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REVERSE MORTGAGES END MONTHLY PAYMENTS

SPECIAL REPORT
A Reverse Mortgage Can Be A Good
Source of Money For Elderly Homeowners

Everybody who owns stocks or stock funds is moaning and groaning about the 3-year-old bear market. But there's another group that's sufering: fixed-income investors, many of them elderly.

True, falling interest rates did push bond prices up last year. But many investors who owned bonds that matured or were called early saw their incomes plummet after they reinvested.

Today, you're lucky to make 2 or 3 percent on bank savings. If you're replacing a 10-year Treasury bond that just matured, your yield is dropping from 6.3 percent to 3.7 percent.

Is there a way a senior can make up the income gap?

One alternative is a Reverse Mortgage, a way to pull money out of your home without saddling yourself with monthly payments, as you would with a Home Equity Loan.

While Reverse Mortgages are not suitable for everyone, low interest rates and rising home prices make them particularly attractive right now for those who can stomach the high up-front fees and compounding interest charges.

A 75-year-old who owns a $150,000 home could get a Reverse Mortgage loan for nearly $98,000 today, compared to $84,000 when rates were 1 percentage point higher a year ago, for example.

Like a Forward Mortgage, a Reverse Mortgage is a loan. Instead of requiring monthly payments, the loan, plus interest, is repaid, a) when the Homeowner chooses, b) when the property is sold during the Homeowner's lifetime, or c) after the Homeowner passes.

Since there are no payments, the Homeowner doesn't need a job or other income to qualify for a Reverse Mortgage. An applicant must use the property as their primary residence, and they must be at least 62 years old, though older Homeowners can get larger loans.

If the home is sold after your passing, the heirs will receive any money that's left once the debt, including interest, is paid. (Contrary to popular belief, the Lender does not get the home.) If the heirs prefer, they can pay off the loan rather than sell the property.

Homeowners can take their loan proceeds as a lump sum, a fixed monthly income, or a line of credit, which they can draw against whenever they wish. There is no income tax on the loan proceeds, since the money is a loan rather than income.

The longer you have the loan, the more interest you would owe. But federal regulations limit the total amount owed to the value of the property. If the property value falls or if the Homeowner lives to be very old, interest charges or money received on the monthly payment plan can exceed the property's value.

That, of course, is a risk that worries Lenders. To reduce this prospect, they limit the initial loan amount, considering factors such as interest rates and the Homeowner's life expectancy. (If the Homeowner has a previous loan on the property, a portion of the Reverse Mortgage must be used to pay that off.)

Hence, the older you are, the more money you can get. A 62-year-old with a $150,000 home might get $83,000, while an 85-year-old could get $113,000.

In the same way, lower interest rates allow Homeowners to lock in much larger loan amounts than they can get when rates are high. Once this loan amount is set, it is permanent, even if interest rates rise later. So it might pay to lock in now, while rates are low.

The interest charges applied to the loan float, changing either once a month or once a year. Typically, they are based on the rate paid by one-year Treasury notes, plus a "margin" of 1.5 percent or 2.1 percent, depending on whether the borrower chooses the monthly or annual adjustment. Currently, the combined rate on monthly adjustments, chosen by most borrowers, is 2.8 percent.

Although the Homeowner doesn't make payments on the loan, low interest rates mean interest charges don't build up as much, so there's more money left for the Homeowner or their heirs after the loan is paid off.

So, what's the downside?

The biggest one is fees, which can run to thousands more than you might pay on a Forward Mortgage.

These include a fee of several hundred dollars to appraise the property, a loan origination fee of up to $2,000, an insurance premium paid at closing equal to 2 percent of the property's value, a Mortgage Insurance Premium, MIP, that adds 0.5 percent to the loan rate and a monthly servicing fee of up to $35.

Another major drawback: Since the borrower doesn't pay interest each month, interest charges compound and you pay interest on interest. Hence, you might pay much more in interest than you would on an Forward Mortgage or Home Equity Loan.

Hence, it often makes better financial sense to sell a home, buy a cheaper one and live off the difference. Or you might do better with a Forward Mortgage or Home Equity Loan, assuming you have the income to qualify.

But a Reverse Mortgage can work well for an elderly Homeowner who wants to stay in their home, can't borrow elsewhere, really needs the money, and isn't concerned about the compounding interest charges chewing away at the equity that can be left to their heirs. --

MORE QUESTIONS AND ANSWERS

Q. How does a Reverse Mortgage differ from a Home Equity Loan?
A. While both Reverse Mortgages and Home Equity Loans enable you to turn the equity in your home into spendable dollars, there are important differences between the two types of mortgages.

WITH A HOME EQUITY LOAN, you must make regular monthly payments to repay the loan. These payments begin as soon as the loan is originated. To qualify for such a loan, you must earn a monthly income great enough to make those payments. If you fail to make the monthly payments, the Mortgage Lender can foreclose on you, and you can be forced to sell your home. In addition, you may be required to re-qualify for a Home Equity Loan each year. If you do not re-qualify, the Lender may require you to pay the loan in full immediately.

WITH A REVERSE MORTGAGE, you do not repay the loan as long as your home remains your principal residence, your income is not considered when qualifying you for the loan, and there is no requirement that you re-qualify each year.

Q. I am told the first thing I have to do in order to proceed with a Reverse Mortgage application is to complete HUD approved independent counseling. How do I get the required counseling in order to qualify move forward with my Reverse Mortgage?
A. You've come to the right place. Just have your mortgage representative contact us here so we can arrange your counseling session. You can then proceed with you application. See 'COUNSELING' here.

Q. Who is eligible for a Reverse Mortgage?
A. You and any co-borrowers must be at least 62 years old and either own your home free and clear or have a very low outstanding mortgage balance that can qualify to be paid off at loan closing. Your home must also be a single-family or two-unit to four-unit dwelling. Units and Condominiums may be eligible if they are in FHA approved developments. You also must agree to accept expert mortgage counseling from a HUD approved counseling agency. Family members also are strongly encouraged to attend these counseling sessions.

Q. What are the minimum and maximum amounts I can borrow?
A. The maximum amount you can borrow is based on a HUD formula that factors in the age of the youngest borrower, the interest rate, and the maximum claim amount. The maximum claim amount is the lesser of the appraised value of your home or the maximum principal amount for a one family residence that can be insured by FHA in your area. The maximum mortgage amount insured by FHA varies by geographic area and changes frequently. Please check with your Lender for the FHA maximum mortgage amount for your area.

Q. What types of proceeds payment plans are available with the Reverse Mortgage loan?
A. A borrower with a Reverse Mortgage may choose among five proceeds payment options: TERM, TENURE, LINE OF CREDIT, MODIFIED TENURE, and MODIFIED TERM.

Under the TERM option, you may receive equal monthly proceeds payments for a fixed period of time selected by you.

Under the TENURE option, you may receive equal monthly proceeds payments for as long as you occupy your home as a principal residence.

Under the LINE OF CREDIT option, you may draw up to a maximum amount of cash at times and in the amounts of your choosing, as long as you occupy your home as a principal residence.

The MODIFIED TENURE plan allows you to set aside a portion of loan proceeds as a line of credit and receive the rest in the form of equal monthly proceeds payments as long as you occupy your home as a principal residence.

The MODIFIED TERM plan allows you to set aside a portion of loan proceeds as a line of credit and receive the balance as equal monthly proceeds payments for a fixed time period as specified by you.

If you select either of the TERM plans, you can remain in your home after the end of the loan term without starting repayment. The same is true if you have withdrawn the maximum amount under a LINE OF CREDIT or MODIFIED TENURE payment plan.

Remember, repayment of a Reverse Mortgage does NOT begin until you no longer occupy your home as your principal residence.

Q. How will the amount of the monthly payment be calculated?
A. How much you can receive in monthly proceeds payments depends on the age of the youngest borrower, the interest rate, the maximum claim amount, and the length of time that you will be receiving proceeds payments for a fixed period, or for as long as you live in your home. The older you are the larger your proceeds payments are likely to be.

Q. Will Reverse Mortgage payments affect my Social Security, Medicare, Supplement Security Income (SSI), or Medical Benefits?
A. Reverse Mortgage proceeds payments do not affect your Social Security or Medicare benefits because those benefits are not based on the assets of the recipient.

However, in the Federal Supplement Security Income Program beneficiaries must keep their liquid resources under certain limits. If you do not spend Reverse Mortgage advances in the month received, then such funds are considered part of your liquid resources and may adversely affect your eligibility for SSI. Therefore, a Reverse Mortgage borrower who also receives SSI should never draw more money than they actually need to spend that month.

Regulations for state administrated programs such as Medicaid, AFDC, Food Stamps, and for state funded welfare programs (such as state supplements to SSI) all have different eligibility requirements. Therefore, we suggest that you consult a Benefits Specialist at your local Area Agency on Aging, or the local offices for these programs, to determine how Reverse Mortgage payments may affect your particular situation.

Q. Will I have to pay any fees to obtain a Reverse Mortgage?
A. Yes, you will have to pay an origination fee, other closing costs, and a Mortgage Insurance Premium, MIP, fee which is divided into two parts: an up front premium of two percent of the maximum claim amount, and annual, ongoing fee of half percent on your mortgage balance. You may be able to finance the origination fee, other closing costs, and the up front, two percent MIP, i.e., these items may be included in your loan balance so you do not have to pay for them in cash. In addition to the yearly insurance premium, a servicing fee is charged to your loan balance each month.

Q. Can I be forced to sell or vacate my home if the money I owe on the loan exceeds the value of my home?
A. Absolutely not, as long as you continue to occupy your property as a principal residence. You cannot be forced to sell or vacate your property, even if the total of the mortgage payments to you plus interest and Mortgage Insurance Premium, MIP, exceeds the value of your property, or if the fixed term over which you received your proceeds payments has expired. No deficiency judgment may result from your Reverse Mortgage loan. FHA insurance covers any further financial obligation to the Lender.

Q. Will my heirs owe anything to the mortgage Lender if I die?
A. Upon your death, the loan balance, consisting of proceeds payments made to you on your behalf plus accrued interest, becomes due and payable. Your heirs may repay the loan by selling the home or by paying off the Reverse Mortgage loan so that they may keep the home. If the loan exceeds the value of your property, your heirs will owe no more then the value of the property. FHA insurance will cover any balance due to the Lender. No additional financial claims may be made against your heirs or estate.

Q. If my home appreciates in value during the mortgage term, who will be entitled to that money?
A. Under a Reverse Mortgage you are legally required to pay back to the Lender only the outstanding balance. Any money remaining after the mortgage is paid goes to you or, upon your passing, to your heirs.

Q. What if I decide to sell my home?
A. If you choose to sell your home, the outstanding loan balance becomes due and payable to the Mortgage Lender. You or your estate will receive any proceeds exceeding the loan balance.

Q. Can I sell my home to my children and continue to live in it?
A. If you sell your home to your children or any other individual, the HECM will be due and payable at settlement. After the loan is repaid, any arrangements for your continued occupancy of the property must be made with the new owners.

Q. What is Fannie Mae's role in the Reverse Mortgage program?
A. Fannie Mae has agreed to purchase two types of adjustable rate HECM loans from the Lenders who originated them. One Adjustable Rate Mortgage (ARM) plan features annual interest rate adjustments with a two percent cap on the amount that the interest may change at each adjustment and a five percent cap on increases or decreases over the life of the loan. The other ARM plan features monthly interest rate changes, and limits interest rate increase to a ten percent over the life of the loan.

Click here for a Reverse Mortgage Application.

AARP Reverse Mortgage Report