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.

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) –  .5% (1.25% on loans closed prior to 10/2/2017) 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 .5% (1.25% on loans closed prior to 10/2/2017).  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.

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.

Facts Are Needed About The 101 year-old Woman Who Did A HECM Reverse Mortgage And Was Evicted

Headlines give misinformation about HECM Reverse MortgagesThis last week headlines across the country talked about the eviction of a 101 year-old Detroit woman with a FHA insured HUD Home Equity Conversion Mortgage (HECM) reverse mortgage.  In reading the articles and viewing the TV media pieces I find that facts were missing or misconstrued about this situation and reverse mortgages.  While Ms. Texana Hollis is returning home, her story leaves a lot of misinformation about reverse mortgages and the benefits they provide to the many borrowers.  Let’s take a look at the misconceptions of Ms. Hollis situation.

  • Foreclosure/eviction of Ms. Hollis was not due to reverse mortgage but due to lack of payment of taxes, a requirement of the loan (all mortgages as a matter of fact).
  • Ms. Hollis son and POA facilitated her in getting the reverse mortgage but didn’t follow through on assisting in making sure the terms of the loan were followed, i.e. he or other family members ignored the requirements to pay property taxes, insurance and maintain the home.
  • I’ve seen statements such as “signed the house over to a reverse mortgage.”  A reverse mortgage is a mortgage with special terms for seniors 62 and older. The title remains in the borrower’s name – they are not signing the house over to anyone, they are taking out a mortgage with a lien against the property.  My blog article “Beware Of Reverse Mortgage Misstatements – The Fact Is Reverse Mortgage Lenders Do NOT Own The Home!” addresses this fact.
  • Articles state that the son failed to make payments on the mortgage.  Payments are not required on a reverse mortgage.  One of the special terms of the reverse mortgage is that the borrower can have access to funds without making monthly mortgage payments.  The loan is repaid when the home is no longer the primary residence of the borrower(s).  The amount repaid includes the funds received up-front or through monthly payments or draws on the line of credit along with the closing costs, interest and on-going FHA Mortgage Insurance Premiums (MIP).
  • Ms. Hollis’ reverse mortgage funds were used for home repairs.  It appears from several sources that they were also used by the son for his purchase of a car, donations to a church and other things.  If this is the case, this is financial exploitation, NOT the fault of the reverse mortgage and NOT reverse mortgage fraud as some articles indicated.
  • Statements such as, “Ms. Hollis only learned about the eviction when the police arrived and carried out her belongings” are misleading.  In reality loss mitigation notices were sent by HUD, however it appears that those who were taking responsibility to “assist” Ms. Hollis ignored these notices.  I’ve seen statements that her son who is her POA didn’t tell her about the notices because he “didn’t want to worry her.”  In some reports he has admitted to ignoring and throwing the notices away.  She personally may not have been informed of the eviction because her family intercepted the notices.  Don’t blame HUD or the reverse mortgage for actions of her family.  If her family didn’t respond to notices it is neglect on their part (i.e. the son/POA) – not HUD or the reverse mortgage.

And now let’s look at the facts of the misconceptions of reverse mortgages which have been shared along with this story and other media coverage.

  • The bank does not own the home and the title is not passed to the bank.  The title remains in the name of the borrower(s) as long as the home is the primary residence of the borrower.  If the borrower does not abide by the terms of the loan (pay property taxes, insurance and maintain the home, the home may go into foreclosure just as with a conventional mortgage.)
  • One report stated that a danger of the reverse mortgage is if one spouse passes or goes into senior housing, the other may have to pay back the loan.  In reality as long as one borrower remains in the home, the loan does not become due and payable until they, the second spouse, is no longer in the home as their primary residence.  If a non-borrowing spouse (one that is not on title with the reverse mortgage) is the one remaining in the home, yes, the loan is due and payable because the borrower (the one on title) is no longer in the home as their primary residence – this is the terms of the loan.
  • HUD Home Equity Conversion Mortgages (HECM) are FHA insured.  As with a conventional/forward FHA mortgage, borrowers pay an up-front Mortgage Insurance Premium (MIP) as well as an on-going MIP.  The benefits to FHA insuring 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.  If the loan balance is higher than what the home can be sold for at fair market value, FHA will cover the difference because one has paid the MIP.
    • 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.
  • “The Government will step in” is another statement I’ve heard.  The government doesn’t “step in,” borrowers are paying the FHA Mortgage Insurance to receive the above listed benefits.
  • And of course we have the all too common statement that reverse mortgages are expensive.  Unfortunately, many do not look at the costs of a conventional mortgage, they just make blanket statements without really doing the comparison as I have done.  I’ve written blog articles to address this misstatement:

I think it’s important to note that with a forward FHA mortgage, the up-front Mortgage Insurance Premium is 2.25% vs the 2% on the FHA reverse mortgage. So the forward FHA mortgage is more expensive than a reverse mortgage.

Ms. Hollis story has a happy ending, she is being allowed to return to her home of 50+ years according to HUD spoke’s person Brian Sullivan.  Unfortunately the story still led to a lot of misinformation and misunderstanding about reverse mortgages giving them a bad name.  It would be nice if the media would provide corrections and facts about these valuable and beneficial options for seniors.

Update September 24, 2011:  Facts are still needed!  The revere mortgage took a hit in the media with misinformation about this viable option for seniors yet we still don’t know if this was a reverse mortgage or a conventional/2nd mortgage that was on Ms. Hollis’ home.  However it appears it was NOT a Reverse Mortgage but a 2nd mortgage on the home… or maybe for non-payment of taxes.  Earlier in the week another article reported:

“Action News also found out the background on what really happened and why Texana and her son Warren Hollis were evicted from their home.

“At first, it was thought that Texana’s son had signed a reverse mortgage on the house or that maybe it was a back-taxes issue.

“It turns out that Warren took out a second mortgage on the home in return for $32,000. He claims the money was spent on repairs for the house. He also admits to buying a car with the money and donating some of the money to his church.

“He says the remaining $5,000 was used to pay a number of other expenses. Warren Hollis defaulted on the second mortgage and never told his mother what was going on or that he was receiving eviction notices and warnings. The news broke her heart and she had no time to prepare for being evicted.

“The house no longer belonged to Texana Hollis or her son Warren – who had been living with her. It belonged to HUD. The agency had asked for a court order to have the occupants removed from the home.

“One of the judges from the 36th District Court granted that order several weeks ago and the order was carried out on Monday.

And in another story it was reported that it was brought on by HUD due to many years of non-payment of taxes.

I wonder if we will ever know all the details and what type of mortgage it was or if it was for non-payment of taxes…
 

© 2011 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-u4

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.

Questions About Reverse Mortgages Continue Receiving Misinformation As Responses

Couple Want A Reverse MortgageRecently I saw a question on an on-line forum wondering if the questionnaire’s relative should be doing a reverse mortgage.  They stated that the relative who is in their mid-60’s and in great health recently remarried a woman who likes expensive things.  This relative evidently has a monthly fixed income of $8,000 and an expensive home and wants to do a reverse mortgage.  With concern over the new wife “bleeding him dry” they “want to protect him.”  They asked for others experience and opinions on reverse mortgages.

Now before you go off and start stating this person shouldn’t be doing the reverse mortgage because reverse mortgages are bad and/or expensive or the person should be able to live off of $8,000 a month as replies to the questions stated, read my reply:

There is a lot of misinformation about reverse mortgages.  Most articles in the media, politicians, so called “financial advisors” who write and/or comment about reverse mortgages and those mortgage professionals who don’t offer them, friends or neighbors with the statements that they are “bad” are based on their own opinions, not on the facts.  They have not talked with those of us in the reverse mortgage industry to get the facts.  So don’t base your opinion or decision on these sources.

You don’t go to a plumber if you are having health problems, right?  You go to a doctor, and not just a generalist but a specialist in the area of need.  Well the same should be true with a reverse mortgage – go to a reverse mortgage specialist to get the facts to make your decision.

See my blog post, “Seventeen Facts about Reverse Mortgages That You May Not Know.

A reverse mortgage is a mortgage with special terms for seniors 62 and older.  Some of the differences include income and credit scores are not considered to qualify and monthly mortgage payments are not required.  Rather than a 15 or 30 year term, the loan is due and payable when the home is no longer the primary residence of the borrowers or on the 150th birthday of the youngest borrower.  In addition, the reverse mortgage is non-recourse, which means if the loan balance is higher than what the home can be sold for there is no personal liability to the borrower or their heirs.  If the home is sold for more than the loan balance, the borrower or their heirs receive the difference.

Often thought of or stated as expensive, the costs are actually comparable to a conventional mortgage except for the FHA Mortgage Insurance Premium.  See a side-by-side comparison at “Comparing Reverse Mortgage Closing Costs To A Conventional Mortgage – You’ll Be Surprised They Are Not That Different.”  And because the interest rates are historically lower than conventional mortgages, in the big picture the reverse mortgage can be less expensive.

Generally seniors don’t qualify for a conventional mortgage.  And even if they do, one needs to consider that payments are required.  What happens if “life happens” and one can no longer make the payment?  They could be facing foreclosure.  I often get calls from those who took out a conventional mortgage and can no longer make the payments and now want to do a reverse mortgage.  Unfortunately, I often have to say that there are not enough funds from the reverse mortgage to pay off their current mortgage (a requirement of the reverse mortgage).  They would have been better to do a reverse mortgage in the first place.

Now with that said, just like anything, a reverse mortgage is not right for everyone.  While there are no limitations on how the funds can be used one should consider if they will have funds to cover taxes, insurance, maintaining the home as well as other needs in the future.

It sounds like in this situation there is more concern about the new wife’s spending habits.  Are you or others concerned about the new wife eating away at an inheritance?  Because reverse mortgage proceeds use the equity, there may be less inheritance for heirs – this can be considered a negative of the reverse mortgage.

Have a conversation about the reasons for a Reverse MortgageI would suggest a conversation with your relative to understand their reasons for a reverse mortgage.  Is the pension and income paying for the everyday lifestyle but they want extra to enjoy life such as traveling or modifying their home to be prepared for the future?  Do they have a financial and estate plan in place?  Do they have long term care insurance to cover needs of their future?  Have they talked with an elder law attorney to set up a will or trust to determine that the inheritance will go to his heirs and not all go to his new wife?

After helping them get the facts and looking at options, keep in mind it is his decision in the end.  You might check out, “Who Are We To Judge How Reverse Mortgage Funds Should Be Used?

Find a reverse mortgage originator who specializes in reverse mortgages (not conventional mortgages) who has experience and will provide you with the facts and details.  Look for one who has the client’s best interest in mind, not just their own.  Work with one who is local – not doing applications through the mail (for example I originate in Minnesota and meet with borrower’s and their relatives in person.).  And see if your relative will allow you to be part of the meetings with the originator and the counseling.  “What to Consider When Talking With Reverse Mortgage Lenders” will help you know questions to ask reverse mortgage originators and determine who you should have assist you with a reverse mortgage.

To get facts and details on reverse mortgages, explore my website, http://www.RMSIDAC.com and other articles on my blog, http://www.BethsReverseMortgageBlog.wordpress.com.

© 2009 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-tL

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.

Comparing Reverse Mortgage Closing Costs To A Conventional Mortgage – You’ll Be Surprised They Are Not That Different

Compare Closing Costs for Refinancing Your Home - A Reverse or 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.  However, with the reverse mortgage HUD regulates the fees and requires that only the actual cost may be charged to the borrower, they do not allow mark ups such as processing or servicing fees.  Look at an estimated comparison based on a Minnesota home valued at $200,000:

Third Party Fees Reverse FHA Forward Forward FHA
Appraisal $450 $400 $450
Credit Report $20 $20 $20
Flood Certification $16.50 $16.50 $16.50
Courier Fee* $25 $55 $25
Escrow, Settlement, or Closing $250 $250 $250
Abstract or Title Search $100 $100 $100
Title Exam $100 $100 $100
Document Preparation $100 $100 $100
Title Insurance $475 $475 $475
Endorsements $100 $100
Recording Fees $92 $46 $92
County/Mortgage Registration Tax $323 $480 $480
Plat Drawing $60 $60 $60
Name Search $30 $30 $30
Special Assessment Search $30 $30 $30
Counseling Fee $125 N/A N/A
TOTAL THIRD PARTY FEES $2,196.50 $2,262.50** $2,328.50

* Courier Fee is for sending a payoff on a current mortgage to the mortgage holder.

** These fees do not include all mark ups/processing fees so these may be higher when mark ups/processing fees are included.

Now let’s compare the Lender Fees:

FHA’s Mortgage Insurance Premium (MIP) is paid directly to FHA.  With the FHA HECM Standard this is 2% of the home value and 2 1/4% for a forward.  The FHA HECM Saver has a reduced MIP.  The advantages with FHA insuring the reverse mortgage include:

  • Guaranteeing the funds are available for you.
  • Guaranteeing the lender against default or shortfalls which means the interest rates are lower (currently under 3% on the HECM Standard Adjustable Rate) 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.

The origination fee is what the originating lender receives to cover the loan officer’s salary, 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.

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.

An estimate based on a $200,000 home value:

LENDER FEES REVERSE FHA FORWARD FORWARD FHA
Origination/Points $4,000 $2,000* $2,000*
MIP $4,000 $0 $3.500
Underwriting/Processing $0 $700 $700
SUBTOTAL LENDER FEES $8,000 $2,700 $6,200
Backend fee** $0 $2,000 $2,000
TOTAL LENDER FEES $8,000 $4,700 $8,200
Prepaid Interest*** N/A ++ ++

*Typical points on Forward loans are 0-4%; this example is based on $100,000 loan at 2% points.
** Forward loans often have a 1% back-end fee.
*** 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.

TOTAL LOAN FEES REVERSE FHA FORWARD FORWARD FHA
$10,196.5 $6,952.50 $10,528.50

Note:  THE DIFFERENCE IS BASICALLY THE FHA MORTGAGE PREMIUM!  Refer to above comments on the benefits of FHA insuring the loan.

Because the majority of conventional loans being done now are FHA insured, the reverse mortgage is actually less expensive.

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 must be disclosed on the Good Faith Estimate (GFE).

Keep in mind that there has to be a cost involved because everyone in the transaction needs to be paid for there services.  If the costs on a mortgage aren’t paid up-front then they’ll be paid over time with a higher interest.

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.  These together can equal or exceed the total of the closing costs on the reverse mortgage.

Whereas with the reverse mortgage you pay the closing costs upfront 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.

In the big picture the cost of the reverse mortgage is less than a forward mortgage over time because the interest rate is lower on the reverse mortgage.  Therefore typically it doesn’t take too long for a forward mortgage to make up and then exceed what difference there is in closing costs of the reverse mortgage.

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

Article updated May 2012

© 2011-2012 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-t4

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 Originate reverse mortgages…What Do You Do to Deserve all that money?

Often 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.

As we were going through the application and process, Joan, a recent client, said, “I sure hope you are being paid well for all this time and effort you put into my loan.” I hear these comments from most all of my clients.

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 though 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 providing initial information 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 45 to 60 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 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 talk with family members or have an additional 1 to 2 hours face-to-face with prospect and their family.
  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 – 20 to 30 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 however I believe that the face-to-face meeting provides better explanations of each of the forms one is signing.)
  12. Spend 1 to 2 hours 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 and 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. Originators now need to make contact with the chosen counselor, prior to the counseling session, and provide certain financial information to the counselor (calculations, etc) – 15 minutes.
    2. Make phone calls to have the signed counseling certificate faxed – 60 minutes.  Or will drive to pick up certification – another 60+ minutes round trip plus 10 to 15 minutes with borrower.
  14. Review file and prepare for submitting for processing – 15 to 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 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.
    16. When appraisal is received, enter new value, if repairs are required, etc. in software program for calculations – Originator: 10 minutes.
    17. Update processing software program with changes – Processor: 10 minutes.
    18. Call borrower to advise borrower of appraised value, required repairs if any, and any calculation changes – Originator: 15 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: 10 to 15 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 adj rate).
    20. Mail re-disclosure to borrower – Originator: 10 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 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 condition.  Conditions are required so that HUD will insure the loan and the investors will provide the funding.
    25. Have borrower sign loan 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: 15 minutes.
    30. Receive closing documents, review that the numbers match those in our program – Processor: 10 minutes.
    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: 10 to 30 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.  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, marketing expenses, overhead for the business such as computers, office supplies, copiers, health insurance for employees, etc.  Originating a loan is not charged by the hour.  However if we calculated time versus pay, with some borrowers, because of various problems that come up or they need some extra hand holding, if we were to be paid by the hour there have been times when I would  make less than $10 an hour.

As we go through the application and process, my borrowers, as Joan did, 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.

© 2011 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-rv

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.