Mortgage Monday: Reverse Mortgage Basics

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Education & Training with Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals.


This is a guest post by Janice Brown from the Wenatchee office of American Pacific Mortgage. I have asked Janice to write an article on the Proprietary Reverese Mortgage she refers to in this post.

What you want to know about Reverse Mortgages.

There are two types of Reverse Mortgages that you need to be aware of. The most popular is the FHA insured Home Equity Conversion Mortgage or HECM (Pronounced HeckM). The second type is a Proprietary Reverse Mortgage that is not insured by FHA. If you don’t qualify for, or your home value exceeds the FHA loan limits, then a Proprietary Reverse Mortgage may be an option for you. Remember, a Reverse Mortgage whether HECM or Proprietary is a versatile financial tool that can be individualized to your specific financial needs.

I am going to focus on the FHA Insured Home Equity Conversion Loan (HECM) for this article.
First you need to be 62 or older to qualify for the HECM. If your spouse is younger than 62, they may be on title, however as a non-borrowing spouse they will not be on the loan. If the older spouse dies the younger spouse may be able to live in the home however, they will not have access to the HECM funds. The amount borrowed will be based on the non-borrowing spouses age which will affect the amount of funds available. If both spouses are 62 or older, the amount of funds available will be based on the younger borrower, since they will have a longer life expectancy.

You may purchase a new home or you may refinance your current home with a HECM as long as the home will be your primary
residence that you live in for at least 6 months and 1 day per year.

There isn’t a principal and interest payment, however
you are responsible for paying the real estate taxes, homeowners’ insurance, homeowner association dues and maintaining the property. If there is not enough income to cover these expenses you may be required to have a life expectancy set aside, think escrow account, to pay your real estate taxes and homeowners’ insurance.

You may request a lump sum, a monthly set aside of income, or a line of credit or a combination of these. Lump
sum is usually used to pay off an existing mortgage and/or additional debts. A monthly set aside of income is for someone who needs additional monthly income to meet expenses. A line of credit is used when there is a large amount of equity and the borrowers only want to use the funds as needed.

The loan amount you may qualify for is based on the youngest borrowers age, the appraised value of the home and the fixed or adjustable interest rate and margin. The loan amount is limited so that you do not exceed the value of your home prior to your permanent departure based on average appreciation rates and expected interest accrual. Any liens on the property will need to be paid off with either your own funds and/or proceeds from the HECM. There can be no other liens on the property at the funding of the reverse mortgage. The HECM will be your new mortgage loan and you will be on title to the property just like any other mortgage loan. The loan becomes due and payable when the last borrower leaves the home permanently or if there is a default under the loan terms. The HECM can be paid off, refinanced into another loan, or the home may be sold.

A HECM is an FHA insured non-recourse loan that makes sure that you or your heirs will not have to pay back any loan balance that exceeds the amount of the home value when the last borrower permanently leaves the home. The home is treated as its own entity. Other assets like retirement accounts are not considered. It is strictly based on the home
value.

The equity in your home is based on the appraised value minus any liens. A HECM loan accrues interest based on the amount of funds borrowed, the interest rate and the monthly mortgage insurance premium. Which means that every month you will owe more on the loan and your equity position most likely will decrease every month.


Remember this is a loan, so the funds you use are not normally taxed as income (be sure to consult your tax advisor for your individual situation). However, you should be aware that some social services monitor the funds in your checking and savings and if you exceed their asset thresholds you may lose those services.

FHA requires both an upfront mortgage insurance premium of 2% and a monthly mortgage insurance premium based on the maximum loan amount. Similar to an FHA forward mortgage. These funds are sent to FHA and kept in a pool of funds that are used to pay lenders when home values are less than what is owed. You will see the upfront mortgage insurance as a closing cost and the monthly mortgage insurance will be seen on the amortization schedule showing annual projections. All closing costs can be financed into your home loan or paid by you. Remember, on a HECM refinance, you will have a 3 day right of rescission starting from when you sign the documents. Keep this in mind if you are paying off debts with the proceeds.

You must attend a mandatory government approved Reverse Mortgage counseling session prior to the lender taking an application. This can be done in person or over the phone and all borrowers need to attend the session. Prior to sounseling your lender will request your income and asset information along with a credit report to pre-qualify you. This information is used by both the lender and the counselor to make sure the HECM is a viable option for your individual situation. Credit history and credit scores are generally less strict then conventional loans and your interest rate is not based on your credit score.

You may consult with your family, accountant, financial planner, attorney or anyone else that will help you to make a decision or you may make the decision to continue on your own once you have a signed counseling certificate.

Since each individual circumstance is unique you will want to look at all your options before taking out a HECM. Have a local HECM lender run a HECM analysis which will give you 3 comparisons. Look them over and make sure you understand your options. Think of the Analysis as an estimate, based on estimated home value and current interest rates. Once you decide to move forward, complete the required HUD counseling and receive your signed counseling certificate. Contact your lender to fill out the application and receive your initial disclosures. Once the appraisal comes back, the proceeds may adjust up or down depending on the appraised value.

Remember, each client’s situation will be different based on all of the factors above and their own financial goals. There are many ways to use a HECM mortgage to your advantage.

I am here to answer any of your questions and can put together an estimated loan package specific to your individual financial goals. I can be reached at 509-888-6700.

Janice L Brown, NMLS 147704
American Pacific Mortgage, NMLS 101328/1850
P: 509-888-6700/F: 509-888-6701/E: Janice@APMWen.com www.apmortgage.com/JaniceBrown
PO Box 1351/Wenatchee, WA 98801
Equal Housing Opportunity

American Pacific Mortgage Corporation. All information contained herein is for informational purposes only and, while every effort has been made to ensure accuracy, no guarantee is expressed or implied. Any programs shown do not demonstrate all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions apply.

Reverse mortgages are loans offered to homeowners who are 62 or older who have equity in their homes. The loan programs allow borrowers to defer payment on the loans until they pass away, sell the home, or move out. Homeowners, however, remain responsible for the payment of taxes, insurance, maintenance, and other items. Nonpayment of these items can lead to a default under the loan terms and ultimate loss of the home. FHA insured reverse mortgages have an up front and ongoing cost; ask your loan officer for details. These materials are not from, nor approved by HUD, FHA, or any governing agency.

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"The best way to predict the future is to create it!"
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"Information is FREE. Knowledge, Experience & Integrity Are Priceless."

-Carol Williams

Retired: Real Estate Broker/Owner, Property Manager 
Coaching, goal setting and marketing consultant by appt.

Active: Golf & Travel Blogger
"Golf isn't a sport. It's a lifestyle."
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Rainer
500,638
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Great blog, thanks for sharing! There is a lot of misinformation about reverse mortgages out there!

May 21, 2019 04:21 AM #20
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Will Hamm 
Referring inquiries out to trusted advisors is certainly the way to go.  Thanks for stopping by.

May 21, 2019 05:00 AM #21
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Myrl Jeffcoat 
So glad to know the mortgage is working for you!  I'm anxious to check out your blog posts on your road trip.  I've been so busy haven't been able to keep up but I will catch up eventually!

May 21, 2019 05:01 AM #22
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Anna Banana Kruchten CRB, CRS 602-380-4886 
Janice is pleased to know her info has been so well received.  I will publish her post on the Proprietary Reverse Mortgage when she completes it.

May 21, 2019 05:03 AM #23
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Sally,
Great! Glad to know you found this information useful! 

Sally K. & David L. Hanson 

May 21, 2019 05:04 AM #24
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Dörte Engel 
Thanks for sharing that. Excellent point.  Thank you!

May 21, 2019 05:06 AM #25
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

HI Cindy Edwards 
You're right, they did (and still do) have a bad reputation.  They are a good fit for some but not all. 

May 21, 2019 05:07 AM #26
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Sham Reddy 
Thanks for stopping by to check out the Reverse Mortgage article.  There is a lot of misinformation and distrust regarding this type of loan.  Knowledge is power.

May 21, 2019 05:08 AM #27
Anonymous
RE broker

RM is like any tool, it can be used to fit if you need it. I have seen many in this program and for the most part it has work nicely.
The main misunderstanding is what is at risk.
First and foremost no lender is ever on your mortgage, you can lose your house if you don't pay property taxes, home insurance like any mortgage. However, leave the residence empty or rent the property leaves you at risk also.
If you have a ton of equity and market value or location of house is in a prime area you really can use it to your full advantage.
Your heirs have options up to 1 year, sell the home if any profit left they receive it, if the home is in negative equity then no choice give it to bank, or if the home outstanding shape is in a prime area and your heir or heirs want to buy it out they can do that.
The big problem is like anything else, the owner of the home sees a big cash sum in equity and blows it rapidly instead of the rainy day or health issues it was intended for.
Yes you can still stay in the house even though you ran out the equity since you always own the home, but goodness many get sick in old age and if you have $250k or more in line of credit equity you can now use it to maybe save your life or have a dignity end of life, so don't be foolish and spend it needlessly don't has been a problem and that is where getting educated before taking it out comes in play.

May 21, 2019 03:54 PM #28
Rainmaker
649,801
John Juarez
The Medford Real Estate Team - Fremont, CA
ePRO, SRES, GRI, PMN

It is my understanding that the home must be owner occupied as the principal residence...defined in the post as 1 day more than 6 months per year. So, if one spouse dies and the other moves in with family or to a retirement home or care home, "The loan becomes due and payable when the last borrower leaves the home permanently..."

The home can be sold, relatives can buy it or the loan can be paid off with other assets but it needs to be repaid.

I am surprised the article writer did not cover the ability to use a reverse mortgage to buy an new home and be payment free forever. That can be an attractive financial planning tool for the right folks.

 

May 21, 2019 09:20 PM #29
Rainer
470,902
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

HECM is a great tool for seniors and can be used effectively as solutions for many different circumstances. I've used this tool often for clients and when integrated in a retirement plan or college fund for grandchildren, it has distinct tax savings advantages. The information is simple, concise and easy to comprehend. Great post.

May 21, 2019 11:54 PM #30
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi John Juarez 
Thanks for stopping by to check out the Reverse Mortgage article.  RM is a big subject and this is only the first in what I hope is several on the subject.  I felt it was already long enough for the first installment.  Stay tuned for more. 

May 22, 2019 05:03 AM #31
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Kimo Jarrett 
Thanks for stopping by to check out the article on Reverse Mortgages.  I'm glad to hear you have used them successfuly for your clients as well. I am hoping Janice will write some more articles on the subject.

May 22, 2019 05:05 AM #32
Rainmaker
2,422,675
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

There are people who have no one, live alone and tire of the subject and this is a way for them to solve this subject to their liking. So be it...P.S. I know of two incidents where people exchanged elder care till death in exchange for their home to be given the care-giver. When made personal, it makes so much sense

May 23, 2019 06:52 AM #33
Rainmaker
5,257,579
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

This is an important topic and many real estate professionals lack the knowledge to advise seniors on these products. 

May 23, 2019 10:11 AM #34
Ambassador
3,040,680
Paul S. Henderson, REALTOR®, CRS
RE/MAX Northwest. - Tacoma, WA
Tacoma Washington Agent/Broker & Market Authority!

I have been looking forward to the second part of your reverse mortgage blog posts; I was not disappointed, Carol Williams 

May 23, 2019 01:47 PM #35
Rainmaker
3,172,510
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Carol I must be the only person who is not a fan of this type of mortgage... I had three listings where the estate almost lost the property to foreclosure... just saying, Endre

May 23, 2019 11:31 PM #36
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Roy Kelley 
I know just enough to know I don't know enough.  Always get the guidance of a qualified professional, right? 

May 24, 2019 07:44 AM #37
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Glad you enjoyed it, Paul S. Henderson, REALTOR®, CRS 
Reverse Mortgages definitely have their place under the right circumstances.

May 24, 2019 07:45 AM #38
Rainmaker
1,276,257
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Endre Barath, Jr. 
I had a friend who got into a bad RM too.  I do think they can be a great tool under the right circumstances, with all knowledge, and a reputable company.

May 24, 2019 07:51 AM #39
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