1 info sheet Selecting a Reverse Mortgage Many older people are house-rich and cash-poor. They own a home, free and clear, that may be worth hundreds of thousands of dollars. Yet they have little income and can t afford repairs, taxes, health care, or living expenses. They could sell their house and find a less expensive place to live, of course. But if they have These funds are not considered income for tax purposes and do not affect your Social Security or Medicare benefits. (Supplementary Security Income and Medicaid can be affected, however.) You retain title to your home, and you are responsible for taxes, repairs, and maintenance. lived in the home a long time, have friends and family living nearby, and feel comfortable and secure in the neighborhood, moving may be a very unpleasant option. For these people, a reverse mortgage may be the answer. The loan is repaid with the funds received when the home is sold either when you move or when you die. In some cases, you can keep receiving monthly payments as long as you live, even if you do have to move out of your home. Your loan might also become What is a reverse mortgage? Reverse mortgages, also known as home equity conversions, allow homeowners over age 62 to convert home equity into cash, while continuing due if you fail to pay your property taxes, fail to keep up your homeowner s insurance, or fail to maintain the property. But the lender may also be able to make extra payments to you to cover those expenses. to live in their homes. In contrast to the conventional forward mortgage, where you repay debt each month and eventually own your home, a reverse Who should take a reverse mortgage? A reverse mortgage might make sense for you if mortgage offers you a loan against the value of your home. This means that the amount of debt increases over time as payments are made to you and as interest compounds. you plan to stay in your home for several years. If you plan to stay only a short time, the up-front costs can make a reverse mortgage as expensive as a short-term loan. A reverse mortgage can provide cash as monthly payments, a lump sum, a line of credit, or a combination. The monthly payments may be for a specific number of years or for as long as you live in you are willing to use up some or all of the value of your home. A reverse mortgage leaves fewer assets for your future use or for the benefit of your heirs. your home. If you use the loan to buy an annuity, the payments can continue for the rest of your life, no matter where you live. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
2 info sheet Selecting a Reverse Mortgage/2 Who is eligible? reverse mortgages include a credit line that steadily increases over time. Others include credit lines that do To qualify for most reverse mortgages, borrowers not increase, or that increase more slowly and for a must be at least 62 years old, and the home being limited amount of time. borrowed against must be the owners principal residence (where they spend the majority of the year). How much does it cost? If the home has more than one owner, all must become borrowers. The total amount you will owe at the end of the loan will be how much cash was paid out to you by the The homeowners must either own the home free lender plus all the interest that has accumulated on and clear, or else have only a small remaining debt, that loan. However, you can never owe more than the which is to be paid off immediately using a cash value of the home at the time that the loan is repaid. advance from the reverse mortgage. Most borrowers Let s say that the home decreases in value so that start by paying off their remaining debt. when it is sold (or the last surviving borrower dies), it is worth less than the payments plus interest. In this Single-family, one-unit dwellings are eligible for case, the value of the home when it is sold is the most all reverse mortgages. Multi-unit owner-occupied that will have to be repaid. Most reverse mortgages are dwellings, condominiums, and manufactured nonrecourse loans, which means that the lender homes are eligible for some but not all reverse cannot try to claim your (or your heirs ) income or mortgage programs. Mobile homes and cooperatives other assets only the value of the home. are not eligible. The application costs should include only the cost of How much can you borrow? an appraisal for your home (usually $250 to $300) and the cost of a credit report (about $50). Other costs are Reverse mortgage programs vary greatly. The amount usually paid for with an initial payment from the loan you can borrow and the amount that must be repaid itself and become part of the total balance you owe. can vary by tens of thousands of dollars from one plan (Many of these other costs are like those found in to another. Before applying for a reverse mortgage, regular mortgages: interest charges, origination fees, decide how much money you need to borrow. title search, and so on.) The amount you are eligible to receive is based on The best indicator of how much the loan will cost your age, the appraised value of your home, and the is the Total Annual Loan Cost (TALC). This figure interest rate the lender charges. includes all the costs, expressed as one interest rate. This is the figure you can use to compare various Generally, the older you are, the more cash you can loans. The TALC will usually be highest during the first receive. Also, the greater the value of your home and years of a reverse mortgage, and then decrease over the lower the cost of the loan, the more cash you are time. You may think that the TALC sounds a lot like likely to receive. the APR for a normal forward mortgage, but that impression is misleading. Forward and reverse If you choose a credit line rather than monthly mortgages are quite different. Reverse mortgages may payments or a lump sum, you can take cash when you appear to cost more, but they give you benefits that need it, up to the amount of your credit line. Some other kinds of loans cannot give you.
3 info sheet Selecting a Reverse Mortgage/3 Federal Truth-in-Lending law (Regulation Z) requires To qualify, you must be at least 62 years old and lenders to show you a loan s TALC rate after you live in a single-family home, a two- to four-unit have applied for it. If you want to compare TALC dwelling, or a condominium in an FHA-approved rates for various loans before you apply for any of development. You must either own your home them, you can order the National Center for Home free and clear, or have only a very small Equity Conversion s list of selected counselors and mortgage balance left. lenders who have the software that can show you The loan is not due as long as you live comparative TALC rates. Send a self-addressed in your home. stamped business-size envelope to the National Center You can receive monthly payments, for Home Equity Conversion, 360 N. Robert St., #403, a line of credit, or a combination of both. St. Paul, MN Fees include closing costs, a mortgage insurance premium, and sometimes a The TALC does have some limitations there are monthly servicing fee. some significant costs that may not be figured into it. Your credit line grows over time. The National Center for Home Equity Conversion has For a small fee, you may change from one information on these pitfalls. (See the Resources payment option to another. section at the end of this infosheet.) You must accept mortgage counseling from a One cost you should not have is for a service HUD-approved counseling agency. agreement with anyone to help you find a reverse mortgage lender or to help you apply for a loan. This In general, the popular HECM program provides the kind of help is available to you for free or at very little most cash at the lowest cost if the value of your home cost from your nearest HUD (U.S. Department of is about average for your area. A list of HECM lenders Housing and Urban Development) office or from HUDapproved housing counseling agencies. To find a is available from the Fannie Mae Public Information Office, at FANNIE ( ). housing counseling agency near you, call HUD s Fannie Mae loans Housing Counseling Clearinghouse at Fannie Mae, a quasi-governmental agency, offers Types of reverse mortgage plans its own reverse mortgage program, the Home Home Equity Conversion Mortgage (HECM) loans Keeper Mortgage. HUD, working through the Federal Housing To qualify, you must be at least 62 years old Administration (FHA), insures reverse mortgage and live in a one-unit single-family home, plans under the Home Equity Conversion Mortgage a condominium, a unit in a planned-unit program. These mortgages are available from development, or a leasehold property or HUD-approved lenders across the country. property held in trust that meets Fannie Mae s standard guidelines. You must either own your home free and clear, or have only a very small mortgage balance left.
4 info sheet Selecting a Reverse Mortgage/4 The loan is not due as long as you live Public sector loans in your home. Many state and local governments offer loans, secured You can receive monthly payments, a against the value of the home, to provide money for line of credit, or a combination of both. paying property taxes or for repairing or improving Fees include closing costs and a monthly homes. These are somewhat limited in scope, and servicing fee. generally available only to low- or moderate-income Your credit line does not grow. homeowners. The mortgage is an adjustable-rate loan Payments can be used only for certain purposes. so the interest rate can change. The monthly payments will not change. Costs are usually lower than those charged by private lenders. You must receive home buyer education. Contact a representative from your city or state If the value of your home is greater than the median government for details. for your area, a Fannie Mae-insured mortgage may be the best choice because the maximum is higher than Choosing a reverse mortgage plan for an FHA loan. Fannie Mae also offers a Home Keeper for Home Purchase mortgage, which allows you to use Before shopping around for reverse mortgage plans, the payment from a reverse mortgage to buy an you ll need to decide the following: additional home. In addition, Fannie Mae offers the how much money you need FHA-insured HECM loan discussed above. how long you will need the money Lender-insured loans what form you would like the payments to take Also known as conventional reverse mortgages, lenderinsured loans offer monthly loan advances or loan (lump sum, monthly payments, credit line) advances plus a line of credit. Be sure to check out the Next, take the following steps to gather information: financial strength of the company offering the loan. Put together a list of lenders offering You can choose to mortgage less than the full reverse mortgages. Reverse mortgages are value of your home, thus saving home equity for offered through banks, mortgage companies, later use by you or your heirs. savings associations, and credit unions, as well as through the government agencies Charges tend to be higher than those of FHA or discussed above. Fannie Mae plans, but it s also possible to find higher maximum loan advances. Contact three or more lenders (also called originators). Speak with loan officers by phone Some loans include an annuity that continues to get an idea of the options available. Ask for making monthly payments, even if you sell your information by mail, including a breakdown of house. (These annuity payments may be taxable all costs and options. and can affect your eligibility for Supplemental Security Income and Medicaid.)
5 info sheet Selecting a Reverse Mortgage/5 Meet with lenders and ask questions. The If you are looking at other kinds of reverse Federal Truth in Lending Act requires lenders mortgages, contact a HUD-approved housing to inform borrowers about the plan s terms and counseling agency (discussed on page 3) that will costs, including the Total Annual Loan Cost advise you at little or no cost. (TALC). Find out what itemized costs you will have to pay (origination fees, closing costs, You may also want to discuss the loan with a servicing fees, interest charges, insurance investment professional or an attorney specializing in premiums, and maturity fees) and how much elder law who is familiar with reverse mortgages. equity will be left in your home at the end of the loan. On plans with adjustable rates, lenders Resources for Further Information must provide specific information about the variable rate feature. On plans with credit lines, AARP (The American Association of Retired Persons) lenders must disclose any charges to open the Home Equity Information Center account, such as appraisal, credit report, or 601 E Street NW attorney s fees. Washington, DC Ask if the reverse mortgage is insured. For insured mortgages, loan advances will continue Offers publications on reverse mortgage programs, and you may remain in your home as long as on other home equity conversion options, and on you live, even if the amount borrowed exceeds finding reliable counselors and lenders. One useful the value of the home. Fixed-term, uninsured publication is Home-Made Money: Consumer s loans are available in a few states, but are risky, Guide to Home Equity Conversion. There is since the balance is due at the end of the term. information on reverse mortgages on the AARP If you are unable to refinance when that time Web site at comes, you could be forced to sell your home to repay the loan. Fannie Mae 3900 Wisconsin Avenue NW Don t choose without counseling Washington, DC Reverse mortgages can be an excellent option for some people, but you should be very careful to (or use the phone book to find your nearest office) study all your options. It is strongly recommended that you take advantage of one of the readily available Provides financial products and services that make forms of consumer counseling before taking out a it possible for low-, moderate-, and middle-income reverse mortgage. families to buy homes. If you seek FHA-insured or Fannie Mae reverse mortgages, you will automatically receive financial counseling from an independent, third-party agency at little or no cost. You will also be told about alternatives and options that may be more appropriate for you than the reverse mortgage.
6 info sheet Selecting a Reverse Mortgage/6 The National Center for Home Equity Conversion An independent, not-for-profit organization dedicated to reverse mortgage analysis and consumer information on reverse mortgages. Their Web site has a lot of very useful information, including Frequently Asked Questions, which gives a very thorough presentation Calculator, which will estimate the cash advances or credit lines you might receive, given your age, the value of your home, and where you live Alerts, which explains various pitfalls Related Alternatives, which has links to organizations that may provide alternatives, or supplements, to a reverse mortgage The U.S. Department of Housing and Urban Development (HUD) 451 Seventh Street SW Washington, DC Use the phone book to find your nearest office. This material is not intended to replace the advice of a qualified attorney, tax adviser, investment professional, or insurance agent. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional. This material was prepared by Ceridian Performance Partners (CPP); accordingly CPP (not MFS Fund Distributors, Inc.) is solely responsible for the accuracy of the content. 1998, 2000 Ceridian Corporation. All rights reserved. MFS Fund Distributors, Inc., 500 Boylston St., Boston, MA H pdf Scholen, Ken. Your New Retirement Nest Egg: A Consumer Guide to the New Reverse Mortgages. National Center for Home Equity Conversion, 1996, 342 p., $ Call to order. Money from Home: A Consumers Guide to Reverse Mortgage Options. Fannie Mae, 1996, 106 p., free. Call to order. Contact your investment professional for more information or to construct a personalized Heritage Planning Profile to help your parents, your children, or yourself.