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 reverse-mortgages-essentials reverse-mortgages-essentials Document Transcript

  • The MetLife Mature Market Institute®The MetLife Mature Market Institute is MetLife’s centerof expertise in aging, longevity, and the generationsand is a recognized thought leader by business,the media, opinion leaders, and the public. TheInstitute’s groundbreaking research, insights, strategicpartnerships, and consumer education expand theknowledge and choices for those in, approaching, orworking with the mature market.The Institute supports MetLife’s long-standingcommitment to identifying emerging issues andinnovative solutions for the challenges of life.MetLife, Inc. is a leading global provider of insurance,annuities, and employee benefit programs, serving90 million customers in over 50 countries. Throughits subsidiaries and affiliates, MetLife holds leadingmarket positions in the United States, Japan, LatinAmerica, Asia Pacific, Europe, and the Middle East.www.MatureMarketInstitute.comNational Council on AgingThe National Council on Aging (NCOA) is anon-profit service and advocacy organization thatserves as a national voice for older adults and thecommunity organizations that serve them. It bringstogether non-profit organizations, businesses, andgovernment to develop creative solutions to im-prove the lives of older adults.1901 L Street, NW, 4th FloorWashington, DC 20036(202)© 2012 MetLife
  • The Essentials: Reverse MortgagesFor many homeowners age 62 and over, a reversemortgage could be an important option for finan-cial flexibility. It can provide a way to access partof your home equity to use loan proceeds for whatyou want or need, while you retain ownershipand continue living in your home. These loanscan provide long-term funds to help to meet yourongoing expenses.A reverse mortgage may not be right for everyone.Your age, the value of your home, and your estateplans are among the factors that can help you de-termine if this product is right for you. If you areconsidering a reverse mortgage, it is advisable toconsult with a knowledgeable financial advisor ora certified U.S. Department of Housing and UrbanDevelopment (HUD) reverse mortgage counselor.The HUD reverse mortgage counseling programand how to find a counselor in your area are ad-dressed later in this guide. You may also want todiscuss this decision with family members whocan help you weigh your options.This educational guide—prepared in cooperationwith the National Council on Aging (NCOA)—isa general introduction to reverse mortgages. Itexplains the terminology associated with theseloans, presents some basic issues you need toconsider, and provides answers to some frequentlyasked questions. We trust you will find it helpful. 1
  • Table of ContentsGeneral Information . . . . . . . . . . . . . . . . . . . 4› What Is a Reverse Mortgage?. . . . . . . . . . . . . . . 4 › Are There Different Types of Reverse Mortgages? . . . . . . . . . . . . . . . . . . . . . . . 4› Who Is Eligible for a Reverse Mortgage?. . . . . . 5 › Do I Need to Meet any Financial Guidelines to Qualify for a Reverse Mortgage?. . . . . . . . . . . 6› If I Still Owe Money on a First or Second Mortgage, Can I Qualify for a Reverse Mortgage?. . . . . . . . . . . . . . . . . . . 6Financials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7› How Much Can I Borrow?. . . . . . . . . . . . . . . . . . . 7 › How Can I Take the Proceeds from a Reverse Mortgage? . . . . . . . . . . . . . . . . . . . . . . . 7 › Is There Any Way to Protect Against Rising Costs?. . . . . . . . . . . . . . . . . . . . . 8 › What Are the Costs Involved in a Reverse Mortgage? . . . . . . . . . . . . . . . . . . . . . . . 8› How Does the Interest Work?. . . . . . . . . . . . . 10 › Are There Any Restrictions on What I Can Do with the Money?. . . . . . . . . . . . . . . . . 11 › Am I Able to Use a Reverse Mortgage to Purchase a Home?. . . . . . . . . . . . . . . . . . . . . 11› Will the Lender Own My Home?. . . . . . . . . . 12› When Do I Have to Pay Back the Loan? . . . . 12› What Is the Most I Can Owe?. . . . . . . . . . . . . 122
  • Important Considerations. . . . . . . . . . . . . . 14 › Will This Affect Any of My Other Benefits? . . . . . . . . . . . . . . . . . . . . . . . . . 14 › Is the Interest Accrued on the Reverse Mortgage Tax-Deductible?. . . . . . . . . . . . . . . . 14 › How Will This Affect the Estate I Leave to My Heirs?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 › How Do I Know Whether a Reverse Mortgage Is Right for Me?. . . . . . . . . . . . . . . . 15 › How Can I Compare Products and Features?. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 › How Can I Estimate What My Costs May Be?. . . . . . . . . . . . . . . . . . . . . . . . . . 16Additional Resources. . . . . . . . . . . . . . . . . . 17Endnotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3
  • General InformationQ. What Is a Reverse Mortgage?A. A reverse mortgage loan is a financial optionthat lets you tap into the equity you have built inyour home. These loans allow you to receive moneyfor the things you need or want, while still living inand owning your home. A reverse mortgage is theopposite of a regular, or forward, mortgage. Witha regular mortgage, you take on debt to buy yourhome. As you make monthly payments and pay offthe loan, you can build up equity.A reverse mortgage allows you to access fundsfrom your home equity by taking on debt whilereducing the equity in your home. With a reversemortgage, there are no monthly mortgage pay-ments. You are responsible for paying propertytaxes, required insurance premiums, and anyhome maintenance.A reverse mortgage also differs from a home equityloan. With a home equity loan you also take ondebt. However, with a home equity loan you makeongoing payments to reduce the debt and rebuildyour equity through a series of ongoing payments.With a reverse mortgage you do not make monthlypayments and therefore you take on debt withoutrebuilding the equity in your home. Interestaccrues on the portion of the loan that is disbursed.Q. Are There Different Types of ReverseMortgages?A. Yes. A Home Equity Conversion Mortgage(HECM) is the most common type of reverse4
  • mortgage. HECMs are insured by the FederalHousing Administration (FHA), a part ofthe U.S. Department of Housing and UrbanDevelopment (HUD). They account for 95% ofreverse mortgages.1 HECMs are available witheither a fixed rate or an adjustable rate. There aretwo HECM products, the HECM Standard andthe HECM Saver. The HECM Standard has a 2%upfront Mortgage Insurance Premium (MIP)and provides the highest benefit (loan amount).The HECM Saver has a minimal (0.01%) upfrontMortgage Insurance Premium but provides alower benefit (loan amount).Occasionally lenders offer other types of reversemortgages, often referred to as ProprietaryLoans. They are not FHA insured. Some mayhave lower fees but higher interest rates. Othersmay allow you to borrow a higher initial amountthan a HECM mortgage. It is important tocompare the costs and features of these loanswith HECM loans to decide which is mostappropriate for your situation. This guide willprimarily focus on the features of HECM loans.Q. Who Is Eligible for a Reverse Mortgage?A. To be eligible for a reverse mortgage, you and allborrowers who are co-owners of the home must beage 62 or older. The home must be your principleresidence to qualify for a reverse mortgage. Eligibleproperties include single-family homes, multi-family homes (up to four living units) townhouses,most condominium units, and some mobile homes.You may need to make repairs to ensure that thehouse meets minimum property standards. Youmay be able to use the proceeds from your reversemortgage to pay for these repairs. 5
  • Q. Do I Need to Meet Any Financial Guide-lines to Qualify for a Reverse Mortgage?A. Your lender may conduct a financial assessmentto ensure that you are willing and able to meetthe obligations of a Home Equity ConversionMortgage (HECM) loan, including general homemaintenance and paying ongoing property taxesand homeowners insurance. The U.S. Departmentof Housing and Urban Development (HUD)does not have specific income requirements forHECM reverse mortgage borrowers. However,HUD has stated that HECM lenders may nowconduct a financial assessment of the applicant aspart of the process of qualifying them for theseloans. This assessment could include a review oftheir credit history, income, debts, and cash flowsituation. Applicants who do not meet the lender’srequirements may have their loan applicationdenied by the lender. This assessment can varyamong lenders, depending on the different reversemortgage products that they offer.Q. If I Still Owe Money on a First orSecond Mortgage, Can I Qualify for aReverse Mortgage?A. You may still be eligible for a reverse mortgagedepending on the amount you owe on yourcurrent mortgage and the value of your home.The funds from the reverse mortgage would firstbe used to pay off any existing debt you have onthe property.6
  • FinancialsQ. How Much Can I Borrow?A. The amount you can borrow depends on:› Your age› Type of reverse mortgage you select› Current interest rates› Value of your home› FHA lending limitsThere are no limits on the value of a home thatwould qualify for a reverse mortgage. However,for HECM loans, HUD limits how much you willbe able to borrow. The maximum amount is cur-rently set at $625,500 in most areas.2 These limitsare subject to change annually. Typically, increasedage, higher home values, and lower interest rateswill allow you to borrow more. If there is morethan one owner, the age of the younger owner willdetermine the amount you can borrow.Q. How Can I Take the Proceeds from aReverse Mortgage?A. There are a number of options available toborrowers. Depending upon the loan you choose,you may be able to receive your loan fund as:› A lump sum payment, where the cash will be available to you immediately› Equal monthly payments for as long as one bor- rower lives in the home (Tenure payment plan)› Equal monthly payments for a fixed number of months (Term payment plan) 7
  • Financials› A line of credit that will allow you to draw funds when you need them› Any combination of these optionsIt is important to consider which method of pay-ment or combination may be best suited to yoursituation. In many cases, you can change yourpayment plan for a fee of $20 at a later time.3 Yourlender will assist you in understanding your op-tions for changing the loan payment plan.Q. Is There Any Way to ProtectAgainst Rising Costs?A. If you select a monthly payment plan, theamount you will receive each month will remainconstant over time. If you select a line of creditpayment plan, the unused portion in your line ofcredit may increase annually depending on yourinterest rate at the time.Q. What Are the Costs Involved in aReverse Mortgage?A. The costs associated with taking out a reversemortgage may include an origination fee, otherclosing costs, and for HECM loans, an upfrontmortgage insurance premium. These upfront costscan be included in the loan, and paid (with inter-est) when the reverse mortgage becomes due.Borrowers also may pay a monthly servicing fee,and for HECM loans, a monthly mortgage insur-ance premium on the amount they have borrowed.As of January 2011, borrowers can expect to incursome or all of the following costs when obtaining aHECM reverse mortgage:48
  • TYPE COSTOrigination Fee(if applicable) $125,000—flat fee › Homes worth up to of $2,500. › Homes worth more than $125,000— calculation based on 2% of the first $200,000 of your home’s value plus 1% of the amount over $200,000. › There is a cap on these fees. Currently, HECM origination fees cannot be more than $6,000.Closing Costs › These third-party costs can include an appraisal, title search and insurance, surveys, inspections, recording fees, mort- gage taxes, credit checks, and other fees. On average they may range from $2,000–$3,000.5Mortgage Insurance › Upfront MIP—2%Premium (MIP)— of the value of yourGuarantees you will home up to the FHAreceive expected lending limit. (0.01%loan advances, and required on thethat if you or your HECM Saver)heirs sell the hometo repay the loan, › Ongoing monthlyyou will never owe MIP—the annualmore than the sale rate of 1.25% ofprice of the home. the outstanding loan balance. 9
  • Financials TYPE COST Lender’s Servicing Fee—(if charged) $30 monthly for › No more than This fee covers loans with a fixed the cost of send- rate or with an ing account state- annually adjusted ments, distributing interest rate. the proceeds, and › No more than making sure you $35 monthly for adhere to loan loans where the requirements such interest rate as paying taxes and adjusts monthly. insurance.Q. How Does the Interest Work?A. Interest rates for most reverse mortgages aretied to a financial index and will vary accordingto market conditions. Some financial institutionsoffer both fixed- and variable-rate reverse mort-gages. With an adjustable rate you may choose tohave the rate adjust monthly or annually.6 Yourlender should provide you with the interest ratesfor the various options and discuss the potentialimplications of these rates based on your individ-ual circumstances. You may also want to consultwith a tax professional to help you decide whichoption could work best for you.Interest is charged only on the money you receive. Itwill accrue based on the time of your withdrawals.For instance, if you take a single lump sum at thestart of your loan, all of those funds will accrueinterest over the life of the loan. On the other hand,if you have a credit line, interest will accrue for each10
  • withdrawal beginning at the time you make thewithdrawal. The same would hold true for regularmonthly payments.Q. Are There Any Restrictions on What ICan Do with the Money?A. You can use the money from your reversemortgage any way you choose. This could includecovering monthly living expenses, making homerepairs, or using it to help pay for health care orlong-term care expenses. Some of the proceedsof your reverse mortgage can be used to repayany existing mortgage and fees associated withobtaining the reverse mortgage itself. Pleaseconsult your personal legal or tax advisor beforeusing the proceeds for the purchase of anyfinancial product.Q. Am I Able to Use a Reverse Mortgageto Purchase a Home?A. Yes. The Federal Housing Administration(FHA) has recently approved the use of theproceeds of a reverse mortgage to purchase ahome. It works like any other reverse mortgage.Your credit history and current income do notaffect whether you will qualify. The amount youmay borrow is based on the lower of the sales priceor the appraised value of the home, your age, andthe interest rates at the time. The option of using areverse mortgage could provide an answer if youwish to move to a new location or find a home thatbetter meets your current needs. Your lender canexplain the details and give you an estimate as tohow this might work in your particular situation. 11
  • FinancialsQ. Will the Lender Own My Home?A. No. The lender issuing the reverse mortgagewill not own your home. You retain ownershipand can continue to live in your home as longas you meet your borrower responsibilities. Youmust continue to pay property taxes, maintain andrepair your home, and keep your home insured.The lender can require repayment at any time ifyou do not comply with these requirements.Q. When Do I Have to Pay Back the Loan?A. Unlike a traditional forward mortgage orhome-equity loan, there are no monthly mortgagepayments. The reverse mortgage becomes duewhen you (or the last borrower):› Die› Sell the house or move permanently to a new residence› Fail to live in the home for 12 consecutive months (e.g., you need to go to a nursing home for extended care)If there are co-borrowers and one dies, changespermanent residence, or leaves the home for 12consecutive months or more, the other borrowerscan continue to live in and own the home.Q. What Is the Most I Can Owe?A. When the reverse mortgage becomes due youwill need to pay the amount you borrowed plusinterest charges and any service fees. The paymentcan be made by selling the home, refinancingthrough a conventional mortgage, or by usingother assets.12
  • If you sell the house to pay the loan, any proceedsin excess of what is due on the loan would belongto you. If the house is sold for less than what isdue on the reverse mortgage, the FHA will makeup the difference to the lender for HECM loans.For example, if your total loan due at the time ofpayment was $200,000 and your home sold for$175,000, FHA would pay the additional $25,000to the lender. However, if you do not sell the homeand decide to pay the loan with other assets, youwill owe the total amount due on the loan even if itis higher than the potential sale price of the house. 13
  • ImportantConsiderationsQ. Will This Affect Any of MyOther Benefits?A. The money from a reverse mortgage is not con-sidered taxable income. Payments from a reversemortgage do not affect regular Social Security orMedicare benefits. However, extra cash from areverse mortgage may affect your eligibility forneeds-based public programs such as Medicaid andSupplemental Security Income (SSI). Your lenderand your HUD counselor can help you assess yourspecific situation. The Web-based service BenefitsCheckup ( can help olderindividuals with limited income and resources findout if they may be eligible for benefits programs.Please consult a professional advisor regarding theimpact of SSI to your personal situation.Q. Is the Interest Accrued on the ReverseMortgage Tax-Deductible?A. The interest accrues over time and is deductibleonly at the time that the loan is repaid. Your taxadvisor can provide more specific information.Q. How Will This Affect the Estate I Leaveto My Heirs?A. A reverse mortgage reduces the equity in yourhome. If you die and there is no other co-borrower,the reverse mortgage becomes due. Your estate willneed to contact the lender to determine the timeframe they allow for repayment. Your estate mustrepay the amount of money received, plus interestand service fees. If the home is sold, any proceedsin excess of the loan balance belong to your heirs.If the home is sold for less than the total due on14
  • the loan, the FHA will pay the remainder due tothe lender. Your heirs will not be responsible formaking up the shortfall. However, if the home isretained by your heirs, the full amount of the loandue must be paid, even if it is higher than thepotential sale price of the house.Q. How Do I Know Whether a ReverseMortgage Is Right for Me?A. As with any financial product, it is importantto educate yourself on how a reverse mortgageworks and how it would compare to other optionsavailable to meet your personal financial goals.You should also consider issues such as how longyou plan to stay in your current home, your abilityto maintain the home, and whether you will beable to obtain help at home should you need it atsome future time. Reading this guide is a good firststep to starting the process of deciding whether areverse mortgage is right for you.Continue to get educated about the different typesof reverse mortgages, their costs, features, and ben-efits. A HUD-certified reverse mortgage counselorcan also be an important source of information.These independent counselors are not connectedto lenders and can help you weigh the pros andcons of a reverse mortgage and its features basedon your situation. See the “Additional Resources”section of this guide for additional ways to learnmore. Also, consider involving friends or familymembers in the education and evaluation process.It is helpful to have someone you trust help you toevaluate your options.A reverse mortgage can be a valuable option formany people, but it is not for everyone. The moreyou learn, the more you will be able to decidewhether it is right for you. 15
  • Important ConsiderationsQ. How Can I Compare Productsand Features?A. Once you decide that a reverse mortgagemay meet your needs, you can meet with one ormore reverse mortgage lenders to learn about thedifferent product features and how they work. Youcan obtain a listing of lenders in your area thatare approved to sell HECM reverse mortgages byvisiting the HUD Web site at You can enter your city orstate, check the box marked “HECM,” and clickon “Submit” to obtain this list.The government requires that anyone seeking aHECM reverse mortgage receives HUD-approvedcounseling on the product before submitting anapplication. You can call FHA at (800) 569-4287 tobe referred to a HUD-approved counseling agencyin your area that can provide counseling related toreverse mortgages. They can also give you a list ofapproved lenders upon your request. There may bea charge for HUD-approved counseling.Q. How Can I Estimate What My CostsMay Be?A. HECM reverse mortgage costs can vary fromlender to lender, and change based on the paymentoptions you select. There are several online toolsthat you can use to estimate how much youmay be able to borrow, how long funds may lastdepending on different payment options, and howmuch the closing costs of the loan may be. See the“Additional Resources” section of this guide. Yourlender and HUD counselor should provide youwith charts that will help you make comparisonsbased on a variety of factors including the loanamount, the payment option you select, interestrates, fees, and how long you stay in the home.16
  • Additional ResourcesAARP FoundationThe AARP Foundation provides a great deal ofinformation for consumers related to reversemortgages. Its Web site,,covers many aspects of the topic and includeshelpful calculators and a downloadable, 36-pageconsumer guide entitled Reverse Mortgage Loans—Borrowing Against Your Home. You may also ordera hard copy of the guide by calling (800) 209-8085.National Council on Aging (NCOA)NCOA,, is a non-profit serviceorganization committed to advocacy to improve thelives of older Americans. Its Use Your Home to Stayat Home™ initiative is a public-private partnershipthat encourages the appropriate use of home equityto help older people live at home. Their Web siteincludes research on trends in the use of reversemortgages and how their use could be expanded.NCOA’s consumer guide: Use Your Home to Stayat Home: A Guide for Homeowners Who Need HelpNow details the pros and cons of reverse mortgagesas tools to help people remain at home, even if theyrequire assistance.National Reverse Mortgage LendersAssociation (NRMLA)NRMLA’s mission is to educate consumers aboutreverse mortgages and enforce its “Code ofConduct and Best Practices” among lenders.In addition to providing information and guidanceto its member lenders, it has established aconsumer Web site at site includes a calculator for consumers toestimate the amount they would be eligible to 17
  • Important Considerationsreceive from a reverse mortgage, a listing of thoselenders that are members of the organization,consumer information and guides related toreverse mortgages, and profiles of buyers ofreverse mortgages, with commentaries abouttheir experience.U.S. Department of Housing and UrbanDevelopment (HUD)The HUD Web site provides helpful informationabout multiple aspects of reverse mortgages,including a Top Ten HECM FAQs section site also allows you to search for both reversemortgage lenders and HUD counselors in yourlocal area: You may also call FHA at (800) 569-4287toll-free, for the name and location of a HUD-approved HECM counseling agency near you.18
  • Endnotes “Home Equity Conversion Mortgage: The Most 1 Popular Choice for Reverse Mortgages,” Reverse Mortgage, accessed March 2011 via Internet at: http://www.reverse-mortgage-information. org/99/home-equity-conversion-mortgage-%E2%80%93- the-most-popular-choice-for-reverse-mortgages.php “FHA Reverse Mortgages (HECMs) for Consumers,” 2 U.S. Department of Housing and Urban Develop- ment, accessed March 2011 via Internet at: http:// /housing/sfh/hecm/hecmabou Ibid. 3 Ibid. 4 Reverse Mortgage Loans—Borrowing Against Your 5 Home, AARP Foundation, 2008, org/ hires_nocrops.pdf “FHA Reverse Mortgages (HECMs) for Consumers,” 6 U.S. Department of Housing and Urban Develop- ment, accessed March 2011 via Internet at: http:// /housing/sfh/hecm/hecmabouThis guide offers general information and is nota substitute for consultation with an appropriateprofessional. 19
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