Reverse Mortgages: A Guide for Consumers. A New Report from THE AMERICAN ADVISORY COUNCIL

Transcription

1 Reverse Mortgages: A Guide for Consumers A New Report from THE AMERICAN ADVISORY COUNCIL

2 This publication is designed to provide accurate and authoritative information regarding the subject matter covered. The publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Copyright 2007 Acquire Direct Marketing, Inc. All rights reserved. Printed in the U.S.A

3 Introduction More and more older Americans are recognizing the financial advantages that a reverse mortgage can offer. In fact, during the 2006 fiscal year, the number of federally insured reverse mortgages in the U.S. increased by 77 percent, according to the National Reverse Mortgage Lenders Association. Two main factors in this rapid growth were rising home values and greater consumer acceptance of these loans. Reverse mortgages have been available for quite some time, but have been somewhat misunderstood. In the past, reverse mortgages were viewed primarily as a last resort for lower or fixed income seniors to keep their homes. These days, reverse mortgages are a widely endorsed financial planning tool for senior homeowners at all income levels. There are, however, still some common myths associated with reverse mortgages. See how many of these you have heard: The bank will take my house FALSE The bank never owns your house - you always retain title. The bank will place a lien on your house for the reverse mortgage, just as they would for a regular mortgage. My heirs won t be able to afford to pay off the reverse mortgage FALSE A reverse mortgage is a non-recourse loan. You and/or you heirs will never owe more than what the house is worth, even if house prices decline. I can t get a reverse mortgage if I still owe money on a current mortgage FALSE Depending on how much you owe, you can still get a reverse mortgage. If you have sufficient equity, the proceeds from the reverse mortgage can pay off your existing conventional mortgage I can t take a reverse mortgage because the income from it will affect my eligibility for government benefits or tax breaks FALSE Proceeds from a reverse mortgage are not considered income, so they do not affect any eligibility programs, including tax breaks. This report from the American Advisory Council (AAC) will help you understand reverse mortgages and give you the facts you need to make an informed decision for yourself. 3

4 Reverse Mortgage Q&A What is a reverse mortgage? A reverse mortgage is a special type of loan that allows senior homeowners like you to convert the equity in their home into cash. As long as you continue to live in the home, you never have to repay the loan. It is termed a reverse mortgage because instead of your making payments to the bank (as you do with a traditional mortgage) the bank is actually making payments to you. How are reverse mortgages different from traditional mortgages? A reverse mortgage is a loan, just like a traditional ( forward ) mortgage you use to purchase a home but there are several distinct differences. Both types of mortgages affect the following: The amount of debt you have (money you owe the lender) The amount of equity you have in your home (the value of your home less any debt against it) With a traditional mortgage, you make monthly payments to the lender. Over time, this decreases your debt to the lender, and increases your equity. For example, if your home is valued at $200,000 and you still owe $25,000 on your mortgage; your home equity is $175,000. So with a traditional mortgage, your debt decreases and your equity increases. With a reverse mortgage (as the name implies) the exact opposite occurs. You are borrowing against the equity you have built up in your home. This increases the amount you owe the lender (debt) and decreases your equity. At first glance, that may seem unwise; but you have to remember that the equity in your home doesn t do you much good until you sell the property. Many seniors find themselves in the position of having to sell their home as a result of unexpected expenses or because their fixed incomes are insufficient. With a reverse mortgage, you are able to convert the equity in your home into spendable cash without having to sell your home and without having to make monthly loan repayments. Instead of your paying the lender, the lender makes payments to you. Another thing to consider: when property values rise, you will begin to rebuild the equity you reduced with your reverse mortgage. Depending on how long you stay in the 4

5 home, you may even replenish your equity to the point where you can refinance your reverse mortgage and convert that equity into cash again. Who can qualify for a reverse mortgage? There are three basic qualifications for a reverse mortgage: You must be at least 62 years old. If there is a spouse or co-owner listed on the title, all parties must be 62. If one spouse or co-owner is under 62, that person s name can be removed from the title so that the other person can qualify for the reverse mortgage. You must be a homeowner with equity in your home. Even if you are still paying your first mortgage, you still may qualify. Reverse mortgages are available on your primary residence only. A singlefamily home, condo, townhouse or manufactured home will qualify, providing it is the primary residence. Vacation homes, timeshares, etc do not qualify. What are the income and credit requirements? Unlike traditional home mortgages, there are no income or credit requirements for a reverse mortgage. You cannot be denied a reverse mortgage based solely on your income or credit score. The only qualifications that matter to the lender are your age, home value, and the amount of equity in your home. How can I spend the money? One of the reasons reverse mortgages have become so popular is that there are no restrictions on how you use the funds. You can use the money from a reverse mortgage for any reason: Additional income Pay off existing debts (credit cards, medical bills, etc) Travel Long term care insurance Home repairs 5

6 Prescriptions or medical care Your children s or grandchildren s education The options are limitless. Anything that you have needed or wanted but felt you couldn t afford may now be within your reach. How much money can I get? The amount of money available to you through a reverse mortgage depends on several things: Your age (The older you are, the more cash you can get) The value of your home (The more your home is worth, the more cash you can get.) The amount of equity you have in your home. The current interest rate There are also several different types of reverse mortgages available today. What s right for your neighbor may not be right for you. It is best to consult with a reverse mortgage specialist to make sure you are aware of all your options. What are the different types of reverse mortgages? The most well-known and widely available reverse mortgage is the federally insured Home Equity Conversion Mortgage (HECM). This loan is backed by the U. S. Department of Housing and Urban Development (HUD) and can be used for any purpose. It is generally offered by mortgage companies or banks. Other widely available reverse mortgage products include the Fannie Mae Home Keeper loan and proprietary jumbo reverse mortgage products which are owned and backed by the private companies that develop them. The term jumbo refers to the fact that these loans are usually reserved for higher valued homes (above the $500,000 level) and there are no loan limits. The structure and payouts are similar to standard FHA and Fannie Mae reverse mortgage programs. However, jumbos do have slightly different payout options. Jumbo reverse mortgages are available in many, but not all, states. The HECM and Home Keeper reverse mortgages are available in every state. Some state and local governments offer low-cost reverse mortgages that generally must be used for one specific purpose only, for example, to make home repairs or pay property taxes. Many of these public sector loan programs are only available to homeowners with low or moderate incomes. 6

7 Loan costs can vary significantly from one type of reverse mortgage to another. Not all reverse mortgages include the same types of loan costs. As a result, the true, total cost of reverse mortgages can be difficult to understand and compare. Because of this, the Federal Truth-in-Lending Law requires lenders to disclose a Total Annual Loan Cost (TALC) for these loans. How do I receive my money? Another convenient reverse mortgage feature is that you decide exactly how you want to receive your money. In general, your payment method options are: A lump-sum upfront payment A line of credit (the most popular) Monthly payments as long as you live in your home (or for a pre-determined period) A combination of monthly income and a line of credit. When does the loan have to be repaid? As long as you remain in your home, the reverse mortgage stays outstanding and you do not have to make any monthly payments to the bank. The loan becomes due when: The last surviving borrower passes away You no longer occupy your home as a principal residence You sell the house When any of the above instances occur, the loan amount due equals the sum of the total funds you received from the mortgage, the initial fees and closing costs financed as part of the loan, plus accrued interest. One of the other benefits of a reverse mortgage is that the repayment amount cannot exceed the value of your home at the time the loan is repaid. The house doesn t have to be sold to pay off the loan, either. You, your children, or heirs always have the option of paying off the loan and keeping the house. Reverse mortgage lenders can also require repayment at any time if you: Fail to pay your property taxes Fail to maintain and repair your home Fail to keep your home insured 7

8 Donate or abandon your home Are guilty of fraud or misrepresentation These conditions of default are standard on most traditional mortgages as well. With a reverse mortgage, however, lenders generally have the option to pay for these expenses by reducing your loan advances and using the difference to pay these obligations. This can only be done if you have not already used up all your available loan funds. Other default conditions on most home loans, including reverse mortgages, include: Your declaration of bankruptcy If a government agency needs your property for public use (for example, to build a highway) If a government agency condemns your property (for example, for health or safety reasons). Changes that could affect the security of the loan for the lender may also make reverse mortgages payable. For example: Renting out your home Adding a new owner to your home s title Changing your home s zoning classification Taking out new debt against your home You must read the loan documents carefully to make certain you understand all the conditions that can cause your loan to become due. If you have any questions or concerns, be sure to ask your reverse mortgage counselor or lender. Are there any upfront or closing costs? The fees for reverse mortgages are similar to those associated with a standard home loan. In general, you can expect to be charged: An Origination fee A Mortgage insurance fee (for FHA Home Equity Conversion Mortgages) An Appraisal fee Other standard closing costs 8

9 In most cases these fees and costs are capped and can be financed as part of the reverse mortgage. What kind of interest rate can I expect? Your interest rate and how it is calculated will depend on the specific product you select. Home equity conversion plan rates are all adjustable rates changing either monthly or annually based on the current rate of the one-year Treasury bill, onemonth certificate of deposit, or the LIBOR (London Inter-Bank Offer Rate the interest rate banks charge each other for loans) indices. How do I select a lender? You want a loan officer who treats you with respect and helps you reach your own decisions. You don t want to feel pressured. Be wary of a lender who is clearly more concerned about selling you a loan than meeting your needs. It is also a good idea to look at a lender s professional affiliations. Members of the National Reverse Mortgage Lenders Association (NRMLA) agree to follow the best practices for the industry and have a commitment to meeting consumer needs. Most NRMLA members will display their affiliation prominently. Finding an independent lender is also important when evaluating reverse mortgages. An independent lender has access to an array of products from a variety of sources. This gives you the consumer the best opportunity to find a reverse mortgage that meets your individual needs. Proprietary lenders are limited to offering only their own products which may or may not be a good fit for your situation. How can I protect myself from scams? One very important safeguard built into the reverse mortgage process is the requirement that counseling is mandatory for all reverse mortgage products before you can obtain a loan. Counseling is an educational session at which you are informed about reverse mortgages and other options. You can get the name of a local counseling agency or qualified telephone counselor from a reverse mortgage lender, or by calling HUD s Housing Counseling and Referral Line (toll-free ). Although most reverse mortgage lenders are reputable and ethical in their business practices, consumers should be aware of some common scams and frauds involving reverse mortgages: 9

10 Charging for information that is available to everyone for free. Beware of any company that offers to give you the name of a lender for a small percentage of the loan. HUD provides this information without cost at the above phone number, or at Pushing reverse mortgages as a way to pay for purchases. Some companies that sell large ticket items or services may suggest using a reverse mortgage as a way to fund these purchases. Be wary of anyone who seems too eager for you to take out a reverse mortgage. They may not have your best interests at heart. If something about the proposal doesn t seem right, check with your counselor. Unethical reverse mortgage terms. Some lenders load up their contracts with extraneous fees and terms; which can have a serious effect on your equity. Look out for shared equity or shared appreciation terms, which give the lender the right to collect a portion of the appreciation when the home is sold or refinanced. The cost of these provisions can run into the tens of thousands if the home appreciates significantly. These rising cost provisions eat up equity without providing any additional benefit to the homeowner. Read your contracts carefully, and question any fees or terms that you do not understand or expect. There are several things that you can do to protect yourself from falling for these reverse mortgage scams: Speak with your HUD approved reverse mortgage counselor. The counselor will help you understand reverse mortgages and help you evaluate your situation. Get offers from several different reverse mortgage lenders in order to compare options. Make sure to get the TALC from each lender. Be certain you understand all the terms and conditions within the reverse mortgage contracts. Your reverse mortgage counselor, attorney, or a trusted advisor can guide you through the contracts. You generally have three business days after signing the loan document to cancel it for any reason. 10

11 If you suspect that a company is operating in violation of the law, alert your reverse mortgage counselor. You can also file a complaint with your State Attorney General s office or banking regulatory agency and the Federal Trade Commission. Your best defense against fraud or scams is to deal with an established lender with a professional affiliation, or someone who comes highly recommended to you. In the right situation, reverse mortgages can be a valuable financial tool for older Americans. By reading this report, you have taken a very important first step in the process educating yourself. If you think a reverse mortgage could be a solution for you, contact a local lender to see if you qualify and how much money would be available to you. Best of luck in your financial future! 11

12 Summary of Reverse Mortgage Benefits Your credit history is not a factor in determining eligibility for a reverse mortgage. There are no income or credit requirements to qualify for a reverse mortgage. You hold title to your house during the term of the reverse mortgage, not the lender just like with a conventional home mortgage. No loan repayment for as long as you live in your home You will never, under any circumstances resulting from the reverse mortgage, be forced to leave your home. Funds received from a reverse mortgage are tax free. You can spend the money however you like Your line of credit can grow. If you choose a HECM reverse mortgage with a line of credit payment option, the size of the line of credit will increase annually for inflation. A reverse mortgage will not affect regular Social Security payments. Depending on your situation, a reverse mortgage may affect the benefits you receive, if any, from the federal Supplemental Security Income (SSI) program, or state-administered programs like Medicaid. If this is the case, we suggest you consult with your local Area Agency on Aging, a reverse mortgage lender, or other benefits expert. A tax-advantaged way to pass on part of your estate today As your age and home value increases, and/or interest rates change; you can potentially refinance your existing reverse mortgage and convert the additional equity into cash. 12

13 Additional Resources Other organizations that are a good source of Reverse Mortgage information: AARP US Department of Housing and Urban Development (HUD) National Council on Aging Federal Trade Commission FTC-HELP ( ) 13