Why You Pay FHA Mortgage Insurance Premiums on Reverse Mortgages

Puzzled by FHA Mortgage Insurance PremiumThis is a question I recently received:

Hello Beth.
I notice that the monthly costs for my reverse mortgage loan include very costly mortgage insurance. From my experience as a homeowner, mortgage insurance was to cover the mortgage payment in the event the mortgagee could not make payments for one reason or the other. Since there are no mortgage payments in a reverse mortgage loan, why do I have to pay mortgage insurance?
Thank you.

This is a very good question!

With conventional mortgages many people look at mortgage insurance premiums as protection of risk if they, the borrowers, can’t make their monthly mortgage payments.  The reverse mortgage doesn’t have monthly mortgage payments required for this product. Although with the reverse mortgage there is a repayment required, it is one payment when the loan becomes due and payable, generally when the borrower(s) is(are) no longer in the home as their primary residence.

Mortgage insurance on a reverse mortgage does not protect the consumer or borrowers obligation to pay the loan balance when the home is no longer the primary residence of the borrower or if they haven’t abided by the terms of the loan.

However, with a Federal Housing Administration (FHA) insured Home Equity Conversion Mortgage or better known as a HECM reverse mortgage, there is a required mortgage insurance premium by FHA. The FHA Mortgage Insurance Premiums (MIP) offer significant benefits for reverse mortgage lenders, investors, as well as the borrowers.

The FHA required MIP are in place even though one is not making mortgage payments for several reasons:

  • The insurance protects the investors against risk and loss.

There are also advantages and increased borrowing power for the borrowers with FHA insuring the reverse mortgage.  These  include:

  • Guaranteeing the funds are available for you, the borrower, during the term of the loan.  With HELOCs the bank/lender can call the loan due and payable if there are changes with the bank, for example they merge with another bank/lender or they close their doors.
  • Guaranteeing the reverse mortgage lender against default or shortfalls means the interest rates are lower compared to other mortgages for the benefits one receives with the reverse mortgage.  i.e.,
    • With conventional loans the interest is impacted by one’s credit score.  With the reverse mortgage one’s credit, even if it’s poor, does not impact the interest rate.
    • The FHA insurance on the HECM loans keep the interest rate low and allows more dollars to be loaned than with proprietary programs.  Proprietary reverse mortgage programs have a higher interest rate to cover the lender’s and investor’s risks and loss.
  • Providing a line of credit growth rate (available only with reverse mortgages).  The tenure monthly payment option also has a growth rate factored in when the tenure payment is calculated.
  • As a reverse mortgage it is a non-recourse (no personal liability) loan.  What this means is if the loan balance on the reverse mortgage is higher than what the fair market value is on the home when the loan is due and payable, the FHA MIP will cover the difference to the lender rather than the borrowers or their heirs having to come up with the difference.

If you are considering a reverse mortgage, look at the benefits of the reverse mortgage which include:

  • No monthly mortgage payments, therefore increase your cash flow.
  • With no monthly mortgage payments required the risk of default due to not being able to make monthly mortgage payments is reduced.  (Borrowers are still required to pay property taxes, keep hazard insurance on and maintain the property and pay home owners association dues if applicable.)
  • A line of credit option which has a growth rate making more funds available to you in the future, no other mortgage offers this.  Or you can use the funds to receive monthly payments either as tenure (life of the loan) or an amount set by you.
  • Non-recourse, no personal liability to you or your heirs.

While there have been different structures for calculating the MIP with past programs, currently, the up-front FHA MIP is .5% of the property value or mortgage lending limit, whichever is less if borrowing 60% or less of the Principal Limit within the 1st 12 months; 2.5% if borrowing more than 60% of the Principal Limit within the 1st 12 months. The on-going MIP is 1.25% of the loan balance.

Received benefits with Reverse MortgageTo summarize, while one is not making payments on their reverse mortgage, the FHA Mortgage Insurance Premium with the reverse mortgage provides benefits over conventional and HELOCs where mortgage payments are required, which cannot be received with any other mortgage.

For further details on the reverse mortgage contact us if you are in Minnesota.  As your local broker, we work with several lenders and provide free information and facts with no obligation, meeting in person whenever possible.  For other states, contact your local reverse mortgage specialist who is a broker, one who works with several lenders, has their Broker License/NMLS and preferably holds the Certified Reverse Mortgage Professional (CRMP) designation.

© 2016 Beth Paterson, CRMP, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety and without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-1oM

Related Articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

What do reverse mortgage originators do to earn their money?

Calculating reverse mortgage originator's timeOften stated, the reverse mortgage is expensive and the fee the originator makes is part of the reason. Originating reverse mortgages is not as easy as one, two, three but a very time consuming process whether one is a retail officer (works directly for the lender) or a broker (one who works with various lenders).  Note that brokers are often more involved in the process, not just taking an application and moving on to the next application.

My clients often make comments at the closing that they understand and appreciate all the work I did to get to the closing table.  To help you understand the work and time we, as reverse mortgage expert originators, put into originating and processing a reverse mortgage let me walk you through an outline and approximate time involved.  Note: While you may not read the outline word for word (yes, it’s long), you’ll at least have a good idea of the time involved for originating each reverse mortgage.  Make sure you go to the last five paragraphs for the conclusion.

  1. Take the phone call from one interested in a reverse mortgage.  Generally spend 30 to 60 minutes gathering information about the situation, why they are inquiring about the reverse mortgage, providing initial information, discussion options available, and getting information to run calculations to determine eligibility.
  2. We generally spend time on researching property values. This can be critical to determining the feasibility of completing a reverse mortgage if there is a significant mortgage balance outstanding and important even without debt payoff concerns just to give the homeowner the most accurate estimate of loan proceeds possible – 20 to 60 minutes.
  3. Enter information into computer program, run calculations, prepare informational folder – approximately 60 to 90 minutes.
  4. Drive 60+ minutes round trip to the prospect’s home for an initial educational meeting.
  5. Discuss their situation and educate them on the reverse mortgage, the various program options, i.e. adjustable rate vs fixed rate, monthly vs annual adjustable rate programs, cap on draw in 1st 12 months,  and possible other options – 1 to 3 hours.
    1. Leave a list of reverse mortgage counselors for the required FHA HUD insured Home Equity Conversion Mortgage (HECM) counseling.
  6. Generally there are numerous phone calls to answer additional questions.  These calls can be 15 minutes to an hour or more each call.
    1. Sometimes we talk with family members or have an additional 1 to 2 hours face-to-face with prospect and their family.
    2. If one is doing the HECM for Purchase, using the reverse mortgage to purchase a new home, we also meet with the real estate agent, building contractor, etc. – additional 1 to 2 hours with each along with numerous calls in between.
  7. Receive phone call that the prospect is ready to proceed with the loan.  Schedule application time and date – 10 to 30 minutes (longer if they have additional questions).
  8. Call prospect to gather information needed for application as well as which option they are choosing – 15 to 20 minutes.
  9. Enter complete information into computer program – 30 to 60 minutes.
  10. Prepare the full application package for signatures and a separate borrower set – 60+ minutes.
  11. Drive 60+ minutes round trip for the application.  Drive time can be 5 to 10 hours round trip if the client is outside the metro area.  (Some lenders will mail the application or use a notary however I believe that the face-to-face meeting provides better explanations of each of the forms one is signing.  Note that notaries, unless a licensed or registered mortgage originator, cannot answer any questions, they are there only to verify your identity and make sure you sign the application forms in the appropriate spots.)
  12. Spend 1 to 2 hours, sometimes longer to review information on application and get signatures.MN Reverse Mortgage Borrowers Signing Application
  13. If counseling wasn’t completed prior to the application, work with borrower to receive counseling certification with signatures of both the counselor and the borrower(s) which is needed prior to starting the processing of the loan – 15 to 30 minutes.
    1. Make phone calls to have the signed counseling certificate faxed – 15 minutes.  Or will drive to pick up certification – another 60+ minutes round trip plus 10 to 15 minutes with borrower.
    2. May need to contact counselor for corrections on address or correct names or Power of Attorneys – 15 to 30 minutes.
  14. Review file, making sure everything is collected and prepare for submitting for processing – 30+ minutes.
  15.  Start processing.  We are a reverse mortgage broker (one who works with more than one lender) and we process the loans in our office, we don’t send them off somewhere to another office or state to be processed.  While the processor is different than the originator, the originator of a broker is often involved in the facilitating the processing by working with the processor and the borrower through to the closing and funding, not just taking an application.
    1. Enter information into processing software program (one we have developed on our own) – Processor: 30 to 45 minutes.
    2. Request FHA Case Number – Processor: 10 minutes.
    3. Order Title Report – Processor: 10 minutes.
    4. Order appraisal from Appraisal Management Company – Processor: 10 to 15 minutes.
    5. Order Insurance Binder – Processor: 10 minutes.
    6. Pull Flood Certificate – Processor: 10 minutes.
    7. Pull Credit Report – Processor: 10 minutes.
    8. Pull other required documentation – Processor: 10 minutes each when necessary.
    9. Review Title Report when received – Processor and Originator: 15 to 30 minutes.
    10. Review appraisal when received – Processor and Originator: 30 minutes.
    11. Review Insurance Binder – Processor: 10 minutes.
    12. Review Flood Certificate – Processor: 10 minutes.
    13. Review Credit Report – Processor: 10 minutes.
    14. Request any changes if necessary – Processor: 10 minutes for each change that is necessary.Reverse Mortgage Borrower talking with MN Reverse Mortgage Loan Officer
    15. Phone calls with borrower for clarifications on any information that is on title, credit report, etc.   For example if a mortgage is on title that we didn’t know about, showing taxes weren’t paid, a judgment is on title or the credit report – Originator: 15 to 30 minutes each call; sometimes 3, 4 or more calls.
    16. When appraisal is received, enter new value, if repairs are required, etc. in software program for calculations – Originator: 15 to 30 minutes.
    17. Update processing software program with changes – Processor: 10 to 15 minutes.
    18. Call borrower to advise borrower of appraised value, required repairs if any, and any calculation changes – Originator: 15 to 30 minutes.
      1. Or up to several hours based on the appraised value, repairs, or other factors, the borrower decides a program change would be in their best interest (i.e., a change from fixed rate to adjustable rate), or contractor bids or additional inspections are needed for repairs.
    19. Prepare re-disclosure for borrower – Originator: 15 to 30 minutes.
      1. Or up to several hours or more if, based on the appraised value or other factors, the borrower decides a program change would be in their best interest (i.e., a change from fixed rate to adjustable rate).
    20. Mail re-disclosure to borrower – Originator: 10 to15 minutes.
    21. Review all documentation to make sure everything needed is in the file for underwriting – Processor: 20 to 30 minutes.
      1. Multiple follow up calls to the borrower may be necessary to remind them and/or advise them on missing, corrected or additional documents that are necessary (i.e., SS card shows maiden name, etc) – Originator: 10 to 20 minutes each call.
    22. Scan and submit file to underwriting – Processor: 15 minutes.
    23. Request final fees from title agent – Processor: 10 to minutes.
    24. Address any underwriting conditions by contacting title company, appraisal management company, borrower, or making other necessary changes – Processor: 30 minutes to several hours depending on the conditions.  Conditions are required so that HUD will insure the loan and the investors will provide the funding.
    25. Have borrower sign letterof commitment – required in MN to be signed and dated by borrower and can’t close for 7 days – Originator: 60+ minutes round trip to get borrower’s signature plus 10 to 15 minutes with borrower.  Can be done via fax or scanned and emailed if borrower has this capability.  If they live outside the metro area and don’t have capability to fax or scan and email the commitment will be done through the mail delaying the time for the closing (not what the borrowers want at this point).
    26. Gather, review and Submit changes/conditions to underwriter – Processor: 10 to 15 minutes.
    27. Discuss with borrower how they want their reverse mortgage funds and their availability for closing – Originator: 15 to 30 minutes.
    28. Schedule closing according to availability of title agent/signer (and possibly a notary), borrower and loan officer and lender’s closing department’s timing requirements, and possibly with family members and/or Power of Attorney (POA) – Processor and Originator: 30 to 40 minutes  each of the phone calls.
    29. Prepare closing document request to send to lender – Processor: 2+ hours.
    30. Receive closing documents, review that the numbers match those in our program; make sure title company’s and lenders numbers match- going back and forth between those involved – Processor: 2+ hours.
    31. Attend closing.  We believe in attending the closing with our borrowers to assist in explaining the closing documents.  We generally close at borrower’s home for their convenience or would drive to the title company’s office – Originator: 60+ minutes round trip drive time.   Drive time can be 5 to 10 hours round trip if the client is outside the metro area.
    32. Closing with borrower – 1 to 1 ½ hours.MN Reverse Mortgage Borrower Signing Closing Documents
    33. Follow up on funding conditions, i.e. missed signatures or documents,  if there are any (we rarely have any) – Processor: 30 to 60 minutes.
      1. If necessary, we may make another trip to the borrower’s home to get a signature on a document in order to keep on schedule for funding) – Originator: 60+ minutes round trip drive time.  If outside of the metro area we will assist borrower via phone and having sent over-night the necessary documentation – 60+ minutes.
    34. Keep borrower advised of funding status, i.e. when funds were wired to their bank and payments made for paying mortgages, taxes, etc. – Originator: 10 to 15 minutes per phone call, generally 2 calls.
    35. Once funded, send thank you letter – Originator and Processor: 15 minutes to prepare and mail.
  16. Answer questions from borrowers during the life the loan – generally 15 to 30 minutes each call.  We often talk with our borrowers once or twice a year.

What is described above is an ideal no-problem/issues loan. The majority of our loans can have multiple issues that increase our time investment significantly including POA, Conservatorships, Trusts, non-borrowing and non-occupying individuals on the title, private liens and a long list of property issues including manufactured homes, condos, rural properties, repairs, etc. These can result in additional huge time requirements on the originator’s and processor’s part.

We also continually market for new clients meeting with referral sources and reverse mortgage prospects (some of whom decide to wait or not do the reverse mortgage), as well as other marketing efforts.

A good loan originator will take time to meet with the prospects, educate them, their families and advisors about the various reverse mortgage programs and options.  They will also be familiar with the processing and assist with the processing as well as be available to answer questions even after the loan is closed.  Originators, processors, underwriters, lenders, title companies and their settlement agents, and all involved in the loan process need to be compensated for their time, experience, and expertise.

The originator does NOT receive the full fee collected.  The fee received by the reverse mortgage broker covers the originator’s salary, the processor’s salary, overhead for the business such as computers, office supplies, copiers, health insurance for employees, taxes, licensing, marketing expenses, etc.  Originating a loan is not charged by the hour but this gives an idea of the hours involved for the originating and processing reverse mortgages.

As we go through the application and process, my borrowers, recognize the time we put into helping them with their reverse mortgage and don’t question the fee we are paid. I hope this outline helps you also understand that it is a time consuming process and the reason the fees are what they are. And when broken down “all that money” is not really all that much compared to the time involved.

© 2015 Beth Paterson, Beth’s Reverse Mortgage Blog,651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-1a2

 

Related Articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Surprise! Reverse Mortgage Closing Costs Actually Compare to Conventional Mortgage Costs

Reverse Mortgage Closing Costs Compare to Conventional MortgageIt seems like every article, report or someone you talk with states the reverse mortgage  closing costs are high.  Have you looked at closing costs on a conventional home mortgage?

As with a conventional home mortgage (called a “forward” by HUD), the closing costs for reverse mortgages may vary depending on the home value and the complexity of the loan.  Let’s compare the costs side-by-side for a Home Equity Conversion Mortgage  or HECM and a conventional/forward mortgage.

The third party and recording fees are standard for any loan.  Keep in mind that there has to be a cost involved because everyone in the transaction needs to be paid for their services.  If the costs on a mortgage aren’t paid up-front then they’ll be paid over time with a higher interest.  Look at an estimated comparison based on a Minnesota home valued at $200,000:

Third Party Fees Reverse FHA Forward Forward FHA
Appraisal $500 $450 $500
Credit Report $25 $25* $25
Flood Certification $10 $10* $10
Courier Fee* $35 $35* $35
Escrow, Settlement, or Closing $275 $275 $275
Abstract or Title Search $110 $110 $110
Title Exam $110 $110 $110
Document Preparation $125 $125* $125
Title Insurance $475 $392 $392
Endorsements $50 $50* $50
Recording Fees $92 $46* $92
County/Mortgage Registration Tax $295 $384 $384
Plat Drawing $60 $60 $60
Name Search $35 $35 $35
Special Assessment Search $35 $35 $35
Counseling Fee $125 N/A N/A
TOTAL THIRD PARTY FEES $2,357 $2,142 $2,238

* These fees are included in the Qualified Mortgage (QM) Rule; included in as part of the “Closing Costs” under Lender Fees.

Now let’s compare the Lender Fees:

FHA’s Mortgage Insurance Premium (MIP) is paid directly to FHA.  The FHA reverse mortgage includes a .5% or a  2.5% initial mortgage insurance premium, determined by the funds being drawn in the first twelve months.  The advantages with FHA insuring the reverse mortgage include:

  • Guaranteeing the funds are available for you during the term of the loan.
  • Guaranteeing the reverse mortgage lender against default or shortfalls means the interest rates are lower compared to other mortgages for the benefits one receives with the reverse mortgage.
  • Providing a line of credit growth rate (available only with reverse mortgages).
  • As a reverse mortgage it is a non-recourse (no personal liability) loan; the FHA MIP will cover the difference to the lender rather than the borrowers or their heirs having to come up with the difference

The origination fee is what the originating lender receives to cover the loan officer’s compensation, overhead to run the business, i.e. staff salaries, administration costs, computers, electricity, office supplies, marketing expense, gas mileage, health insurance of employees, etc..  The origination fee also includes the processing and underwriting costs which are generally separate and charged to the borrower on forward loans.  HUD regulates the reverse mortgage origination fee to be 2% of the 1st $200,000; 1% thereafter with a cap of $6,000.  With a minimum of $2,500.

In some situations the lender will offer no or a reduced origination fee however the interest rate will be higher than if one pays the origination fee.

The reverse mortgage fees are based on the full home value because over time borrowers can access more than the home value at the time of origination.  One is essentially borrowing the interest and mortgage insurance premium each month because they are not making a payment.  And as one draws from their line of credit or through monthly payments the loan balance will increase making the loan amount higher.

An estimate based on a $200,000 home value (based on loan amount at 80% for the Forward loans):

LENDER FEES REVERSE FHA FORWARD FORWARD FHA
Origination/Points $4,000 $4,800* $1,600
MIP $1,000** $0*** $2,800
Administration Fees $0 $900* $900
SUBTOTAL LENDER FEES $5,000 $4,800 $5,300
Prepaid Interest**** N/A $375 $375
TOTAL LENDER FEES $5,000 $5,175 $5,675

*QM Rule closing costs cannot exceed 3% of the loan amount.  Number of points are directly related to interest rate charged; the more points paid the lower the interest rate; the lower points paid, the higher interest rate.
** Based on .5% – taking 60% or less within the 1st 12 months.
*** Conventional loans may have a Private Mortgage Insurance fee.
**** Forward loans have up-front prepaid interest due for remaining days in the month of closing; this is an example amount.  Funds will also be needed up-front to set up escrow.

TOTAL LOAN FEES REVERSE FHA FORWARD FORWARD FHA
$7,357 $7,026 $7,913

NOTE THE DIFFERENCE IS BASICALLY THE FHA MORTGAGE PREMIUM!  Refer to above comments on the benefits of FHA insuring the reverse mortgage.

The fees associated with the reverse mortgage are fully financed as part of the loan with no out of pocket expenses other than the FHA appraisal.  (As of 2010 Appraisal Management Companies must be used to order and process the appraisal.  This fee is required to be paid for by borrower up front or “out of pocket.”)  All of the fees for reverse mortgages and forward mortgages must be disclosed on the Good Faith Estimate (GFE).

When considering whether to do a forward mortgage or a reverse mortgage you must consider if you can even qualify for a forward mortgage; then if you can make the payments over time.  For example, what happens if “life happens,” could you continue making those payments or would you be facing foreclosure?

You also need to consider that if you do a forward mortgage now (if you even qualify), you’ll be paying the closings costs on that loan and then when you need more funds in the future and you refinance you’ll be paying the closings costs again.

Whereas with the reverse mortgage you pay the closing costs up-front and then without paying closing costs again you have access to more funds through your life as long as you are living in the home as your primary residence.  The additional funds would be either through monthly payments, a line of credit if that is the type of loan you have chosen.

Consider the benefits of the reverse mortgage which include:

  • No monthly mortgage payments, therefore increase your cash flow.
  • With no monthly mortgage payments required the risk of default due to not being able to make monthly mortgage payments is reduced.  (Borrowers are still required to pay property taxes, keep hazard insurance on and maintain the property and pay home owners association dues if applicable.)
  • A line of credit option which has a growth rate making more funds available to you in the future, no other mortgage offers this.  Or you can use the funds to receive monthly payments either as tenure (life of the loan) or an amount set by you.
  • Non-recourse, no personal liability to you or your heirs.

Now that we’ve compared the costs side-by-side, are you surprised that they are comparable to a conventional loan?

Comparison of fees first published 2009; Updated 2014; updated 12/3/2014
© 2009-2014 Beth Paterson, Beth’s Reverse Mortgage Blog,  651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-Z3

Related articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

You’ve Decided To Do A Reverse Mortgage… Should You Do The HECM Standard or The HECM Saver?

Deciding between HECM Standard and HECM Saver

AS OF OCTOBER 1, 2013 THE HECM STANDARD AND HECM SAVER PRODUCTS ARE NO LONGER AVAILABLE.

Deciding between the different options of the reverse mortgage can be challenging and certainly depends on your situation.  The Home Equity Conversion Mortgage, or HECM, is the most common reverse mortgage and only one available in Minnesota.  Before looking at the difference between the HECM Standard and HECM Saver, let’s look at the similarities.

A mortgage just like any other mortgage, the reverse mortgage offers special terms for seniors home owners 62 and older.  Advantages for seniors are with the reverse mortgage there are no income or credit score requirements to qualify and no monthly payment requirements. Borrowers are responsible for paying property taxes and insurance.

The Principal Limit or maximum loan amount is determined by the home value or FHA Lending Limit, the age of the youngest borrower (the older one is the more they can receive), the Expected Interest Rate, and the program chosen.

The funds available can be received in a lump sum, monthly payments, or a line of credit.  The monthly payments can be structured as one needs or for life as long as the home is the primary residence.  Funds in the line of credit grow so more funds can be available in the future.

The borrowers keep the title to the home and are responsible for property taxes, insurance, and maintaining the home.  Unlike a conventional loan the interest accrues, increasing the balance with no mortgage payments due until the home is no longer the primary residence of the borrower(s).  The repayment amount is the lesser of the loan balance or fair market value of the home.  As a non-recourse loan there is no personal liability to the borrowers or their estate for repayment,.  If there is remaining equity, it goes to the borrowers or their heirs.

One can have a trust, life estate, or receive Medicaid (Medical Assistance in Minnesota), Elderly Waiver or other public benefits.*  In the case of a couple even if one of the borrowers goes into the nursing home or passes away, the other one can stay in the home and the loan isn’t due until both borrowers are no longer in the home as their primary residence.  Not considered income, Social Security and Medicare are not affected.

*Check with legal advisor for your situation.

With no limitations on how the funds can be used, through the years hundreds of thousands of seniors have benefitted from the reverse mortgage allowing them to stay in their home and have security, independence and control.

Because the closing costs are up-front, they are often perceived as high and often scare people away.  However, as with a conventional loan, there are traditional closing costs including an origination fee, appraisal, title fees, title insurance and recording fees.  As a FHA insured loan, with the HECM borrowers also pay the FHA Mortgage Insurance Premium (MIP).

The HECM Standard is the original HECM reverse mortgage, first insured by FHA in 1988.  In 2010 the Saver was introduced.  The Saver has a reduced up-front FHA MIP of 0.01% compared to 2.00% for the Standard.  But it also reduces the Principal Limit available to borrowers.  While the Saver may be appealing because of the lower up-front MIP, in the long run it may not be the best option.

Initially Karen liked the idea about the reduced closing costs of the HECM Saver.  As we compared the HECM Standard and HECM Saver she has a different perspective.

With the HECM Standard Adjustable Rate she would receive over $13,000 more than the HECM Saver Adjustable Rate and $12,000 over the Saver Fixed Rate based on her home value of $170,000.  The Fixed Rate requires that all funds be drawn as a lump sum at closing vs having the flexibility of monthly payments, line of credit, lump sum or a combination of these with the Adjustable Rate.

Because she didn’t have any mortgages to pay off or other needs for all funds initially, pulling all the funds out in a lump sum with the HECM Standard Fixed Rate or Saver Fixed Rate (the only fixed rate option available as of April 1, 2013) is not the best option for her situation.  So it came down to deciding which of the two Adjustable Rates would best fit her situation.

Being Karen plans on staying in her home for many years to come, when looking at the estimated Amortization Schedules, the HECM Standard Adjustable Rate option is more advantageous for her.  With the higher funds available initially with the HECM Standard, she could leave funds in the line of credit to use as she needs.  The line of credit grows so more funds become available over time meaning she can access more over time.

Or with the tenure monthly payment option she would be able to receive more in her monthly payments as long as she remains in the home as her primary residence.

If the interest rate is higher on the HECM Saver, the increased costs of the MIP up-ftont MIP for the HECM Standard is diminished over time when compared to the HECM Saver by the lower interest rate it has versus the HECM Saver.  But even if the interest rate is the same on the two adjustable rate programs, less funds are available up front which would mean if in the future she needed more funds she would need to refinance, paying closings costs a 2nd time.  Being she plans to stay in the home for many years to come, the HECM Standard providing more available funds initially will best suit her situation.

The HECM Saver could be beneficial to those who don’t want to pay as much in the up-front closing costs but also don’t want to use as much equity from their home.  It can be ideal if one plans on moving in a shorter period of time or has a higher home value and wants to preserve more of the equity.

HECM Saver Most AdvantageoHECM Saver Most Advantageous When Moving in 2 yearsusMark and Margaret are considering moving to a one-floor home in two to three years but needs some extra cash flow now.  The HECM Saver with the lower up-front MIP is more advantageous for their situation.  This would preserve some of their equity for when they sell.  And at that time
they could use the HECM for Purchase program to purchase their new home without having monthly mortgage payments.

Before assuming the lower up-front MIP of the HECM Saver is the best option, consider your long-term goals and needs, look at the calculations and Amortization Schedules to determine which is going to the most advantageous for your situation.  While we can’t predict the future, reviewing the options can help you make better plans for your future.

©2013 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-YZ

*As of April 27, 2015 income and credit are used for the Financial Assessment to determine borrower’s ability and willingness to pay property taxes and insurance into the future

Related articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Let Me Educate You On Adjustable Rate Reverse Mortgages

Reverse Mortgage Interest RateWith the April 1st elimination of the FHA Home Equity Conversion Mortgage (HECM) Standard Fixed Rate, the Adjustable Rate will once again be the most common choice of reverse mortgage borrowers.  While adjustable rates mortgages have gotten a bad rap they should be understood and considered with reverse mortgages.  Let me educate you.

A mortgage just like any other mortgage, the reverse mortgage offers special terms for senior home owners 62 and older.  Advantages for seniors, are with the reverse mortgage there are no income or credit score requirements to impact the interest rate and no monthly mortgage payment requirements.  The non-recourse loan is due and payable when the home is no longer the primary residence of the borrower(s) or on their 150th birthday.

To understand the programs and interest rate options, first you need to know how the loan amount is determined.  With the reverse mortgage the Principal Limit or maximum loan amount at the time of origination is determined by the home appraised value or FHA’s Lending Limit ($625,500 through 2013), the age of the borrower (the older one is the more they can receive), and the Expected Interest Rate of the program chosen.  The Expected Interest Rate is only used to determine the loan amount it is not necessarily the same as the interest rate on the loan.

The funds available can be received in a lump sum, monthly payments, a line of credit, or a combination of these.  The monthly payments can be structured as one needs or as tenure payments (for life) as long as the home is the primary residence of at least one of the borrowers.  Funds in the line of credit grow so more funds can be available in the future.

Prior to 2008 the only reverse mortgage option was an adjustable rate.  In 2008 HUD introduced the HECM Fixed Rate.  And in October 2010 the HECM Saver was introduced which reduces the up-front Mortgage Insurance Premium (MIP) but also has a lower Principal Limit or loan amount; generally the HECM Saver has a higher interest rate as well.  The HECM Saver is available as an adjustable rate option and a fixed rate option.  The programs that have the full up-front 2% FHA MIP are called Standard, and are available in the adjustable and fixed rate programs (through April 1, 2013 when the Fixed Standard will be eliminated).

The Fixed rate is often a favorite option however with the reverse mortgage it requires that all the funds be drawn in a lump sum at closing which isn’t the best option for everyone’s situation.

The bad rap on adjustable rates occurred with conventional mortgages because when the interest went higher so did the monthly mortgage payments.  And this impacted many who couldn’t afford the higher monthly mortgage payments.  Let’s look at why  the reverse mortgage is different and should be considered as a viable option for senior homeowners.

  1. Because monthly mortgage payments are not required with the reverse mortgage, having the rate change doesn’t impact one’s monthly payment and/or cash flow.
  2. The Adjustable Interest Rate is the option that offers receiving funds as monthly payments, a line of credit, lump sum or a combination of these.
  3. Having more flexibility with how the funds are drawn is beneficial to borrowers.  If you don’t have a need for all the funds up-front then leaving them in a line of credit, which has a growth rate, or structuring monthly payments to your needs are more favorable options.
    • The growth rate on the unused portion in the line of credit is determined by the current interest rate on the loan plus 1.25.  For example if the current rate is 2.5%, the growth rate will be 3.75%.  If/when the interest on the loan increases so does the growth rate on the line of credit, meaning even more funds become available to the borrower over time.
  4. Because it is a loan against the property, not considered income, if one is receiving or will receive Medicaid (Medical Assistance in Minnesota) in the future, the adjustable rate is also more favorable, allowing you to draw funds as needed rather than as a lump sum which could impact receiving Medicaid.
  5. Taking funds as periodic payments means interest and the on-going MIP is accruing on the loan balance at a slower pace vs taking funds as a lump sum, especially when there isn’t a need or better use for lump sum funds.
  6. Monthly mortgage payments are not required however you have the option of making payments.  When the payment is made it reduces the loan balance and with the adjustable rate it is applied to the line of credit and available for future draws.
  7. The adjustable rate is low right now, and yes, it can adjust and be higher in the future, however it only impacts the amount due when the loan is due and payable.  And there is a cap of 10 points higher than the initial interest rate at closing.  For example, if the interest rate at closing is 2.5%, the cap is 12.5%.
  8. What we don’t know is when the rates will increase or how high they will increase but with the lower rates now, even if the rates do increase substantially the interest expense over the life of the loan will be tempered by the current low interest rates.
  9. And even if the reverse mortgage interest rate does go up, as a non-recourse loan when the loan is due and payable if the loan balance is higher than the home can be sold for, the borrower or the estate will not need to come up with the difference.  If the home can be sold for more than the loan balance due, the equity goes to the borrower or their estate.

Reverse Mortgages get the thumbs upWith an understanding you can see why the reverse mortgage, even with an adjustable rate, can be favorable to senior homeowners.

The HECM Saver is available in the adjustable rate and will remain an option with the fixed rate.  So if you really want a fixed rate you will still have the option, just remember less funds will be available and the interest rate is likely to be higher.

When considering a reverse mortgage review all the options, Adjustable Standard, Adjustable Saver or Fixed Saver, and decide which is best for your situation.

©2013 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-CD

Related articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Reverse Mortgage Features and Terms Summary

Reviewing Reverse Mortgage DocumentsThere are many loan documents with the reverse mortgage (all mortgages actually) and it’s hard to remember all the details through the life of the loan.  To help you have a better understanding initially as well as be a reference in the future, this article summarizes the reverse mortgage features and terms.

  • A reverse mortgage is a mortgage or lien against your property allowing you to use the equity in your home.
  • Monthly mortgage payments are not required however you are responsible for property taxes and hazard insurance.
  • Through FHA, the Home Equity Conversion Mortgage (HECM) is a government insured program and regulated by HUD.
  • As a loan against your property, the funds are not considered income so Social Security and Medicare are not affected; and generally SSI and other public benefits are not affected; Medicaid can also be received under certain situations – consult with legal services for your situation.
  • Generally the funds received are considered tax free – consult your tax advisor regarding your situation.

Who Owns Your Home  

  • You retain title and remain a vested owner of your property.
  • You retain all rights and responsibilities of home ownership, including property maintenance, tax and insurance payments, etc.

Borrower Protection

  • Should the lender default, FHA will assume the responsibilities of the lender and guarantees funds are available to borrowers according to terms of the loan.
  • As FHA loan, interest rates are lower than they otherwise would be on a reverse mortgage.
  • Non-recourse: Borrower/Homeowner or the estate will never be obligated for more than the fair market value of the property.

Adjustable Interest Rate – HECMs

    • If you have selected an adjustable rate product, your interest rate may change over the life of the loan.
    • There is a lifetime cap on the rate; for the monthly adjustable rate it is 5 or10 points (depending on the lender) and for the annual rate it is 5 points over the initial rate at the time of closing.
    • The interest rate may adjust annually (maximum of 2 points with each annual change) or monthly. The current and future rates will be provided on your monthly statement.
    • The rate is based on the LIBOR index.

Interest is charged against your loan balance only. Unused line of credit and/or unused term/tenure payments will not accrue interest.

Fixed Interest – HECMs    

  • If you have selected a fixed rate product, your interest rate is fixed and will not change over the life of the loan.

Ongoing Costs

  • Interest accrues only on amounts borrowed.
  • Monthly charge for FHA Mortgage Insurance Premium (MIP) – 1.25 per year on loan balance (added to loan balance).
  • All costs, charges, and accrued interest are added to loan balance.
  • Essentially you are borrowing these funds each month because you are not paying them monthly; this is why the loan balance increases over time.

Line of Credit (if applicable)    

  • Available credit of unused portion of line of credit grows over time at the current applied interest rate plus 1.25.  This is not interest, but a growth rate.
  • Interest is not charged on unused portion of line of credit.
  • Line of credit funds advances must be requested in writing from the lender/servicer.  Lender has 5 business days to process your request.

Term/Tenure Payments (if applicable)

  • If you have selected monthly Term or Tenure Payments, these monthly advances will be paid to you on the first business day of each month beginning the month after loan closing.
  • Interest is not charged on un-advanced monthly term/tenure funds.

Prepayment

  • Although monthly or periodic mortgage payments are not required, you may make full or partial payments at any time.
  • Please contact the lender/servicer for payment address and information.
  • Partial payments reduce the loan balance due.
  • Partial payments on adjustable rate HECM’s will create or increase the line of credit and these payments can be borrowed in the future.
  • Payments on fixed rate HECM’s are permanent payments.
  • Payment in full will terminate the loan and eliminate any available term/tenure payments and/or line of credit.

Due and Payable

  • No payment is required until/unless one of the following occurs:
    • Borrower(s) no longer occupy the home as a primary residence.
    • Borrower(s) no longer owns the home.
    • All borrowers have passed away.
    • Property taxes are not kept current.
    • Homeowner’s/Hazard insurance is not kept current.
    • Flood Insurance (if applicable) is not kept current.
    • HOA dues (if applicable) are not kept current.
    • Required repairs are not completed.
    • Property is not properly maintained.
    • Title vesting changes are made.

Upon Death of Borrower(s)

  • If there is a surviving borrower(s) continuing to occupy the home, the reverse mortgage continues without any changes.  If a sole borrower dies or there are no surviving borrowers or a non-borrowing spouse, the reverse mortgage becomes due and payable in full. (Non-borrowing spouses see HUD Mortgagee Letter 2015-15 and check with the servicer regarding their rights)
  • Heirs/estate should contact the lender/servicer within 30 days to provide notice of the death.
  • A reverse mortgage is not transferrable to the heirs or estate.
  • The loan may be repaid from sale of property.
  • If heirs wish to keep the home, they may satisfy the debt by paying the lesser of the mortgage balance or 95% of the FHA appraised value of the home at that time.
  • Most lenders are allowing up to six months for heirs to settle the estate and repay the reverse mortgage (but timely communication with the servicer is required).  Where justified, HUD, who regulates the HECM,  may approve extensions beyond this time up to a total of 12 months.

Your Responsibilities

  • Pay property taxes.
  • Maintain homeowners insurance on property.
  • Maintain flood insurance (if applicable) on property.
  • Pay HOA dues (if applicable).
  • Complete required repairs timely.
  • Maintain property.
  • Not make changes to title vesting.
  • Return the annual occupancy certificate to lender.
  • Provide proof your property taxes have been paid annually.
  • Provide proof your property insurance has been paid.

When To Notify Your Lender

  • If you change your insurance provider.
  • If you change your bank for direct deposits.
  • If you are putting the property into a Trust.
  • Any other changes to the property.
  • If there is a claim from your property insurance.
  • When a Power of Attorney (POA) is being implemented to make decisions on your behalf.

©2013-2015 Beth Paterson and Greenleaf Financial, LLC, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-Cr

Related articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

You Don’t Need To Have A Mortgage To Do A Reverse Mortgage

A reverse mortgage is often used to pay off a mortgage which improves the homeowner’s cash flow by eliminating their mortgage payments.  But you don’t have to have a mortgage to “reverse the mortgage.”

You Don't Have To Have A Mortgage To Benefit From A Reverse MortgageMy borrower, Marjorie didn’t have a mortgage on her home but did a reverse mortgage to be prepared for future needs.  She used some of the initial funds to purchase hearing aides and left the rest in a line of credit.  She was happy with her decision to do her reverse mortgage because she now has security knowing she has funds available for her needs, independence to live on her own without relying on her family for financial support, she’s maintained her dignity of being able to pay her own bills, and continues having control of her life and the ability to make her own choices.  She recently took some funds from her line of credit to make a trip from Minnesota to California to visit her daughter who lives there – she wouldn’t have been able to do this without having her reverse mortgage.

A reverse mortgage is a mortgage with special terms for seniors 62 and older that provides them cash for whatever they need or want.  Monthly mortgage payments are not required and income or credit scores are not considered to qualify. The funds can be received in a monthly payment, paid to you, a line of credit with a growth rate, a lump sum or a combination of these.  The loan is due when the home is no longer the primary residence of the borrower(s) or on the 150th birthday of the youngest borrower.  The borrower is still responsible for paying taxes, insurance and maintaining the property.

A reverse mortgage doesn’t mean you are reversing a current mortgage, it means that rather than having to make payments on a mortgage, funds can be available to you without monthly mortgage payments.

The amount loaned is based on the appraised value (determined by a FHA licensed appraiser) or FHA Lending Limit, whichever is lower, the age of the borrower, the expected interest rate and the program chosen.  Any liens or mortgages need to be paid prior to determining the amount available in a line of credit, monthly payments or lump sum.

When there are no current liens or mortgages on a property, more accessible funds are available for borrowers.

As an example, with a $200,000 home value for a 75 year old person and the current interest rate on an adjustable loan (the program that offers the monthly payment, line of credit option, lump sum or combination option; the fixed rate requires all funds be drawn in a lump sum), the amount available after closing costs is $128,805.

The $128,805 can be left in a line of credit or taken in monthly tenure payments of $767, this means you are paid this amount each month as long as you are living in the home as your primary residence.Enjoying remaining at home with a HECM reverse mortgage

If there is a current lien or mortgage that needs to be paid, say in the amount of $50,000, the amount available after paying for the current lien or mortgage and the closing costs is $78,804 which can be left in a line of credit or $469 received in monthly tenure payments.

Either situation can provide security, independence, dignity and control for borrowers but with no current mortgage to be paid off, more accessible funds are available.  The funds can be used for whatever the borrower needs or wants, such as enhancing one’s retirement, home modifications or repairs, medical expenses, home care, or even just giving that extra elbow room.

Some pertinent facts about reverse mortgages:

  • You own the home, no one else does.
  • You won’t lose your home because of a reverse mortgage – you don’t have to make monthly mortgage payments.  If you don’t pay property taxes, insurance, maintain the home or abide by other terms of the loan, the loan may be called due and payable.
  • Tax-free money – consult tax advisor but make sure they know the facts about reverse mortgages
  • The most common reverse mortgage, HUD’s Home Equity Conversion Mortgage or HECM, and only one available in Minnesota, is government insured and funds are guaranteed to be there for you.
  • You or your heirs get to keep any remaining equity after the loan balance is paid off.
  • There is no personal liability to you or your estate when repaying the loan and the loan balance is higher than what the home can be sold for.
  • There are no out of pocket costs other than the cost of the appraisal.
  • Closing costs typically become part of the loan balance.  Closing costs compare to those on a conventional or “forward” mortgage – the difference is the FHA Mortgage Insurance Premium.
  • A credit report is pulled to check for any federal liens or debts that would be required to be paid.
  • You can’t access 100% of your home value at the time of your closing – the amount available is based on your age, your home value or FHA lending limit (currently $625,500), an Expected Interest Rate and the program chosen.
  • The funds may be received in a line of credit, lump sum, monthly payments or a combination of these.
    • Line of credit grows based on the current interest rate plus 1.25%
    • Monthly payments may be received as tenure payments (for life as long as the home is your primary residence) or structured to fit your needs.
  • Historically the interest rate is lower than conventional loans.

Just because you don’t have a current mortgage doesn’t mean a reverse mortgage wouldn’t be beneficial to you.  Consider having security knowing you have funds available during your retirement years with the benefit of improved financial health just like Marjorie did.

© 2012 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-YQ

Related articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

A Reverse Mortgage Can Really Be Compared To Your Smart Phone

Comparing Your Smart Phone To A Reverse MortgageI recently upgraded my phone to a “smart phone.”  There’s lots more features than my old cell phone, lots of “bells and whistles” as they say.  In fact the phone is so smart I’ve had to take classes and talk to the phone representative to learn now to use it and I still don’t understand all of the features.  So how does this compare to a reverse mortgage?

It’s often said that a reverse mortgage is complex and complicated which has a scare factor for some people, including by the Consumer Financial Protections Bureau (CFBP) who claims they are complex and consequently needs additional protections to prevent seniors from making unwise decisions.

At a recent meeting I asked how many understand their conventional mortgage and can explain the terms.  The response was laughs of embarrassment and shaking of heads, and comments that they can’t explain much more than there is interest and they have to make payments and when they are due.  They don’t understand how the interest rate or payment amount is calculated, generally don’t look at the fees or understand what they cover, the risks the lenders and/or investors take, etc.

Do you know how the interest rate and payment was determined on your mortgage?  Do you know what the fees were on your conventional mortgage?  When I’ve shared the Explanation of Closing Costs with borrowers, I’ve been told, “We’ve purchased many homes and no one has explained the fees like this so we understand them.”

The same when purchasing a car and getting financing, one looks at the features of the car but doesn’t necessarily pay attention to the terms of the loan to purchase the car they desire other than the interest and payment and when it’s due.

Yes, the reverse mortgage is “different” than what one usually thinks of for a mortgage.  Based on the FHA insured Home Equity Conversion Mortgage (HECM), the most popular reverse mortgage and only one available in Minnesota, the differences include:

  •  the interest rate is not determined by one’s income, assets or credit scores
  •  there are no monthly mortgage payments required,
  •  the loan is not due until the borrowers are no longer living in their home as their primary residence or on their 150th birthday and they are non-recourse
  • there are many protections including counseling by an independent third-party HUD trained and approved counselor

Like with your smart phone where you’ve had to read, study and get educated on the features and terms to enjoy the benefits, once one does some studying, gets the facts and details from a knowledgeable and experienced reverse mortgage specialist, and goes through the required counseling, one finds that the reverse mortgage isn’t that complicated and there are many benefits.

As with any purchase, a smart phone, a car, a mortgage, a credit card, even an appliance, one needs to be educated on what they are obtaining.  With knowledge one can make educated decisions for their situation and enjoy the benefits of the product without the fear that they are making an unwise decision.

© 2012-2014 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link: http://wp.me/p4EUZQ-YO

Related articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.

Are “Hefty Fees” Really A Drawback of the Reverse Mortgage?

Are Reverse Mortgage Closing Costs Really High?An all too common statement is that a drawback of the reverse mortgage is the hefty or high up front fees.  But are they really hefty?  Are the fees really a drawback?

First, have you looked at the fees to obtain a conventional mortgage?   Do you realize the reverse mortgage fees compare to a conventional mortgage with the FHA Mortgage Insurance Premium being the difference?  I’ve done side-by-side comparisons.

These comparisons reflect the third-party fees, including the appraisal, credit report, flood certificate, title fees, recording fees, Minnesota Mortgage Registration Tax, etc. are almost identical.  Actually because HUD regulates the fees, mark-up and junk fees or processing fees aren’t allowed so the third-party fees may even be a little less than a conventional mortgage.

Another fee associated with both the reverse mortgage and a conventional mortgage is the origination fee, the fee that covers the lender’s time and costs associated with originating the loan including: loan officer’s and staff’s salary, licensing, administrative costs, business overhead (computers, electricity, health insurance, marketing, processing, underwriting,) etc.  The underwriting fees are generally additional fees on conventional loans but have to be included in the origination fee on FHA reverse mortgages loans.

On a conventional mortgage one can “buy” a lower interest by paying a higher origination fee or a lower interest rate with a higher origination fee.  The reverse mortgage is similar however the rate versus paying an origination fee or not is determined by the product (fixed or adjustable rate) and what the lender sets as allowable.  For example, with the fixed rate one may have zero origination fee but the interest is a set amount determined by the lender or there may be a lower interest rate but the FHA allowable origination fee is included.  (2% of the first $200,000, 1% on thereafter, with a cap of $6,000).  Again the fee is comparable between a reverse mortgage and a conventional mortgage.

The fee that really makes the difference from a conventional mortgage is the FHA Mortgage Insurance Premium (MIP).  The most common reverse mortgage, and only one available in Minnesota, is the HUD Home Equity Conversion Mortgage or HECM.  With the Standard Reverse Mortgage the up-front MIP is 2% of the home value.  (The MIP on a forward FHA loan is currently 1.75%.)

The many benefits of paying the FHA MIP on the reverse mortgage include:

  • Guaranteeing the funds are available for you.
  • Guaranteeing the lender against default or shortfalls
  • Keeping the interest rates lower, the interest rates have historically been lower compared to other mortgages.
  • Providing a line of credit growth rate (available only with reverse mortgages).
  • Ensuring as a reverse mortgage it is a non-recourse (no personal liability) loan; FHA makes up the difference if the loan balance is higher than what the home can be sold for.
  • Requiring counseling by a third-party HUD trained and approved counselor.
  • The HECMs are highly protected.  See my Blog article “You Need To know Reverse Mortgage Borrowers Are Highly Protected.”

One must understand that the reverse mortgage is an open-ended term loan (the due date on the mortgage is the youngest borrower’s 150th birthday*) with no limit to how high the balance can grow and the collateral is only limited to the property (a non-recourse loan with no personal liability to the borrower or the heirs).  With FHA’s generous allowance of proceeds, not based on income, assets, or credit scores, some reverse mortgages will end up with loan balances higher than the value of the home either due to the current declining home values or the nature of the loan with no monthly payments being made and accrued interest and on-going FHA MIP (essentially one is borrowing these fees each month).  Therefore the MIP and other closing costs are necessary to make the program viable and are not a drawback to the reverse mortgage.

When comparing the costs of a conventional mortgage to the HECM Saver program which reduces the upfront MIP to .01%, the fees are essentially the same.  However, in exchange for the reduced upfront MIP, reverse mortgage borrowers receive fewer funds and the interest rate is higher.

It’s important to note that the fees become part of the reverse mortgage loan balance – there are no out-of-pocket fees other than the cost of the appraisal.  So borrowers are not required to come up with the money to cover the fees before they do a reverse mortgage.

If one thinks about it selling one’s home could also be considered expensive with similar fees to the reverse mortgage (the generally higher real estate agent’s commission and again the FHA MIP is the difference).  Are the real estate commission and closing fees a drawback to selling one’s home?

Besides looking at the costs of a conventional loan or selling one’s home, how expensive are credit cards?  While they don’t have up front costs, the interest on credit cards can be outrageous which over time this can make the credit card expensive.  We often find seniors have high credit card debt because that is what they are using to finance their living expenses.  The cost of credit cards don’t seem to be a drawback, people still get and use credit cards.

Reverse Mortgage benefits outweighed the costsIf a senior can’t afford to make mortgage payments, if they need funds for repairs, for home care or medical expenses, for daily living expenses, for the extra elbow room, funds to make that trip for a family reunion or wedding, or even to be able to check something off their bucket list, the benefits may outweigh the costs.  The security, independence, dignity and control and peace of mind received from the reverse mortgage may outweigh the costs.

Do you not refinance or purchase a home because the of the fees on a conventional loan?  And what about the costs of surgery?  Would you not have surgery if it would improve or save your life just because of the fees?  The cost of food is going up but do you do without food because of the costs?   Not if the benefits outweigh the costs, right?  Well, if the benefits of the reverse mortgage outweigh the costs, then the fees are not a drawback of the reverse mortgage.

*The reverse mortgage is due and payable when the home is no longer the primary residence of the borrower(s), i.e. when they sell, move, die.  The due date on the reverse mortgage is the 150th birthday of the youngest borrower rather than a 15 or 30 year term on a conventional mortgage.

© 2012 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

This material may be re-posted provided it is re-posted in its entirety without modifications and includes the contact information, copyright information and the following link:  http://wp.me/p4EUZQ-yM

Related articles:

Blog posts’ information is current as of date post published, program is subject to change in in the future. Contact us for current information, 651-762-9648.

This site or the information provided is not from, or approved by, HUD, FHA, or any US Government or Agency.