Reverse Mortgage Borrowers Have Responsibilities Or They’ll Pay the Consequences

Posted on March 15, 2015 by Beth Paterson, CRMP

When loan documents are signed at closing, borrowers agree to the terms of the loan, whether a conventional loan for refinance or purchase; a home equity line of credit (HELOC); or a Home Equity Conversion Mortgage (HECM), the reverse mortgage insured by HUD; or a proprietary (private) reverse mortgage. As with any home loan, with the reverse mortgage borrowers are using the equity in their home and the title of the home remains in the borrower’s name; the lender is using the home for collateral. With any mortgage, conventional or reverse, the bank does not own the home, nor do they want t.

The reverse mortgage has helped seniors 62 and older remain in their home with their security, independence, dignity and control but not without responsibilities to adhere to the terms of the loan. The main responsibilities are to not violate terms of the loan, generally these include:

Paying property taxes
Keeping hazard insurance on the property
Maintaining the property
Paying association dues if applicable
Not changing/transferring the title

Paying property taxes means keeping up with the county property taxes, paying them on time. If one doesn’t pay property taxes, with or without a loan, the county could start tax forfeiture or foreclosure.

Keeping hazard insurance on the property helps protect the homeowner, with or without a mortgage. If one doesn’t have insurance on their property and a storm comes along and damages the home they wouldn’t have funds to repair or rebuild the home. With a mortgage (reverse or traditional) on the home, lenders require hazard insurance be kept on the property to protect the homeowner and lender if there is any damage to the property. Being the lenders are invested in the property by lending money based on the home equity, they require the insurance so their investment is protected if there is damage. For example if a tree falls on the home and damages the roof, the hazard insurance will cover the replacement of the roof and bring the home back to the condition required for lender’s investment.

Maintaining the property is required to protect the lender’s investment in the property and includes keeping the home in good condition including not letting the property become run down. Keeping the roof in good repair, insuring the siding and trim do not have chipped or bare wood but are protected against the elements. Ensuring against safety issues such as automatic garage doors will rise if something is under them, railings are in place and stable on stairs and decks rotten boards are replaced. Interior maintenance is also important, for example having heating, electricity, plumbing, water in working order as well as safety issues such as railings on stairs.

If one is in a condo or town home and association dues are required, loans require that the association dues are kept current. If they are not kept current then the association has the right to force the homeowner from the property.

What are the consequences if the requirements of the reverse mortgage loan terms are not abided by? If terms of the loan agreement are not followed, the lenders have the right to call the loan due and payable or foreclose.

Changing or transferring titles may mean the loan becomes due and payable. For example if one decides to add a person to the title of the property (depending on who the person is), implement a Life Estate, or sell the property this may change who the lender’s have invested their interests. If the property is going to be put in a trust it will not mean the loan will be come due and payable however the lender will need to review the trust to ensure that it meets the requirements of their investors and in the case of the HUD insured HECM, the trust must meet HUD’s guidelines. Check with your lender before making any changes to the title to make sure it won’t impact your loan.

The area that has caused the biggest problem is when borrowers don’t pay their the property taxes and hazard insurance. Therefore, FHA, the arm of Housing and Urban Development (HUD) who insures the majority of reverse mortgages, will soon require a Financial Assessment to stabilize the HECM and determine borrowers’ ability and willingness (based on payment & debt history) to pay property taxes and insurance.

With conventional mortgages, if taxes and insurance are not paid, the lenders will start an escrow account, requiring more money from borrowers in their monthly payments for the escrow account. The lenders then make the tax and insurance payments on behalf of the borrower from their escrow accounts.

With the implementation of the Financial Assessment depending on borrower’s income, assets and debt history, for some a partial or full set aside will be created to pay the homeowners property taxes and insurance into the future. Others won’t have to have a set aside created if there is a positive history of payments of taxes, debts, hazard insurance and income and disposable assets document their ability to pay taxes and insurance in the future. Credit scores will still not be utilized to determine qualifying nor impact the interest rate. (The Financial Assessment is a requirement as of April 2015.)

After the HECM is in place if borrowers do not have the capacity to pay the taxes and insurances they owe, the servicer will be forced to foreclose on the property per HUD’s requirements. (Note that reverse mortgage lenders and servicing companies are required to abide by HUD’s requirements.)

Having reverse mortgage terms and responsibilities explained

While the originators, counselors and loan documents spell out these requirements, borrowers must take their responsibilities seriously. It is also their responsibility to be sure to look at their budget and have a plan to be able to pay their property taxes, hazard insurance as well as maintaining the property. Then they can remain in their home and enjoy the many benefits of the reverse mortgage.

Originally posted in 2010, updated 2015.

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-1b5

Related articles on Reverse Mortgages in Minnesota:

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.

Widower’s Financial Situation Improves with Reverse Mortgage

Posted on November 9, 2014 by Beth Paterson, CRMP

Reverse Mortgage benefited widower

Gary’s financial situation was impacted when his wife passed away a year ago. Instead of having income from two Social Security checks, there was only one. Having gone to just one Social Security check he wasn’t able to maintain his lifestyle as he had been accustomed and it was difficult to have enough funds to pay his property taxes. And for awhile he started using a credit card to cover some of his living expenses.

Wanting to stay in his home of many years, Gary contacted me to do a reverse mortgage. A reverse mortgage is a loan with special terms for those 62 and older. The funds available are based on the age of the youngest homeowner, the lessor of the appraised value or FHA lending limit of $625,500 and the Expected Interest Rate of the program chosen; income or credit score qualifications are not used for the interest rate.* Similar to a traditional mortgage, the title stays in the homeowner’s name. The most common, and only reverse mortgage currently available in Minnesota, is HUD’s FHA insured Home Equity Conversion Mortgage (HECM),

The additional benefits Gary liked about the reverse mortgage was he doesn’t have to make monthly mortgage payments and with the flexibility of the adjustable rate program he can receive funds in a lump sum, a line of credit with a growth rate, monthly payments or a combination of those.

In addition, Gary liked the fact that the loan isn’t due until he is no longer in the home as his primary residence or on his 150th birthday and it’s a non-recourse loan which means there is no personal liability when repaying the loan, it is repaid from the property only. For example, if the loan balance is $300,000 when the loan become due and payable but the home can only be sold for $250,000 the borrower or the estate do not have to come up with the $50,000 difference. The loan is generally repaid from the sale of the property when the home is no longer the primary residence of the borrower, usually when they move, die or sell. If the home is sold for more than the loan balance the remaining equity goes to the borrower or the estate.

At closing Gary’s home equity line of credit was paid off so he didn’t have any more monthly mortgage payments. Additionally his property taxes were brought current, he took out some funds to pay some bills that had accumulated. And now he has funds in a line of credit. There is a small amount available under HUD’s limit to 60% in the 1st 12 months with the balance available after the 1st year. Recognizing he is responsible for paying his property taxes, keeping homeowners insurance on the property and maintaining the property, the reverse mortgage provides the funds he’ll need for these responsibilities as well as funds for emergencies and the little things that may come up. Gary’s financial situation has improved and he can maintain his lifestyle going forward.

Think about how a reverse mortgage will make a difference in your life and contact your local originator, one who works with several lenders to be able to offer you all options available and one who will meet with you in person.

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

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-19A

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.

Do you wonder if reverse mortgages are so good, why more people aren’t doing them?

Posted on October 15, 2014 by Beth Paterson, CRMP

This is a question that I was asked recently during an initial meeting from potential reverse mortgage borrowers. A great question that I think has a couple answers.

People still haven’t heard of them. When I was talking with one of my reverse mortgage borrowers the other day he said he’s been mentioning that he had done one but is surprised on how many people still haven’t heard about them. While there are many ads and media coverage, some people are still unfamiliar with them.
A lot of misinformation has been spread through the media, politicians and the community putting fear into the minds of potential reverse mortgage borrowers. Unfortunately the media, politicians and people in our communities have not reached out to the experts, those to who specialize in reverse mortgages, to get the facts but continually spread the misinformation. Even some of the articles that tend toward being accurate don’t get all the facts right. Or the comments on the article contain misinformation. This misinformation is what scares people from doing a reverse mortgage even when they could benefit from one.

Let’s look at the facts of reverse mortgages and some of the misinformation that people have that keeps them from doing a reverse mortgage.

A reverse mortgage is a mortgage that has special terms for those 62 and over. Unlike a conventional mortgage or Home Equity Line of Credit (HELOC) monthly mortgage payments are not required. Income and credit scores are not factors in determining one’s interest rate or how much can be loaned. As without or with a conventional mortgage, a HELOC, homeowners are responsible for paying their property taxes and homeowners insurance.

It is often stated that reverse mortgages are complicated or complex transactions. In reality reverse mortgages aren’t any more complex than a conventional mortgage or other financial products. Do you understand all the terms and features of a conventional mortgage or HELOC? Do you understand your 401K’s, stock investments or other retirement plans? What about your credit card(s)… do you know how they work? Comparing Your Smart Phone To A Reverse Mortgage

My smart phone has so many bells and whistles I don’t understand all the options or how it works… complex yes, but I still utilize one and I don’t think I could live without it any more. If people are open to getting the facts, they will likely have a better understanding of reverse mortgage and might just find it useful.

People still think the bank or the lender will own the home once the reverse mortgage is done. Or the bank or lender will take ownership once the loan becomes due and payable. However, like a conventional mortgage or HELOC, the title remains in the homeowners name, the bank or lender does NOT own the home. When the reverse mortgage borrowers are no longer in the home as their primary residence the loan become due and payable.

The amount repaid is the amount borrowed by the homeowners including interest and FHA Mortgage Insurance Premiums. Any remaining funds go to the borrowers or their heirs. As a non-recourse loan, if the loan balance is higher than the fair market value of the home, the borrowers or their heirs don’t have to come up with the difference.

Other false statements often seen or heard are that reverse mortgages are a scam, only the lender benefits. They take advantage of people. Let me clarify, the most common reverse mortgage, the Home Equity Conversion Mortgage (HECM) is FHA insured and regulated by HUD – no, not scams but a valid loan using a home as collateral.

Borrowers receive many benefits in having funds to use without having to make monthly mortgage payments, improved cash flow without restrictions on how the funds can be used, being able to stay in their home or purchase a new home. Originators and lenders do get paid for reverse mortgage loans, but everyone gets paid for the work they do. Personally I find it rewarding to help people, and I’m not ripping people off, in fact I and others I know in the industry are certainly not getting rich in this career…there is a lot of work involved to originate reverse mortgages, but we’re passionate in making a difference for people. In fact, because of all the work, on some loans our compensation works out to very little.

Headlines have stated seniors are losing their homes to foreclosure if they don’t pay property taxes or keep insurance on the home. Think about it, with or without a mortgage if you don’t pay property taxes, the county will foreclose. If you don’t have insurance on your property and the home is destroyed you will have lost your home and you won’t have the money to rebuild or replace it. Neither of these are the fault of a reverse mortgage. But these false headline statements scare people to not do a reverse mortgage.

We often see or hear that the reverse mortgage should be a last resort, to refinance with a conventional mortgage or HELOC or sell. The problem with this is most seniors don’t qualify for conventional mortgages or HELOCs. And if they do, the borrowers have to make monthly mortgage payments. Even if they can make the payments now, if life happens they may not be able to make the payments in the future. Rather than being a last resort the reverse mortgage can help one pay for retirement, long-term care.

The unused portion of the reverse mortgage line of credit so more funds can become available in the future. And the funds in the line of credit could be higher than what one could qualify for in the future. This can be very beneficial to seniors and isn’t available with any other loan.

Seniors often want to stay in their home rather than moving so don’t tell them to sell. If they do sell, where are they going to live? They’d still have housing expenses…can they afford those or wouldn’t having no rent or monthly mortgage payments be more beneficial?

If they do wish to sell maybe to downsize, move closer to their children or to purchase the home of their dreams, the HECM for Purchase program gives them the option to purchase without having to make monthly mortgage payments.

Have you heard or read reverse mortgages are expensive? Have you looked at the costs of a traditional or forward mortgage? The costs are the same other than the FHA Mortgage Insurance Premium. With a conventional mortgage people want to know what the payment will be and what the interest is, they generally don’t pay attention to the costs. But when you look at the costs of the conventional mortgage you’ll likely be surprised, they aren’t really different from reverse mortgages.

HELOC’s may have lower up-front fees but the interest rate may be higher which in the long run could turn out to be more expensive than a reverse mortgage… besides one has to qualify on income, assets and credit. Additionally payments have to be made on the HELOCs. And there is a risk that they HELOC could be called due and at some point during the term the monthly payment must be increased to include the principal, not just the interest.

Seniors and children benefit from reverse mortgages Other headlines or statements about reverse mortgages state the bank/lender gets the children’s inheritance. Another false one! The homeowners receive funds during the term of the loan, whether to pay off conventional loans or receiving funds monthly or draws from their line of credit. When the loan is being paid, due when the home is no longer the primary residence of the borrower(s), there may or may not be funds left for an inheritance. The lender is receiving payment of principal and interest, this is NOT stealing the children’s inheritance from the remaining equity. With the reverse mortgage, the homeowner is using the funds for their needs or wants. Are you as heirs going to give them the funds they need just so you have an inheritance? What about letting your parents live their quality of life and not worry about getting an inheritance?

The last one I’m going to cover today is the option that lowering your expenses is a better option. Really? Most seniors don’t have this option. Seniors want to maintain their lifestyle and why shouldn’t they? Do you want to be told to lower your expenses, stop getting your hair done, not having cable TV, being able to get together with friends for lunch, go to a family wedding or reunion? Just because one turns 62 doesn’t mean they can’t enjoy life especially when they have equity in their home they can utilize.

Don’t buy into the scare tactics! Before believing everything in the media, those commenting on stories, politicians or your friends or neighbors, get the facts about reverse mortgages. As I often ask, “Do you go to a plumber if you’re having health issues?” Of course you don’t! So why are you listening to those who can’t or aren’t providing the facts on reverse mortgages?

Take time to understand and have the facts. When people do, they see the benefits and more people will do a reverse mortgage!

And hopefully, as my borrower is doing, reverse mortgage borrowers will spread the word on how the reverse mortgage has benefitted them so more people will hear about them.

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

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 Mortgages Offer New Products for Better Options for Borrowers

Posted on May 22, 2014 by Beth Paterson, CRMP

Reverse Mortgage Options Change doesn’t always have a positive image but change can be a good thing as it is with the recent reverse mortgage product changes that are insured by HUD. Here is information on the reverse mortgage products available.

First let’s look at understanding the FHA/HUD Home Equity Conversion Mortgage (HECM), which is currently the most common reverse mortgage, and the only option currently available in Minnesota. It is federally insured and regulated. Lending limits are set by the Federal Housing Administration (FHA). The maximum disbursement allowed at closing cannot exceed the greater of 60% of the Principal Limit/Maximum Loan Amount or the sum of mandatory obligations (closing costs, loan and judgment payoffs, set asides, etc.) plus 10% of the Principal Limit/Maximum Loan Amount.

The up-front FHA Mortgage Insurance Premium (MIP) is .5% for initial draws of 60% or less in the 1st 12 months. If one draws more than 60% at closing or in the 1st 12 months due to mandatory obligations, the up-front MIP is 2.5%. The maximum distribution of funds allowed at closing and in the 1^st 12 months is the greater of 60% of the Principal Limit or the total of mandatory obligations plus 10% of the Principal Limit; the amount drawn cannot exceed the Principal Limit.

*Mandatory Obligations include closing costs, loan and judgment payoffs, set asides, etc.

Features on all reverse mortgage programs include:

No monthly mortgage payments however borrowers are still responsible for property taxes, hazard insurance, maintaining the home and abiding by the terms of the loan
No income or credit qualifications for the interest rate*
No personal liability, they are all non-recourse
No equity sharing or appreciation sharing
Loan is due and payable when the home is no longer the primary residence of the borrower(s)
Independent Counseling is required

Now let’s look at the various program options including the adjustable rate options and the fixed rate options as well as the HECM For Purchase.

The Adjustable Rate Program, offering the most choices on how the funds are received makes it the most versatile reverse mortgage program.

Funds available in a line of credit, monthly tenure or term payments, lump sum or a combination of these subject to HUD program limits, i.e. cannot exceed 60% in the 1st 12 months.
The available funds in the unused line of credit grow so more funds become available over time.
With the Adjustable Program, after the 1st 12 months the remaining loan proceeds become available.
One can make repayments which reduce the loan balance and then have the option to re-borrow those funds again via monthly payments or the line of credit.
The interest rate is based on the LIBOR (London Inter-Bank Offered Rate) plus a margin.

One of the features of the Adjustable Rate program is the Principal Limit Protection feature, implemented in 2006, this allows the lock of the Expected Rate index – however it does not lock the margin. Click here to learn about the Principal Limit Protection feature.

Reverse Mortgage Adjustable Rate Mortgage With the HECM Monthly Adjustable Rate program the rate can change monthly with the first rate change occurring on the 1st day of the second full month and can occur every month thereafter. There are no limits on the amount of the rate change each month. With the monthly adjustable rate there is a lifetime cap of 5 percentage points or 10 percentage points above the interest at the time of closing depending on the lender.

The HECM Annual Rate program has the same features as the Monthly Adjustable Rate although the rate adjusts annually with the first rate change occurring between 12 and 18 months from the date of closing. The rate changes thereafter must occur every 12 months. The rate cannot change more than 2 percentage points at each rate change with a lifetime cap of 5 percentage points above the initial rate at closing.

With some of the same features as the HECM Adjustable Rate program, the HECM Fixed Rate offers a fixed rate option. There is one interest rate, fixed for the term of the loan, for borrowers who are drawing 100% of their available funds up-front. With this option funds are NOT available in a line of credit or for monthly payments.

One may choose to make a payment on the fixed rate option which will reduce the loan balance however these funds are not available to re-borrower again in the future.

NOTE: While a fixed rate reverse mortgage sounds enticing, once it is understood, it may not be the best choice for a reverse mortgage unless you need all the proceeds for the mandatory obligations at time of closing.

With the Fixed Rate the interest is being accrued on all funds drawn up front when it may not be necessary to take all the funds initially. Additionally, the growth rate is not available on the funds in the line of credit on all the Fixed Rate programs. If you are doing the fixed rate, ask for the fixed program that offers the line of credit and monthly payment options for the most flexibility.

Using a reverse mortgage to purchase a home Another program of the reverse mortgage is the HECM Home Purchase Program which provides financing to those who desire to downsize, move closer to children or purchase a new home without having mortgage payments.

The steps to do so are the same as with the regular reverse mortgage. However there are some unique points for this beneficial home purchase option. If you are over 62 and purchasing a new home in Minnesota contact us to learn more about the HECM for Purchase.

While Proprietary or private Reverse Mortgage Programs are not available in Minnesota at this time there is currently one offered. These reverse mortgages are generally for seniors with higher home values and are considered jumbo loans. With much higher or unlimited lending limits, the amount of funds available to a borrower may be much greater for those with home values over $1million than other reverse mortgage programs.

One must always look at their situation, consider how the funds will be received and utilized, to determine which reverse mortgage program will work best for their circumstances. If you are located in Minnesota, contact Reverse Mortgages SIDAC for a review of all the options of reverse mortgages in Minnesota to see which option will be the best for your situation.

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

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 Borrowers Remain in Control

Posted on April 9, 2014 by sidac

When 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, title remains in their name, 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, the borrower or their heirs only need to pay 95% of 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.

The 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.

Originally Posted in 2011; Re-posted in 2014
© 2011-2014 Beth Paterson, Beth’s Reverse Mortgage Blog, 651-762-9648

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.

Think you don’t need a reverse mortgage? Think again… Maybe you’ll WANT one.

Posted on February 23, 2014 by sidac

I sometimes have people say to me they don’t need a reverse mortgage. Have you said or thought this? Have you thought a reverse mortgage should be a last resort or one should wait until they are older before doing one? Let’s explore how a reverse mortgage can help you with your retirement planning and long term care planning needs. And why doing a reverse mortgage now rather than later may be to your advantage. You might then decide you want one.

A reverse mortgage is a mortgage like any other mortgage, using the equity in one’s home, but has special terms for homeowners 62 and over. There are no income or credit score qualifications for the interest rate and no monthly mortgage payments required. Homeowners maintain the title; the reverse mortgage lender does not own the home. Borrowers are responsible for paying their property taxes and insurance as well as maintaining the home. Reverse mortgage borrowers are highly protected – more so than with any other loan.

The Loan Amount, referred to as the Principal Limit, 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, 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.

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

	TODAY	10 Years from Now	Barb wrote: “Having a Reverse Mortgage has given me monetary independence and I never realized how important having cash available would be until I fell in October 2013 and broke my right shoulder. Without the Reverse Mortgage money I would have been ‘up a creek without a paddle’. Financial independence saved the day.”
AGE	63	73
HOME VALUE	$200,000	$263,000 (based on Moody’s Analytics Factors)
AVAILABLE (Approximate net after fees)	$92,729	$130,626*
Based on open-ended credit with current Expected Interest Rate of 5.21%; Closing costs of $5,871 plus FHA up-front Mortgage Insurance Premium of .5%; drawing 60% or less in 1^st 12 months; annual FHA Mortgage Insurance Premium (MIP) is 1.25%. The Expected Rate is used to calculate the Principal Limit/Loan Amount and for estimated projections on the loan. Growth Rate in this example based on assumption of Expected Interest Rate of 5.210%. Actual Line of Credit Grows based on current interest rate plus 1.25%. So if interest rate is higher, funds in the line of credit will grow faster. These are estimates, the actual amounts are based on many factors. Different assumptions would result in different numbers.

* If the interest rate is higher, and it is likely that it will be in the future, less funds would be available.

While it may look like it’s to your advantage to wait until you are older, look at what happens if you do the revolving credit reverse mortgage now and leave the funds in a line of credit for your future use.

Funds in the reverse mortgage Line of Credit grow and this is the advantage of doing the reverse mortgage now. Here’s an example of future funds available if at the age of 63 you draw less than 60% in the 1st 12 months and you have $92,729 in your line of credit initially:

Line of Credit Available*	No Draws	After Draw of $5,600 Each Year	Jerry stated, “The Reverse Mortgage enables us to live in our home without mortgage payments. Line of credit will grow for our future needs. The whole package is a win-win for my wife and me.”
Age 68	$136,488	$92,557
Age 73	$188,364	$101,624
Age 83	$358,756	$134,739
Based on open-ended credit with current Expected Interest Rate of 5.21%; Closing costs of $5,871 plus FHA up-front Mortgage Insurance Premium of .5%; drawing 60% or less in 1^st 12 months; annual FHA Mortgage Insurance Premium (MIP) is 1.25%. The Expected Rate is used to calculate the Principal Limit/Loan Amount and for estimated projections on the loan. Growth Rate in this example based on assumption of Expected Interest Rate of 5.210%. Actual Line of Credit Grows based on current interest rate plus 1.25%. So if interest rate is higher, funds in the line of credit will grow faster. These are estimates, the actual amounts are based on many factors. Different assumptions would result in different numbers.

Consider the amount you will have in the line of credit available for your retirement needs or long term care needs when doing the reverse mortgage now.

You can pull all or some of the line of credit funds out as you desire or the payment plan can be changed during the life of the loan, for example, you may change from having some or all of your funds in the line of credit to receiving monthly payments.(1)

Even when you use some of the funds each year you will be taking advantage of having the additional money you need annually plus still having funds in your line of credit for future use.

The Principal Limit or Loan Amount is based on age with the older one is receiving more funds. At the current Principal Limit Factors the increase is approximately 1% for each year. This is lower than the line of credit growth rate. With this taken into consideration, in just 5 years the funds in the line of credit with no draws will likely be higher than if you wait the 5 or 10 years to do a reverse mortgage.

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

Have No Monthly Mortgage Payments, Lower Interest Expense, Funds for Needs or Wants for Retirement Planning or Long Term Care Planning or Needs

In addition to a lower interest rate(2) with a reverse mortgage, eliminating your monthly payment will improve your cash flow because you don’t have to pay out 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. When the loan is being repaid, if the loan balance is lower than what the home can be sold for, the borrower or the estate receive the difference.

You have 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 mortgage payments. Why not improve your cash flow sooner than later?

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.

If you make the payment(s) on the reverse mortgage, the payments will reduce the loan balance. And with the adjustable rate, open-end reverse mortgage the payment will increase the Line of Credit meaning the funds are available in the future. And over time the funds available are likely to exceed the home value at the time the reverse mortgage was initiated. Additionally, using Moody’s Analytics, the line of credit is likely to grow faster than the home is appreciating.

Consider if you do the reverse mortgage now, let the line of credit grow and in 8 years you have a medical situation. If you have a conventional mortgage you’ll have to balance paying mortgage payments with paying medical bills. With the conventional mortgage if you don’t pay your mortgage in a few short months you are likely to be facing foreclosure.

If you are choosing to make monthly mortgage payments on the reverse mortgage, you could stop the payment being they are not required and therefore eliminating the risk of foreclosure from not making the monthly mortgage payments. You have the option of resuming making payments if you choose. You still need to pay your property taxes, keep hazard insurance on your home and pay home owner association dues if applicable.

Take advantage of doing the reverse mortgage now while the interest rate is low. And then when the interest rate does increase, the line of credit will grow even faster (the growth rate is determined by the interest on the loan plus 1.25%). The line of credit will grow regardless of the home values increasing or decreasing.

In waiting to do a reverse mortgage until you feel you have a need, you are taking risks. For example:

Reduced Loan Amount or Principal Limit

Over the last few years HUD has reduced the calculation of the Loan Amount (Principal Limit). We don’t know if HUD may find it necessary to decrease this again and/or increase the FHA Mortgage Insurance Premiums. Waiting may mean less funds are available if HUD reduces the Loan Amount or Principal Limit.

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. 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 likely go up.

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 based on HUD’s requirements, 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.

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. At some point this rate could be reduced to a lower national limit or be based on a lending limit in the county where one lives (as is currently with a Forward FHA). 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. A lower Lending Limit would make 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.

What would it be like for you to have security knowing you readily have funds available in your Line of Credit during your retirement years and the benefit of improved financial health?

You may not need a reverse mortgage now but it may benefit your retirement and long term care planning if you do one now.

(1)Consult with an Elder Law Attorney or financial consultant regarding the impact of pulling all your funds from a line of credit will impact Medicaid.
(2)Historically the HECM open-end credit reverse mortgage interest rate has been lower than what one can generally qualify for with a conventional mortgage.

Some information used in this article obtained from nu62(sm)

*Name changed to protect privacy

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

Topic first published 2009; Updated 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/pxPEm-FD

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

Posted on February 12, 2014 by sidac

It 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

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

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

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

Posted on March 11, 2013 by sidac

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

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

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

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

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

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

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

*Check with legal advisor for your situation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Seniors, want to purchase your new home with no monthly mortgage payments? Use A Reverse Mortgage.

Posted on March 3, 2013 by sidac

Are you over 62 and want to downsize? Move to a townhome so you don’t have to do the yard work? Move to a one-level home? Move closer to your children? Move to a larger home to have space for when the family comes to visit? Do you want to move to your new home but don’t want to have monthly mortgage payments? The HECM for Purchase program may be your financing option.

The FHA insured reverse mortgage program that allows those 62 and older to purchase their new home and then not have monthly mortgage payments is called HECM (Home Equity Conversion Mortgage) for Purchase. The features and terms as well as the steps for the HECM for Purchase are the same as with the regular reverse mortgage. However, because it is a unique process, there are a few points you and all parties involved need to be aware of to make it a smooth transaction.

The properties that qualify for the HECM Home Purchase include single family, 1 to 4 family dwelling units if the borrower/owner resides in one unit, FHA approved condos, manufactured homes that meet HUD’s standards.
To run our calculations we use the lessor of the final appraised value, sales price, or FHA mortgage limit for a one-family residence.
- If the purchase price is $190,000 and the appraised value is $200,000, we would use the $190,000. Or if the purchase price is $210,000 and the appraised value is $200,000, we use the $200,000.
The proceeds available to the borrower are calculated the same way as with any reverse mortgage, having all the closing costs (origination and FHA MIP, reports, title and escrow/settlement fees) included in the loan so there are no out of pocket expenses other than the appraisal and potentially any inspections. The Net Principal Limit is the amount available to the borrower.
- Note: When I’m working with those exploring homes, I run several calculations at various possible home values so when the borrower and their real estate agent are looking for a home, they will have an idea of the home value and the cash the borrower will need at close.
The borrower will need to have the difference between the Net Principal Limit (loan amount) and the purchase price available. For example:
- If the purchase price and the appraised value is $200,000 and the Net Principal limit is $124,000, the borrower will need $76,000* to purchase the $200,000 home.
- If a borrower has $100,000 in funds they want to use to purchase the same $200,000 home, they could combine their $100,000 with the $100,000 from the reverse mortgage proceeds to purchase the home and then have $24,000 in their reverse mortgage line of credit when using the adjustable rate, LIBOR, program. (The fixed rate requires you to pull all available funds at close.)
  - Borrowers must use cash on hand, cash from the sale, liquidation of assets or Gift funds (must meet HUD’s approved funding sources and source of funds needs to be documented).
    - The additional funds cannot come from Builder incentives, Seller financing, Seller contributions or concessions, any person or entity that financially benefits from the transaction or third party that is directly or indirectly reimbursed by any of the parties benefitting in the transaction or Credit Card advances, sweat equity, trade equity, rent credit. Cannot use loan discount points, interest rate buy downs, closing cost down payment assistance, gifts or personal property given by the seller or any other party involved in the transaction. Seller can pay their share of taxes and Home Owner Association fees if applicable.
The borrower may choose any of the options/interest rate options:
- HECM LIBOR
- HECM Fixed Saver
  - For calculation purposes our rates change every week. The rate cannot be confirmed until the week of closing. However, we have a Principal Limit Rate Lock (on the index of the LIBOR which means we can use the rate at the time of application or closing, whichever is the most favorable to the borrower, to determine the loan amount available.) For the process of planning how much will be available to the borrower, I initially use the rate and amount of the program chosen at the time of application.
Rather than using all reverse mortgage funds, more personal funds can be used for the purchase so the reverse mortgage can be set up with a Line Of Credit Option (HECM LIBOR option only)
Seller has to be the owner of record for 90 days prior to the date of the sales contract (based on when recorded). (This is to protect against property flipping.)
Prior to completing an application HUD requires the Certification of Occupancy.
The Original Purchase Contract or Certified Copy of the Purchase Contract is needed for underwriting.
Counseling must be completed by a HUD approved HECM counseling agency that has been approved to provide reverse mortgage counseling. Minnesota requires that the counselor be located in Minnesota. We will provide a you a list of HUD approved counselors.
The property must be livable at the time of closing. Any required repairs must be completed prior to closing by the seller – no repairs or repair set asides are allowed.
Funds are provided at closing, as there is no rescission period.
The new property has to be the primary residence and occupancy must happen within 60 days of closing.
One’s existing home may be retained as rental property or if purchasing current home prior to the sale of existing home income verification will be required to document the ability to maintain both properties. (This is prevent the practice of “buy and bail.”)

Using the reverse mortgage to finance the purchase of your new home may be your solution to meeting your goals without having a monthly mortgage payment.

*You may also need funds for property taxes, initial hazard insurance premium, home owner association dues, etc.

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.

The answer to the common reverse mortgage tax question

Posted on February 16, 2013 by sidac

As people are preparing their taxes, I’ve been receiving the question, “Is the interest on my reverse mortgage deductible?” So let me answer this question for you.

For interest to be a tax deduction for individual taxpayers, it must first be paid. Being one is not making payments on their reverse mortgage, the interest is not being paid but accruing on the loan along with the FHA Mortgage Insurance Premiums (MIP) and servicing fees (applicable on some reverse mortgages). Therefore the interest is not a tax deduction until it’s actually paid.

For FHA Mortgage Insurance Premiums IRS states, “You can treat amounts you paid during 2012 for qualified mortgage insurance as home mortgage interest. The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006.” However, as with the interest on a reverse mortgage, the MIP amount must first be paid.

There is a way to receive the tax deduction during the term of the reverse mortgage loan. While payments are not required with the reverse mortgage, borrowers may choose to make payments. There are no penalties for making these pre-payments and the borrower has the option on when and how much they may choose to pay.

Payments reduce the Unpaid Principal Loan Balance. The loan balance is made up of the following categories: MIP, Servicing fee, interest, and principal amount (sum of amount borrowers obtain for their use, i.e. paying off previous loans and liens, other closing fees, and other personal uses). When borrowers make payments to reduce the loan balance they are first applied to the MIP, then the servicing fees, then the interest followed by the principal balance.

Once the borrower has paid enough to cover the accrued MIP, service fees, then additional payment amounts are applied to the interest on the loan. When interest paid in a calendar year exceeds $600 the lender will send you a 1098 int tax form for the amount of interest paid.

Since the payments have to cover the initial MIP of 2% of the Maximum Claim Amount, then the on-going MIP that has accrued along with any servicing fees before they are applied to the interest, most borrowers don’t find it feasible to take the deduction. The loss of a tax deduction may be considered a negative of the reverse mortgage for some people but the pros and cons need to be weighed.

Making pre-payments on one’s reverse mortgage may still be beneficial in reducing the Principal Loan Balance. And if one has an adjustable rate, having access to the funds in the future.

If one has the adjustable rate HECM the full payment amount can:

be applied to create or increase the line of credit in which these payments can be borrowed in the future;
or applied to their monthly payment to increase the amount they receive monthly or the length time they receive the monthly payments.
If not specified, the payment amount will be applied to or create a line of credit.

If one has a fixed rate reverse mortgage the payment reduces your loan balance as outlined above but the funds do not become available to re-borrow in the future.

Keep in mind that payment in full will terminate the loan and eliminate any available term/tenure payments and/or line of credit.

When the loan is paid in full the interest will have been paid and could become a deduction at that time to the borrower or their estate.

Most seniors who do a reverse mortgage do not have a significant income tax burden therefore a tax deduction is not a large concern for them. Many borrowers feel that receiving funds for one’s needs and desires with no required monthly mortgage payments outweigh the loss of the tax deduction. They want to live comfortably, have some “elbow room,” and be independent with security, independence, dignity and control.

I am a reverse mortgage expert, not a tax expert or advisor. Check with your tax advisor or IRS regarding tax deductions for your individual situation.

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.

Minnesota Reverse Mortgages SIDAC

Minnesota Reverse Mortgage Information, Facts and News from the Experts Excelling in Service

Tag Archives: Reverse Mortgage Facts

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

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

Seniors, want to purchase your new home with no monthly mortgage payments? Use A Reverse Mortgage.

The answer to the common reverse mortgage tax question