Reverse Mortgages — The Process

Part 3 of 5 - Reverse Mortgages — The Process ...

In this section, we look at obtaining a Reverse Mortgage and some of the issues and things to think about in the process. This section describes the steps involved and takes a general look at the different programs.

1. In most cases, costs and benefits depend on local conditions — housing prices, interest rates, etc., which change with location and time. Any general comparison might be misleading.
2. “Preferred Counselors” for Reverse Mortgages have computer software that can give you a detailed analysis and comparisons for loans in your area that meet your needs. (More about Preferred Counselors later in this section.)

1. The first step is to find out how much money is coming in and how much is going out to get an accurate idea of your financial needs. This will become very important as you examine Reverse Mortgage programs and their options and alternatives. The approach suggested here follows an outline provided by the Federal National Mortgage Association (also known as Fannie Mae). A complete outline may be obtained from Fannie Mae. See the Resources Section for contact information.
   
   • Locate and assemble all of the records that show your sources of income and expenses for the past year.
   • List your sources of spendable income. List all the funds available to you as spendable income, but do not include interest or other earnings that were immediately reinvested.
   • List all your expenses. These could include: mortgage payments, other debts, utilities, food, income taxes, property taxes, insurance, transportation, medical and dental not covered by insurance, clothing, recreation, gifts, holidays, vacations, etc.
   • Analyze your cash flow. If you are like most homeowners, you will probably see ways to make more efficient use of your assets. One way might be to use the equity in your home to generate additional income.
   
   
2. Make a budget for the next 12 months. Estimate all the income and expenses you expect over the next year.
   
   • Using your cash flow statement, list regular monthly income and non-monthly income you expect each month for the next year — the amounts and the sources. Add the monthly and non-monthly amounts together to get an annual total.
   • Do the same thing for expenses for the next year.
   • Compare annual income and expense totals. If your total expected expenses are more than your total expected income, this indicates the amount of additional funding required to meet your needs.
   • Now that you have the numbers, list your financial goals in their order of importance. Start by thinking about your needs and wants, now and for the future. This gives you a good starting place, even though they may change. Now list the estimated cost to meet each of these goals. To calculate your funding needs as a “lump sum,” multiply the annual total by the number of years you plan to remain in your home.
   
   
3. The next step is to locate a Reverse Mortgage counselor. To be better informed before you contact the counselor, or to locate one, you may wish to use the Internet from home or at the local library or senior center. A list of useful websites, phone numbers and publications is included at the end of this booklet. For the most up-to-date and detailed information, get acquainted with the National Center for Home Equity Conversion (NCHEC) website, http://www.reverse.org. It contains a wealth of helpful information and pointers to other useful sites. Your library may also have books that will help you learn more about Reverse Mortgages.
   
   Now, about counselors. Some people in the real estate, financial planning and legal professions often have an incomplete understanding of Reverse Mortgages. If you do your homework, you may be surprised to find that you will develop a more complete understanding. Both the U.S. Department of Housing and Urban Development (HUD) and NCHEC websites provide lists, by state, of public or nonprofit organizations that do Reverse Mortgage counseling. Some lists may not be up-to-date. A toll-free number (800-569-4287) can also be used to locate HUD-approved counselors. NCHEC “Preferred Counselors” work for nonprofit or public agencies, not lenders. They have detailed local information about lenders, program options and costs, and alternatives to consider. They pledge to:
   
   • Disclose all your options.
   • Be unbiased.
   • Be independent.
   • Protect your privacy.
   
   Any counselor you use should be willing to make a similar pledge to you.
   
   Why meet with the counselor before you contact a lender? There are several good reasons.
   
   • A counselor can help you consider all your options, some of which may not involve getting a Reverse Mortgage.
   • A counselor can point you to all the Reverse Mortgage lenders in your area. (You may be surprised how few there are.)
   • They can give you a “Personal Reverse Mortgage Analysis” and a comparison, in writing, of all the Reverse Mortgage programs available in your area.
   • A counselor can point you to other sources of advice you may need.
   • There is no pressure from a counselor to apply for a Reverse Mortgage.
   • At the end of the counseling session, the counselor will provide you with a HUD Certificate of HECM Counseling, which you may need if you apply for a Reverse Mortgage loan.
   If you cannot locate a counselor within driving distance (most of them are located in urban areas), you can consult with one by phone. Not all Reverse Mortgage programs require counseling before applying for a loan but it's in your best interest to get it anyway.
   
   However you do it, get this important information before you discuss specific programs with a lender and before you apply for a loan. Because of cost constraints, some independent counseling agencies have a nominal charge for their services (usually around $75). What you learn can save you much more than that.  One more note: not all counselors are equally knowledgeable. It's okay to ask how long they have been doing this type of counseling and how many clients they have worked with.
   
   
4. Your next step is to locate a lender. Your counselor will have names and contact information for lenders in your area. You can also find lender information in the resources listed at the back of this booklet. Applying for a Reverse Mortgage is similar to applying for a conventional mortgage. The process is somewhat more complicated because program options have to be selected and an annuity may be included. There are the usual inspection, appraisal, title insurance and broker fees. Typically, there are more fees than with a conventional mortgage. The lender is required by law to disclose the total cost of the loan. However, you may find this information difficult to understand. A counselor or senior attorney can help you make sense of it. If you are confused at any time, always ask to have it explained. After the lender processes the loan, there is a closing (signing) of the loan. Don't be surprised at the number of pages you will have to sign or initial. Read everything before you sign and always be sure you understand what you are signing.
   
   By law, you have three business days after signing to change your mind and cancel the loan. After three days, you have access to the money under the payment option you chose. If there is an existing mortgage, it will be paid off at this time.

This is a relatively new and rapidly growing market, programs change and new ones appear over time, so we will describe representative examples of currently available programs without trying to include them all. All the programs discussed use adjustable mortgage interest rates (ARM). However, the rates and the way they are calculated vary considerably from program to program. If you choose the line of credit option with any of these programs, there is a monthly service fee. Your counselor will have specific information about programs and options in your area.

By far, the most used program is HUD's Home Equity Conversion Mortgage (HECM). Most Reverse Mortgage lenders offer it. This federally insured program might give you more cash than other programs if your home is worth less than, or about as much as, the average home in your county. Here are some of the characteristics of the HECM program:

• This is the only federally insured program. This insures the lender in case the loan amount is more than the value of the home, and it ensures that your payments will continue no matter what happens to the lender. The premium is two percent of the loan amount plus one-half of one percent of the outstanding loan balance annually.
• Independent counseling (and a counseling certificate) is required to obtain this loan.
• All the payment options and combinations are available with this program except lump-sum payment.
• You can take out a lump sum from the line of credit option. You can change your payment option during the life of the loan — for example, from a line of credit to monthly payments.
• This program often has the lowest interest rates over the life of the loan. It allows you to repay part of the principal and then borrow it again without restarting the loan and without a penalty.
• A unique feature is that if you choose a line of credit, the amount of credit available to you grows larger each month the loan is in effect. This means the total amount you can borrow can become much larger over time.
• One possible drawback of this program is that the appraised value of your home is not the only factor in determining how much you can borrow. The maximum loan amount is also limited by the “203-b-2” limit for your area. This is a fixed maximum home value, defined by HUD, which varies depending on the area where you live. In areas where housing is rapidly appreciating, you may find this limit much lower than the appraised value of your home.

Fannie Mae's program is called Home Keeper. It may be appropriate if your home is worth slightly more than the average home in the county. Some characteristics of this program are:

• The amount you can get from Home Keeper is sometimes higher than from HECM because Fannie Mae's maximum loan limit is higher than HUD's.
• Independent counseling is required to obtain this loan.
• The only payment option is monthly payments for as long as you live in the home (tenure), line of credit or a combination of the two.
• If you choose the line of credit option, the maximum amount available does not grow.
• A variation is called Home Keeper for Home Purchase that can help you “downsize” to a new home without making monthly mortgage payments.

Financial Freedom, a private lender, has two programs. Borrowers with expensive homes, worth much more than the HUD limit, may consider using them.

1. Equity Guard is a Reverse Mortgage Annuity program.
   
   • You either receive a lump sum of cash, purchase an immediate annuity or a combination of the two.
   • The annuity provides payments that continue for life, regardless of whether you remain in your home.
   • Counseling is required but does not have to be done by an independent counselor.
   • The loan becomes due when the borrower or surviving co-borrower no longer lives in the home (as his principal residence) or dies.
   • At maturity, the lender receives the percentage of the home value (up to 80%) you pledged when the loan was obtained. The remaining value returns to you or your estate.
   • If the value of the home when it is sold is less than the pledged amount, the lender can only claim the sale price of the home.
   • This program is usually most cost effective if you plan to stay in your home for a number of years.
   • There may be income tax considerations in connection with the annuity option and it may affect your eligibility for “need based” public assistance.
   
   

The interest rates for both these Financial Freedom programs may be considerably higher than HECM rates.

Go to Part 4 - Reverse Mortgages — Things to Consider