traditional mortgage; Relatively little public information available to explain the advantages and disadvantages of a given loan package; and A borrower cannot calculate the true cost without predicting: how long she will live, and what future interest rates, and what home appreciation rates will be.

7 Trends in aging Number of older people is [the] only natural resource that's actually growing. Laura Carstensen Stanford Center on Longevity 10,000 people turning 65 every day The number of people over 60 expected to surpass those under 15 within four years. Homeownership rates for those years old consistently around 80%

8 Growing reverse mortgage market HECM begins in 1988 First full year 1990: 188 reverse mortgage loans Over 100,000 every year since 2007 HUD predicts over 144,000 reverse mortgage loans will be made in FY 2017.

9 Types of Reverse Mortgages Home Equity Conversion Mortgage (HECM) HECM Saver Proprietary

10 HECM reverse mortgage The only reverse mortgage insured by the U.S. Federal Government. Only available through an FHA approved lender.

11 HECM borrower eligibility 62 years of age or older Property used as collateral must be the primary residence No delinquencies on any federal debt, suspensions, or excluded participation from FHA programs Completion of HECM counseling

12 HECM mandatory counseling Purpose: To educate borrowers about using a HECM financial implications alternatives borrower obligations costs of obtaining the loan repayment conditions

13 Costs Associated with HECM Loan Origination Fee Third party fees (i.e., appraisal, inspection, lender title policy, etc.) FHA Mortgage Insurance Premiums (2% of maximum claim amount) Servicing Fee Interest

14 How much can a HECM borrower receive? Amount varies loan-by-loan Homeowner can elect manner of payouts Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. Term- equal monthly payments for a fixed period of months selected. Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted. Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home. Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

15 Borrower s obligations after loan has closed Occupy the home as a principal residence Make timely payments of their property taxes, homeowners association fees, ground rents, etc. Maintain homeowner s hazard insurance policy Maintain the property in a condition equal to when the loan was closed

16 HECM Saver reverse mortgage Available as of October 4, 2010 HECM borrowers have the option of reducing closing costs by selecting HECM Saver as their initial mortgage insurance premium. Differs from the traditional HECM Standard Program eligible borrowers charged significantly lower upfront fees (0.01% vs. 2% for Standard HECM) but amount of money available to borrower is lower

17 What about private reverse mortgages? Not a big part of the market Reasons: Economic downturn Credit crunch Newly raised HECM loan limits But still available for some with higher equity or high value homes Disadvantages: no counseling required; could result in complete equity depletion

18 Reverse Mortgage Tips If you need cash, consider alternatives to a Reverse Mortgage first. Explore eligibility for less expensive programs or benefits Consider whether an inter-family loan might be better for their situation Attend a face-to-face counseling session with a local HUD counselor rather than the phone counseling that is permitted. Either before or after meeting with a HUD-approved counselor, meet with either a Certified Financial Planner (CFP) or Certified Public Accountant (CPA), and/or with an elder law attorney To find local counselors in their area, seniors should consult:https://entp.hud.gov/idapp/html/hecm_agency_loo k.cfm or contact the AARP Foundation at

19 A word to the wise... "People may have a false sense of security that somehow the mortgage is handled" with no payments due and it is for today. But they're paying interest on that potentially large lump, and that [interest] is drawing down their equity. When it comes time for them to move, they may find there's nothing left. Barbara Stucki National Council on Aging

20 Resources HUD information on reverse mortgages gram_offices/housing/sfh/hecm/hecmhome Reverse mortgage tips from Consumers Union e_mortgage_tips_for_consumers Examining Faulty Foundations in Today s Reverse Mortgages Consumer Financial Protection Bureau

21 Norma P. Garcia Senior Attorney Consumers Union 1535 Mission St. San Francisco, CA

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