What You Should Know About Reverse Mortgages

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1 What You Should Know About Reverse Mortgages The FHA s Program Reverse mortgages are becoming popular in America. HUD's Federal Housing Administration (FHA) created one of the first. The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program, which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more. You can receive free information about reverse mortgages in general by calling AARP toll free at (800) Since your home is probably your largest single investment, it's smart to know more about reverse mortgages, and decide if one is right for you! 1. What is a reverse mortgage? A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA's HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing. 2. Can I qualify for FHA's HECM reverse mortgage? To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are further required to receive consumer information from an approved HECM counselor prior to obtaining the loan. You can contact the Housing Counseling Clearinghouse on (800) for the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders within your area.

2 3. Can I apply if I didn't buy my present house with FHA mortgage insurance? Yes. It doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured. 4. What types of homes are eligible? To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible. 5. What's the difference between a reverse mortgage and a bank home equity loan? With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends upon your age, the current interest rate, and the appraised value of your home, or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment." 6. Can the lender take my home away if I outlive the loan? No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home.

3 7. Will I still have an estate that I can leave to my heirs? When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. 8. How much money can I get from my home? The amount you can borrow depends upon your age, the current interest rate, and the appraised value of your home, or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. You can use an online calculator like the one on the AARP website to get an idea of what you may be able to borrow. 9. Should I use an estate planning service to find a reverse mortgage? FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HUD-approved housing counseling agencies are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) toll-free, for the name and location of a HUD-approved housing counseling agency near you. 10. How do I receive my payments? You have five options: 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 installments, at times and in amounts of your choosing until the line of credit is exhausted.

4 Modified Tenure - combination of line of credit with 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. Additional Programs and Information Reverse Mortgages: Get the Facts Before Cashing in on Your Home's Equity Whether seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for healthcare expenses, many older Americans are turning to reverse mortgages. They allow older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. In a regular mortgage, you make monthly payments to the lender. But in a reverse mortgage, you receive money from the lender and generally don t have to pay it back for as long as you live in your home. Instead, the loan must be repaid when you die, sell your home, or no longer live there as your principal residence. Reverse mortgages can help homeowners who are house-rich but cash-poor stay in their homes and still meet their financial obligations. To qualify for most reverse mortgages, you must be at least 62 and live in your home. The proceeds of a reverse mortgage (without other features, like an annuity) are generally tax-free, and many reverse mortgages have no income restrictions. Three Types of Reverse Mortgages The three basic types of reverse mortgage are: 1. Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations. 2. Federally-insured reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs), and are backed by the U. S. Department of Housing and Urban Development (HUD). 3. Proprietary reverse mortgages, which are private loans that are backed by the companies that develop them. Single-purpose reverse mortgages generally have very low costs. But they are not available everywhere, and they only can be used for one purpose specified by the government or nonprofit lender, for example, to pay for home repairs, improvements, or property taxes. In most cases, you can qualify for these loans only if your income is low or moderate. HECMs and proprietary reverse mortgages tend to be more costly than other home loans. The up-front costs can be high, so they are generally most expensive if you stay in your home for just a short time. They are widely available, have no income or

5 medical requirements, and can be used for any purpose. Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan s costs, financial implications, and alternatives. For example, counselors should tell you about government or nonprofit programs for which you may qualify, and any single-purpose or proprietary reverse mortgages available in your area. The amount of money you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get. The HECM gives you choices in how the loan is paid to you. 1. You can select fixed monthly cash advances for a specific period or for as long as you live in your home. 2. Or you can opt for a line of credit, which allows you to draw on the loan proceeds at any time in amounts that you choose. 3. You also can get a combination of monthly payments plus a line of credit. HECMs generally provide larger loan advances at a lower total cost compared with proprietary loans. But owners of higher-valued homes may get bigger loan advances from a proprietary reverse mortgage. That is, if you have a higher appraised value without a large mortgage, then you may likely qualify for greater funds. Location (for example, your neighborhood) is only one part of the determination of appraised value. Loan Features Reverse mortgage loan advances are not taxable, and generally do not affect Social Security or Medicare benefits. You retain the title to your home and do not have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 months before the loan becomes due and payable. As you consider a reverse mortgage, be aware that: Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender generally sets these fees and costs. The amount you owe on a reverse mortgage generally grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases over time as loan funds are advanced to you and interest accrues on the loan. Reverse mortgages may have fixed or variable rates. Most have variable rates that are tied to a financial index and will likely change according to market conditions.

6 Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A nonrecourse clause, found in most reverse mortgages, prevents either you or your estate from owing more than the value of your home when the loan is repaid. Because you retain title to your home, you remain responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don t pay property taxes or maintain homeowner s insurance, you risk the loan becoming due and payable. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole. Getting a Good Deal If you are considering a reverse mortgage, shop around to compare your options and the offered terms. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. It will help you ask more informed questions, which could lead to a better deal. If you want to make a home repair or improvement or need help paying your property taxes, you may want to find out if you qualify for any low-cost single-purpose loans that may be available in your area. Area Agencies on Aging (AAAs) generally know about these programs. To find the nearest agency, visit or call toll-free, Ask the AAA for information about available loan programs for home repairs or improvements, or property tax deferral or property tax postponement programs. If you are interested in a federally-insured HECM, know that all HECM lenders must follow HUD rules, and that many of the loan costs including the interest rate will be the same no matter which lender you select. Still, some costs including the origination fee, other closing costs, and servicing fees may vary among lenders. If you live in a higher-valued home, you may be able to borrow more from a proprietary reverse mortgage. But it generally will cost more. The best way to see key differences between a HECM and a proprietary loan is with a detailed side-by-side comparison of future costs and benefits. Many HECM counselors and lenders can provide you with this important information. No matter which type of reverse mortgage you are considering, be certain you understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates, which show the projected annual average cost of a reverse mortgage, including all itemized costs.

7 Be a Savvy Consumer Be cautious if anyone tries to sell you something, like an annuity, and suggests that a reverse mortgage would be an easy way to pay for it. If you don t fully understand what they re selling, or you re not sure you need what they re selling, be even more skeptical. Keep in mind that your total cost would be the cost of what they re selling plus the cost of the reverse mortgage. If you think you need what they re selling, shop around before you buy. No matter why you decide to take a reverse mortgage, you generally have at least three business days after signing the loan documents to cancel it for any reason without penalty. Remember that you must cancel in writing. The lender must return any money you have paid so far for the financing. Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives. Contact the following organizations for more information: Reverse Mortgage Education Project AARP Foundation 601 E Street, NW Washington, DC U. S. Department of Housing and Urban Development (HUD) 451 7th Street, SW Washington, DC Disclaimer: This report was compiled from information furnished by H.U.D. and the F.T.C., and is not intended to be a consumer s sole guide to making a decision about reverse mortgages. You should consult your attorney and accountant before making this crucial decision. In addition, we advise all consumers to seek additional information from the AARP Foundation and HUD at the addresses listed above. DeMar Marketing is not responsible for any factual errors or omissions in this report, or for any losses or damages that consumers may incur by taking any action on a reverse mortgage as a result of reading this report. DeMar Marketing, P.O. Box 510, Carmel, NY Tel #

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