Monthly Archives: October 2011

Are you afraid to do a reverse mortgage? Twelve Reasons You Shouldn’t Be.

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Twelve Reasons You Should Not To Be Afraid To Do A Reverse MortgageDoes what you’ve heard about reverse mortgages make you afraid of them?  Has your fear kept you from getting the facts to see if one might benefit you?

A reverse mortgage is a mortgage with special terms for seniors 62 and older.  The most popular, and only one available in Minnesota, a Home Equity Conversion Mortgage or HECM, is insured by HUD.  Let’s look at twelve reasons you shouldn’t be afraid of reverse mortgages.

  1. Reverse mortgages are highly protected – One of the protections includes that borrowers receive counseling from a HUD trained and approved third-party counselor.  Others include prohibiting cross-selling, disclosures and implementing requirements that limit scams and fraud.
  2. No monthly payments required – Your cash flow improves because you don’t have to make a monthly mortgage payment.   Instead of making monthly mortgage payments, the reverse mortgage is due when the home is no longer the primary residence of the borrower(s) or on the 150th birthday of the youngest borrower.  And with no monthly mortgage payments required, the risk of foreclosure is reduced.
  3. A variety of program options are available – The HECM Standard, HECM Saver and Home Purchase Programs are available with a fixed rate and adjustable rate options.  This gives you options to find one that is right for your situation.
  4. The interest rate is not determined by your income and credit score – The interest rate is based on the program chosen, no matter what one’s income or credit score is.  With a conventional mortgage, one’s credit score, income and assets will impact the interest rate of their loan – with a fixed income the interest rate is likely to be higher if one even qualifies for a conventional mortgage.
  5. Funds are guaranteed to be available during the term of the loan – As long as one abides by the terms of the loan, the funds are guaranteed to be available.  Borrowers are responsible to pay property taxes, insurance and maintain the home and if applicable pay home owner association fees.
  6. Flexibility on how funds are received – Funds are available to borrowers in a line of credit (has a growth rate), monthly payments (structured to your needs), lump sum or a combination of these.
  7. No limitations on how the funds can be used – One can use the funds received from the reverse mortgage however they choose – there are no restrictions.  The reverse mortgage is like any other mortgage where the borrower is using the equity of their home to meet their needs and desires now.
  8. The title stays in your name – the bank does NOT own your home, you continue to own the home.
  9. Closing costs are comparable to conventional loans – as with any mortgage there are closing costs.  While often said to be expensive, actually the reverse mortgage closing costs compare to those of a conventional loan.
  10. Fees charged are regulated by HUD – HUD only allows the necessary fees which are standard and customary – no mark up and “junk” fees are allowed.
  11. Reverse mortgages are non-recourse – This means if the loan balance is higher than what the home can be sold for, the borrower or their estate does not have to come up with the difference.  If the home is sold for more than the loan balance, the difference goes to the borrower or their heirs.
  12. Social Security and Medicare are not Impacted – One can still receive Social Security and Medicare with a reverse mortgage.  Medicaid may also be received under ceratin circumstances.  The reverse mortgage is a loan and the proceeds are not considered income.

Face your fear and get the facts about reverse mortgages and see if one may be right for your situation.  You may find that a reverse mortgage could make your life easier and provide you cash for your needs and desires.

© 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-w7

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.

Evaluating HECM Reverse Mortgage Payment Plan Options

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Reverse Mortgage Payment OptionsA Home Equity Conversion Mortgage or HECM, also known as a reverse mortgage, is a mortgage which allows seniors 62 and over to convert the equity of there home into cash.  Unlike a conventional mortgage, with the HUD insured HECM there are no monthly mortgage payments required.  Instead the borrowers have options on how they want to receive the cash “paid” to them: a lump sum, monthly payments, a line of credit, or a combination of these.  It shouldn’t be looked at as “one size fits all.”  One needs to evaluate the different options to decide which is best for their situation.  Let’s review them here.

A Lump Sum – A lump sum is pulling an amount of funds at the time of closing.  A lump sum can be done with both the adjustable rate program and the fixed rate program.  The adjustable rate program offers more flexibility because one can choose the amount they want at the time of closing with the remainder received in monthly payments or a line of credit.  The fixed rate program requires borrowers pull out all of the funds in a lump sum at the time of closing.

Considerations that need to be taken into account with the lump sum:

  • Pulling all funds at closing is ideal if one has a use for all the funds.  For example used to pay off a current mortgage or other debt or to purchase a new home without the requirement of monthly mortgage payments.
  • If one doesn’t have a use for all the funds, what will be done with funds not used?  A savings account and CDs are not paying much interest so that is generally not wise to pull all funds and place in savings accounts or CDs.
  • The interest starts accruing on the loan balance when the funds are drawn so in the case of a lump sum, the interest is added on the amount drawn up front.  If one doesn’t have a use for the funds and they are put in a savings account, the interest accrued will likely be higher than what is earned as interest on funds in a savings account.
  • Pulling all the funds in a lump sum could impact one who is on or going on Medicaid (Medical Assistance in MN) or other public benefits.  Funds from the reverse mortgage are not considered income because it is a loan against the property, so they are not considered an asset for Medicaid qualifications.  However if one pulls funds from the reverse mortgage and place them in their checking account, savings account, a CD or other investments, they could then be considered an asset and impact qualifying for Medicaid and other public benefits.

Minnesota law allows for reverse mortgage borrowers to pull funds and spend them in the month they were received and not impact their Medical Assistance and other public benefits.  Check with your state’s laws to see what is allowed where you live.

  •  For example I had a borrower who was on Medical Assistance (MA), doing the reverse mortgage to be able to remain in her home with home care.  For her convenience the family was having a bathroom installed on the main floor.  At the time of closing they pulled $10,000 for the bathroom installation.  Because it was spent within the month, she remained on MA.  However if they had only spent $5,000 of the lump sum draw, she may have lost her MA benefit because the additional $5,000 would have put her over the allowable $3,000 in assets.  (Check with an elder law attorney to see what is allowable in your state.)

With their fixed income Paul and Mary were struggling making their mortgage payments on their conventional mortgage.  They did a fixed rate payment plan HECM using all the funds available from the reverse mortgage to pay off their conventional mortgage.  Without having monthly mortgage payments their cash flow improved:  the $1,200 monthly mortgage payment they had been making on their conventional mortgage was now available to meet their other needs.

Jim and Paula used the fixed rate reverse mortgage to purchase a new home closer to their children.

I emphasize that choosing to pull the funds out in a lump sum should only be done if you have a use for all or the majority of the funds at the time of the draw.

Monthly Payment Option – The amount of money one could receive as a monthly payment.  The borrower can receive tenure (for “life”/as long as the home is your primary residence) payments or determine the amount they wish to receive each month.  For example, a term payment can be received for a certain period of time, i.e. 10 years.  Or a fixed amount each month, i.e. $100 each month or $800 each month.  This option is only available with the adjustable rate program.

Considerations for receiving monthly payments:

  • It’s a great option to add extra cash each month in an amount that fits one’s needs if they need a regular amount each month.
  • Offers control so one pulls out what one needs each month.
  • The loan balance won’t grow as quickly as with a full lump sum draw.  Interest only accrues on the amount pulled at which time it becomes part of the loan balance.
  • If one has not accessed all the funds via monthly payments  they are not part of the loan balance to be repaid.
  • One can receive Medicaid and other public benefits while receiving funds in monthly increments.
  • If one is not spending the funds each month and one is leaving them or a portion of them in their checking account, their checking account balance could accumulate so that they have an asset more than what is allowable for Medicaid or other public benefits.

Margaret was receiving home care and needed additional funds to cover the private pay charges.  A reverse mortgage was set up for the amount she needed each month.

With his reverse mortgage, Gene chose the monthly payment option to meet his need of an additional $200 a month to supplement his Social Security payments.

Reverse Mortgage Line Of Credit OptionA line of credit – A credit amount from which the borrower can receive funds at any time and in any amount of their choosing.  With the reverse mortgage the amount of the line of credit cannot exceed the Principal Limit.  This option is only available with the adjustable rate program.

Considerations  for the line of credit payment option:

  • One chooses when they want to draw funds and in the amount they need or want.
  • Offers flexibility and control over your cash flow.
  • The loan balance won’t grow as quickly as with a full lump sum draw.  The loan balance is increased at the time the borrower accesses funds in the line of credit.
  • If one has not accessed the funds in the line of credit they are not part of the loan balance to be repaid.
  • One can receive Medicaid and other public benefits with the line of credit option – as long as the funds pulled are spent in the month they are received (check with your state).
  •  Money in the line of credit can grow, so more money could be available to the borrower in the future.  Often confused as an interest rate, it is actually a growth rate.  Growth rate means more funds are available for use at a future date.  If one has not accessed the money in the line of credit it is not their money so interest is not earned.

Connie did a reverse mortgage so she would have funds available in a line of credit for emergency needs.

After paying off a conventional mortgage for Bob, he left the balance in a line of credit.  A year later he pulled some funds and took a dream vacation to Yellowstone with his nephew.  He also pulled funds at a later date to modify his home so it would accommodate a wheel chair when the time came.

A combination of payment plans – An option to pull funds as a lump sum at closing, leave some funds in a line of credit and receive monthly payments; pull funds as a lump sum to meed an immediate need then leave the balance in a line or credit or set up as monthly payments; or leave some funds in a line of credit as well as receive monthly payments.  This option is only available with the adjustable rate program.

Considerations for the combination payment plan:

  • Offers flexibility to meet one’s needs.
  • Review considerations for each option outlined above.

When Jerry and Delores did their reverse mortgage a conventional mortgage was paid off, they pulled $3,000 out in a lump sum for some immediate needs, set up a payment plan of $300 a month and left the rest in a line of credit.  This fit their needs to improve their cash flow.

Dorothy needed hearing aides.  She did her reverse mortgage, using a lump sum draw to purchase her hearing aides then leaving the balance in her line of credit for her future needs.

Note that with the adjustable rate program one can change the payment plan during the term of the loan.  For example, after having a mortgage of $50,000 paid off at closing, and initially one pulls $1,000 at the time of close but leaves the balance in the line of credit, after 3 years one can have the payment plan restructured to receive a monthly payment amount.  There is a one-time fee of $20 for the payment plan change.

Three years after Jerry and Delores did their reverse mortgage they no longer needed the monthly payments so they contacted the servicer of their reverse mortgage and stopped the monthly payment, leaving all the funds in the line of credit.

These same payment plan options are available for both the HECM Standard and the HECM Saver.

The reverse mortgage is beneficial to seniors if the right payment plan is chosen.  As outlined, there are advantages and disadvantages for each of the options.  Review these considerations and work with your reverse mortgage expert to help you decide which option is right for your situation.

© 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-vk

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 Need To Know That With A Reverse Mortgage You Remain in Control

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Reverse Mortgage borrowers remain in control of their homeWhen sitting down with a new prospect the other day I asked what they had heard or thought about reverse mortgages.  Bob responded that reverse mortgage borrowers lost control of their home and their money.  Have you heard this too?  I want to correct this misconception for you.

Reverse mortgage borrowers remain in control of their home.  They own the home, just like with any mortgage.

They have the option to paint the home the color of their choice, plant trees or landscape as they choose, and to decorate the inside as they desire (or not make changes).

I had one borrower ask if they could paint their house purple.  With a chuckle I responded  they could although the neighbors may not like the color purple.  The point is, as the homeowner they have the option to choose what color they want to paint their house.

Borrowers are, however, responsible for maintaining the home.  This is to the homeowners best interest anyway, and whether they have a reverse mortgage, a conventional mortgage or no mortgage at all.  Maintaining means things like no bare wood or chipped paint, roof replaced when needed, foundation and structure is sound, electrical and plumbing in working order.

In their will or trust the reverse mortgage borrowers still choose who will inherit the home or equity of the home.

While the reverse mortgage borrowers will be using the proceeds for their needs or wants during the term of the loan, when the home is no longer their primary residence, the loan is due and payable.  The loan is generally paid back from the sale of the home with no personal liability to the borrower or their heirs.  If the home is sold for more than the loan balance the borrower or the heirs receive the difference.

If an heir wants to keep the home, they have this option – they would just need to pay off the reverse mortgage balance.  This can be done through a conventional mortgage, their own funds or if they were the beneficiary on an insurance policy.

Note that if the loan balance is higher than the fair market value, as a non-recourse loan the borrower or their heirs only need to pay the fair market value of the home, they do not need to come up with the difference.  With the FHA HUD insured Home Equity Conversion Mortgage (HECM) the FHA Mortgage Insurance will cover the difference for the lenders.

They have the option to sell when they want and choose the real estate agent.  If they have passed away then their estate chooses the real estate agent.

The way one wants to receive their reverse mortgage proceeds is also their choice.  They can receive the funds in a line of credit, monthly payments, lump sum or a combination of these.

And how they use these funds is in their control – lenders cannot dictate how one spends the proceeds from their reverse mortgage.  Borrowers can and have used their reverse mortgage funds to pay for home repairs, purchasing a new car, traveling, home care or whatever one needs or wants… it’s their choice.

Reverse Mortgage borrowers remain in control of their homeThe reverse mortgage provides control for borrowers to have funds so they can make their own choices.  For example, where they want to live (in their own home vs government subsidized housing), who they want to care for them (vs the government deciding which home care agency they can use).

Reverse mortgage borrowers do remain responsible for paying their property taxes, having home owners insurance, maintaining the property and paying home owner association dues if applicable, just as they do with or without a conventional mortgage.

Losing control of your home or money with a reverse mortgage is a misconception.  In reality reverse mortgage borrowers have control and in some cases even more control than without doing a reverse mortgage.  Having funds available gives them more choices and options.

© 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-v0

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.

It May Be To Your Advantage To Do A Reverse Mortgage Now

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Couple benefited from doing reverse mortgage sooner than laterIt may not be to your advantage to heed the advice of those who state a reverse mortgage should be a last resort or one should wait until they are older before doing one.  Let’s explore why doing a reverse mortgage now rather than later may be to your advantage.

First you must know the Principal Limit or Loan Amount of the HUD insured Home Equity Conversion Mortgage (HECM) reverse mortgage is based on the age of the youngest borrower, the lesser of the home value or FHA Lending Limit and the program chosen and the Expected Interest Rate.  HUD allows certain types of properties to qualify: single family homes, duplexes or 1 to 4 unit properties as long as the home owner is living in one of the units, townhomes, FHA approved condos, and manufactured homes that meet HUD’s requirements.

Continued Decline in Real Estate Values and Sales Volume

It appears that the real estate values have not yet stabilized so with potential continued decline in home values, one will receive less funds from the reverse mortgage in the future.  To determine the value of the home the appraiser must use homes that are similar in size, number of bathrooms, bedrooms, style, etc. and that have sold in the last 6 months. If homes in the area are selling for lower values and/or are foreclosures which means less comparables are available and the homes are valued lower.  So before the home values continue to decline, doing the reverse mortgage now will mean more funds will be guaranteed to be available based on the current value.  (Note once the loan closes the funds are guaranteed available to borrowers as long as they meet the terms of the loan.)

Properties that qualify

HUD already has restrictions on condos that are not FHA approved making it difficult to do a reverse mortgage on condos.  (The spot condo approval was removed in 2010.)  We are seeing lenders add manufactured homes, log homes, berm, and rural homes to their list of ineligible homes.  While there are still some lenders who continue to lend on these properties, this may change in the future and they are likely to tighten the underwriting requirements for these types of properties.  If you are in one of these properties you should look at doing a reverse mortgage now while it’s still an option.

Ron who has a manufactured home was in the process of doing his reverse mortgage however during the processing of his loan the lender the loan was being done through changed their underwriting requirements.  Now to proceed with his loan has to be put through another lender.  If other lenders change their underwriting requirements he would not be able to do his reverse mortgage.

Reduced Principal Limits

In 2009 and 2010 HUD reduced calculation of the Principal Limit (Loan Amount) by 10% each year.  In 2010 HUD increased their on-going annual FHA Mortgage Insurance Premium.  While we have not heard this is happening again, given the real estate market and the political climate, HUD may find it necessary to decrease the Principal Limit again and/or increase the FHA Mortgage Insurance Premiums.  Waiting may mean less funds are available if HUD reduces the Principal Limit.

No Servicing Fees/Set-Asides

Currently most reverse mortgage programs don’t have a service fee or service set-aside.  However servicing fees may return in the future which means the service fee set-aside will reduce the net Principal Limit available to borrowers.  Taking advantage of no servicing fee means more funds are available now.

Higher Expected Interest Rates Equals Less Funds Available

With FHA Reverse Mortgages the Expected Interest Rate is calculated weekly and is used to determine initial funds available.  The Expected Interest Rate is considered a long term projection of future interest rates.  Currently the Expected Interest Rate is below HUD’s floor of 5% which means more funds are available. (Expected Interest Rates at 5% or below have the same Principal Limit.)  As the Expected Interest Rate changes to a higher rate, in the future less initial funds could be available to borrowers.  It is unknown as to the timing of when the rates may rise but at some point they will for sure go up.

Even if the home value increases in the future the amount available on the reverse mortgage could be the same or less if you wait to do a reverse mortgage.

Let’s compare doing a reverse mortgage now to waiting 5 years before doing your reverse mortgage.

TODAY 5 Years from now Initial Interest Rate is currently below 3%
AGE 70 75
HOME VALUE $200,000 $225,000
*Based on Expected Rate of 4.39 7.515
AVAILABLE (Approximate net after fees) $122,690 $97,687
DIFFERENCE $25,003
These are all estimates.  Different assumptions would result in different numbers.  Interest rates are based on rates of 10/4/2011.

Keep in mind, with an Adjustable Rate Reverse Mortgage funds left in a Line of Credit grow. So if you have $122,690 in your line of credit today, in the future you could have more funds available to you.  Here’s an estimated example:

Line of Credit Growth* No Draws Draw $5,000 each year
Today $122,690 $122,690
Year 1 Balance $127,357 $122,357
Year 2 Balance $132,201 $122,011
Year 3 Balance $137,230 $121,652
Year 4 Balance $142,450 $121,279
Year 5 Balance $147,868 $120,892
*Growth Rate based on Assumption of Expected Interest Rate of 3.739% in this example.  Actual Line of Credit Grows based on current interest rate plus 1.25%.


What would it be like for you to have security knowing you readily have funds available in your Line of Credit without paying additional closing fees in the future?  When you use the funds each year you will be taking advantage of having the money you need during your retirement years and the benefit of improved financial health.

Lucy stated, “Having done the reverse mortgage has given me a new sense of security.”

Eliminate Mortgage Payments, Have Lower Interest Expense by Paying Off Your Conventional Mortgage

In addition to a lower interest rate* with a reverse mortgage, eliminating your monthly payment will improve your cash flow because you don’t have to payout that monthly payment each month.  While the loan balance will rise because you are not making payments, the reverse mortgage is non-recourse which means there is no personal liability to you or your estate if the loan balance is higher than what the home can be sold at fair market value in the future.  And you have the use of the funds to use during the term of the loan for whatever you need or want.  By doing the reverse mortgage earlier you have use of funds that otherwise would go toward your monthly payments.  Why not improve your cash flow sooner than later?

Note that you do have the option of making payments with your reverse mortgage – it’s just not required.  You can choose when, how often and how much you want to pay.  When payments are made the payment reduces the loan balance and with the adjustable rate will be applied to the Line of Credit meant it’s available in the future.

*Historically the HECM reverse mortgage interest rate is lower than what one can generally qualify for with a conventional mortgage.

Higher Valued Home Owners Should Do A Reverse Mortgage Before The Lending Limit Is Reduced

Currently the FHA HECM (Home Equity Conversion Mortgage) Lending Limit is $625,500.  While we have not received final notice from HUD, word was received that the Lending Limit would remain at the $625,500 through FY 2012 – but this is an unknown.  At some point this rate could be reduced to $417,000 or be based on a Lending Limit in the county where one lives.  What this means is that if your home is valued more than the Lending Limit amount you can receive is based on the Lending Limit rather than the home value.  For example if your home is appraised at $700,000, currently we would use $625,500 to determine the reverse mortgage Principal Limit.  January 1, 2012 or after, we would be mandated to use $417,000 (or the county lending limit) for this calculation, making a big difference on the amount one can receive.  If you have a higher valued home look at doing your reverse mortgage now instead of waiting until 2012 or after.

Minnesota Reverse Mortgage Borrower Prepared for FutureMary, a Minnesota Reverse Mortgage borrower whose home value, as most homes, had decreased over the last few years chose do to the reverse mortgage at the time instead of waiting even though she didn’t have any mortgages to pay off and didn’t have immediate needs for the funds.  Her decision was based on the fact that if she waited her home value may continue to decrease whereas if she did the loan now she would have the funds in the line of credit for future use and they would grow so more funds would be available when she needs them.  Additionally if she waited the Expected Interest Rate (used to determine how much can be loaned) may be higher making less funds available to her to her in the future.

We’ve talked with seniors whom we originally talked with 2, 3 or 4+ years go and had educated them about the reverse mortgage option.  At that time they decided to wait and not do a reverse mortgage.  Some even did a conventional mortgage or what we in the industry call a “forward” mortgage.  “Life has happened” and they decide they now want to do the reverse mortgage.  Unfortunately with many of these seniors we have to tell them the sad news that less funds are available now and in some cases there aren’t enough proceeds to pay off their current mortgage.  They can be short $6,000, $10,000 and sometimes $30,000 or more.  This is due to decreased home values and changes in the Principal Limit.  We are finding this can also be the case for even those we talked with just 6 months ago.

Now a few years after Mary did her reverse mortgage, Mary is still happy with her decision to do have done her reverse mortgage sooner than later.  She has security knowing she has funds available for her needs, independence to live on her own without relying on others 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.

Doing a reverse mortgage now may be to your advantage.  Are you ready to live with more now?  And to have security, independence, dignity and control in your retirement?

Note that I am not posting this as sales pitch, rather to make you aware of anticipated changes so you can make the best decision for your situation.

© 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-uP

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