About Reverse Mortgages

A reverse mortgage enables older homeowners (62+) to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment.

The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you. Eligible property types include single-family homes, manufactured homes (built after June 1976), qualified condominiums, and townhouses.

Enhancing your retirement years
The funds from a reverse mortgage can be used for anything. Common uses include supplementing retirement income to cover daily living expenses; repairing or modifying your home (i.e., widening halls or installing a ramp); covering health care expenses; paying off existing debts; taking a vacation; paying property taxes; and preventing foreclosure. There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on a first or second mortgage.

Reverse Mortgage Facts
• A reverse mortgage is only available to homeowners 62 years or older.
• There are no income qualifications.
• The borrowers retain title to the property and can continue to live in and
  own the home for as long as they choose.
• There are no monthly mortgage payments during the life of the loan.
• Proceeds are tax-free** and can be used for any purpose; they may be paid out
  as a lump sum, in monthly payments, as a line of credit, or a combination.*
• The loan amount depends on the borrower’s age, appraised value of the
  home, current interest rates and the type of reverse mortgage selected. It’s
  good to know that lending limits have just gone up at the beginning of 2006
  and interest rates have stayed surprisingly low.
• A reverse mortgage isn’t repaid until the borrower moves out of the home permanently.
• The repayment amount CANNOT exceed the value of the home, regardless of
  the loan balance.
• Once the loan is repaid, any remaining equity is distributed to the borrower
  or the borrower’s heirs/estate. Note: This is great way to reduce the estate
  tax burden on your heirs.**
• The home doesn’t have to be owned free and clear to qualify for a reverse mortgage.
* Not all products and options are available in all states.
** Consult your tax advisor.

What are my payment options?
You can choose to receive the money from a reverse mortgage all at once (lump sum), as fixed monthly payments (for up to life), as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan proceeds at any time.

The amount of money you get from a reverse mortgage depends upon your age (or age of youngest borrower in the of couples), appraised home value, current interest rates, and where you live. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you get.

The funds from a reverse mortgage are tax-free. A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if a person gets a lump sum payment from a reverse mortgage, any amount retained the month after he gets it would count as a resource and could affect Medicaid eligibility.

For example, if a person receives $4,000 for home repairs and spends it the same calendar month, this would not affect resources. But if he didn't spend it all, the amount retained as of the first of the next month would count as a resource. If his total liquid resources exceed $2,000 for an individual or $3,000 for a couple, he would be ineligible for Medicaid.

In addition, how much of the lump sum he could retain without affecting eligibility depends on the amount of other liquid resources he already has, such as money in bank accounts, savings bonds, etc. To be safe, you may want to consult a Medicaid expert.

Mandatory Counseling
Before applying for a reverse mortgage, you must first meet with a counselor. The counselor’s job is to educate you about reverse mortgages, answer your questions, and offer alternative options depending on your situation. A list of approved counseling agencies nationwide is posted online by the U.S. Department of Housing and Urban Development or you can ask your Reverse Mortgage Consultant.

Paying Back Your Loan
No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out.

The amount owed can NEVER exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.

The Home Equity Conversion Mortgage (HECM) is the oldest and most popular reverse mortgage product, accounting for 90-plus percent of the total market. Available since 1989, HECMs are insured by the federal government through the Federal Housing Administration (FHA), a part of the U.S. Department of Housing and Urban Development.

The amount of money you get from a HECM depends upon your age, appraised home value, and current interest rates. The older you are and the more valuable your home (and the less you owe on your home), the more money you get. The location of your home also affects the loan size. The size

of a HECM depends on the maximum loan limit, which varies by county and is adjusted annually. Currently (for 2006), the FHA loan limit varies from $200,160 (for rural areas) to $362,790 (for high-cost areas).

If the value of your home exceeds the FHA lending limit, the amount of money you are eligible to receive will be calculated as if the value of the home is the area limit. For homes that exceed federal guidelines there are privately insured programs that are available to homeowners. Speak to your lender for details and eligibility. Practically speaking, if your home is worth $400,000, but the county lending limit is $362,790 (current maximum limit), the loan amount will be based on $362,790.

As part of the closing costs, you must pay a mortgage insurance premium (MIP), equal to 2 percent

of the loan amount up-front, plus an annual premium thereafter equal to 0.5 percent of the loan amount. The insurance premium guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.
 

Fannie Mae Home Keeper & Home Keeper for Home Purchase
Headquartered in Washington, DC, Fannie Mae is the nation's largest investor of home mortgages and a major investor of reverse mortgages, including the federally insured Home Equity Conversion Mortgage (HECM). In 1996, Fannie Mae developed its own proprietary Home Keeper® reverse mortgage as a conventional market alternative to the HECM.

The Home Keeper was developed to address unmet needs that could not be served by the HECM program, such as individuals with higher property values, condominium owners, and seniors wishing

to use a reverse mortgage to purchase a new home.
 

The Home Keeper is available in every state to homeowners 62 years of age and older. Eligible home types include owner-occupied single-family homes, condominium units, and units in qualified planned unit developments. Properties held in trust and qualified leasehold properties are also eligible. Cooperative units, however, are not an eligible property type for Home Keeper.
 

The amount of funds available to the borrower is determined by a formula and varies with: (1) the age and number of borrowers at the time of application; (2) the adjusted value of the home; and (3) current interest rates. A consumer may choose to receive the funds from a Home Keeper as: (1) fixed monthly payments for life (i.e., for as long as the borrower occupies the home as his/her principal residence; (2) a line of credit; or (3) a combination of monthly payments and line of credit.
 

Home Keeper borrowers are charged an origination fee that may not exceed 2 percent of the adjusted value of the home, whichever is greater, a monthly servicing fee ($15-$30), and other closing costs. Many of these can be financed and included in the mortgage.
 

The interest rate charged on a Home Keeper mortgage adjusts monthly and is equal to a fixed spread above an index rate – the current weekly average of the one-month secondary market CD rate, which is published by the Federal Reserve. The rate may never rise by more than 12 percentage points above the initial rate; there is no cap on a monthly adjustment other than the lifetime cap.
 

Home Keeper for Home Purchase
The Home Keeper for Home Purchase program enables seniors to obtain a Home Keeper mortgage in connection with the purchase of a new home – in a single transaction. The transaction reduces the out-of-pocket cash needed by the consumer to buy a new home, eliminates any new monthly mortgage payment, and helps the consumer keep more of the sales proceeds from their old house –

or a larger amount of savings – to use for other purposes.

To provide a better illustration, let’s say a 76-year-old woman sells her home for a $75,000 profit

and wants to buy a new home in sunny Florida costing $115,000. To avoid a mortgage payment on the new house, she would need to pay $115,000 in cash. This means she would have to use the entire $75,000 from the sale of her first home, plus another $40,000 from her savings. If she doesn’t have the $40,000, she couldn’t buy the new house, unless she qualifies for a new home mortgage, which might be difficult and which in any event would require making monthly mortgage payments again.
 

Alternatively, the woman could purchase the new home outright, or nearly so, using money from a Home Keeper reverse mortgage, plus the sales proceeds from her old house. This product might be used, for instance, by older homeowners who want to sell their old home and move closer to their children or to a warmer climate, or to move into a home that provides greater accessibility. Home Keeper is a registered trademark of Fannie Mae

Cash Account "Jumbo" Loan
Financial Freedom Senior Funding Corporation, based in Irvine, CA, administers a "jumbo" proprietary reverse mortgage product called Cash Account to benefit homeowners living in higher-priced homes valued above the FHA and Fannie Mae lending limits. In addition to Financial

Freedom, the program is offered by most reverse mortgage lenders, including Alliance Financial Mortgage, Inc.

Reverse Mortgage Basic Loan Features & Costs
Although there are different types of reverse mortgages, all of them are similar in certain ways.

Here are the features that most have in common.
 

Homeownership
With a reverse mortgage, you remain the owner of your home just like when you had a forward mortgage. You are still responsible for paying your property taxes and home-owner insurance and for making property repairs. When the loan is over, you or your heirs must repay all of your cash advances plus interest. Reputable lenders don't want your house; they want repayment.
 

Financing Fees
You can use the money you get from a reverse mortgage to pay the various fees that are charged on the loan. This is called "financing" the loan costs. The costs are added to your loan balance, and you pay them back plus interest when the loan is over.
 

Loan Amounts
The amount of money you can get depends most on the specific reverse mortgage plan or program you select. It also depends on the kind of cash advances you choose. Some reverse mortgages cost

a lot more than others, and this reduces the amount of cash you can get from them.
Within each loan program, the amounts you can get generally depend on your age and your

home's value:
• The older you are, the more cash you can get; and
• The more your home is worth, the more cash you can get.
  The specific dollar amount available to you may also depend on interest
  rates and closing costs on home loans in your area.     
 

Debt Payoff
Reverse mortgages generally must be "first" mortgages, that is, they must be the primary debt

against your home. So if you now owe any money on your property, you generally must either :
• pay off the old debt before you get a reverse mortgage; or
• pay off the old debt with the money you get from a reverse mortgage.
  Most reverse mortgage borrowers pay off any home debt with a lump
  sum advance from their reverse mortgage. 
 

Debt Limit
The debt you owe on a reverse mortgage equals all the loan advances you receive (including any you used to finance the loan or to pay off prior debt), plus all the interest that is added to your loan balance. If that amount is less than your home is worth when you pay back the loan, then you (or

your estate) keep whatever amount is left over.
 

But if your rising loan balance ever grows to equal the value of your home, then your total debt is limited by the value of your home. Put another way, you can never owe more than what your home is worth at the time the loan is repaid. The lender may not seek repayment from your income, your other assets, or from your heirs. (The technical term for this cap on your debt is a "non-recourse limit." It means that the lender does not have legal recourse to anything other than your home's value when seeking repayment of the loan.)
 

Repayment
All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a "permanent move" means that neither you nor any other co-borrower has lived in your home for one continuous year.)
Reverse mortgage lenders can also require repayment at any time if you:
• fail to pay your property taxes;
• fail to maintain and repair your home; or
• fail to keep your home insured.
  These are fairly standard "conditions of default" on any mortgage.
Other default conditions on most home loans, including reverse mortgages, include:
• your declaration of bankruptcy;
• your donation or abandonment of your home;
• your perpetration of fraud or misrepresentation;
• if a government agency needs your property for public use
  (for example, to build a highway); or
• if a government agency condemns your property (for example,
  for health or safety reasons). Changes that could affect the security
  of the loan for the lender can also make reverse mortgages payable.

For example:
• renting out part or all of your home;
• adding a new owner to your home's title;
• changing your home's zoning classification; or
• taking out new debt against your home.

You must read the loan documents carefully to make certain
you understand all the conditions that can cause your loan to become due.
 

Cancellation
After closing a reverse mortgage, you have three days to reconsider your decision. If for any reason you decide you do not want the loan, you can cancel it. But you must do this within three business days after closing and it must be in writing. "Business days" include Saturdays, but not Sundays or legal public holidays.

Many of the same costs that someone pays to obtain a home purchase loan, or to refinance their existing mortgage, apply to reverse mortgages too. You can expect to be charged an origination fee, up-front mortgage insurance premium (for the FHA Home Equity Conversion Mortgage or HECM), an appraisal fee, and certain other standard closing costs.

In most cases, these fees and costs are capped and may be financed as part of the reverse mortgage. Below is a more in-depth explanation of each type of fee.
 

Origination Fee
The origination fee covers a lender's operating expenses—including office overhead, marketing costs,

etc.—for making the reverse mortgage.
 

Under the HECM program, which accounts for 90 percent of all reverse mortgages made in the U.S., the origination fee is equal to the greater of $2,000 or 2 percent of the maximum claim amount (i.e., county FHA loan limit). Currently, the FHA loan limit varies from a low of $200,160 (for rural areas) to a high of $362,790 (for high-cost metropolitan areas). Therefore, the 2 percent origination fee generally ranges between $4,003 (2 percent of $200,160) and $7,255 (2 percent of $362,790).

Home Keeper borrowers are charged an origination fee that may not exceed 2 percent of the value

of the home. With either product, the entire amount of the origination fee may be financed as part of the mortgage.
 

Mortgage Insurance Premium
Under the HECM program, borrowers are charged a mortgage insurance premium (MIP), equal to

2 percent of the maximum claim amount, or home value, whichever is less, plus an annual premium thereafter equal to 0.5 percent of the loan balance.

The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid.
 

Appraisal Fee
An appraiser is responsible for assigning a current market value to your home. Appraisal fees generally range between $300-$400.

In addition to placing a value on the home, an appraiser must also make sure there are no major structural defects, such as a bad foundation, leaky roof, or termite damage. Federal regulations mandate that your home be structurally sound, and comply with all home safety codes, in order for

the reverse mortgage to be made.
 

Closing Costs
Other closing costs that are commonly charged to a reverse mortgage borrower, include:
• Credit report fee. Verifies any federal tax liens, or other judgments,
  handed down against the borrower. Cost: Generally under $20
• Flood certification fee. Determines whether the property is located
  on a federally designated flood plane. Cost: Generally under $20
• Escrow, Settlement or Closing fee. Generally includes a title search
  and various other required closing services. Cost: $150-$450

• Document preparation fee. Fee charged to prepare the final
  closing documents, including the mortgage note and other
  recordable items. Cost: $75-$150
• Recording fee. Fee charged to record the mortgage lien with the
  County Recorder's Office. Cost: $50-$100
• Courier fee. Covers the cost of any overnight mailing of
  documents between the lender and the title company or 
  loan investor. Cost: Generally under $50
• Title insurance. Insurance that protects the lender
  (lender's policy) or the buyer (owner's policy) against any
  loss arising from disputes over ownership of a property.
  Varies by size of the loan, though in general, the larger the loan
  amount, the higher the cost of the title insurance.
• Pest Inspection. Determines whether the home is infested with
  any wood-destroying organisms, such as termites.
  Cost: Generally under $100
• Survey. Determines the official boundaries of the property.
  It's typically ordered to make sure that any adjoining property
  has not inadvertently encroached on the reverse mortgage
  borrower's property. Cost: Generally under $250
 

Servicing Set-Aside
The servicing set-aside is an amount of money deducted from the available loan limit at closing to cover the projected costs of servicing your account. You are not charged interest on the unused service set-aside.

Federal regulations allow the loan servicer (which may or may not be the same company as the originating lender) to charge a monthly fee that ranges between $30-$35. The amount of money set-aside is largely determined by the borrower's age and life expectancy. Generally, the set-aside can amount to several thousand dollars. (Note: The servicing set aside is just a calculation and not a charge. The only amount added to your loan balance is the monthly servicing fee, which ranges

from $30-$35).

Consumer Safeguards
As record numbers of senior homeowners use reverse mortgages as part of their retirement financial management, the National Reverse Mortgage Lenders Association is pleased to explain the numerous safeguards built into today’s reverse mortgage programs. Broader understanding of these consumer protection features is responsible for wider acceptance of reverse mortgages, leading to nearly 500% growth in origination volume from 2001 to 2005 (from 7,781 FHA HECM loans in 2001; to 43,131 in 2005).

Although all reverse mortgage products available in the marketplace work similarly, the most popular program is the Home Equity Conversion Mortgage, or HECM, administered through the U.S. Department of Housing and Urban Development (HUD).

Among HECM’s consumer safeguards are several important features:

• Standard & Capped Interest Rates. The interest rate is the
  same no matter which lender a senior chooses. On HECM,
  interest rates are adjusted either monthly or annually
  (the borrower chooses) and based on an index called the
  1-year U.S. Treasury Constant Maturity Rate published
  weekly by the Federal Reserve. Both the monthly and annually
  adjusted rates have lifetime caps. On other products, different indexes are used.
• Limitation on Fees. Origination fees are limited by HUD regulations
  and may be financed as part of the reverse  mortgage. This means
  a senior incurs very little out-of-pocket expense to get a reverse mortgage.

• Advance Disclosure. The Total Annual Loan Cost, or “TALC”
  disclosure, required by the Federal Reserve Board, is provided
  to the prospective reverse mortgage borrower and displays
  the total transaction costs over the projected life of the loan. 
  This way, a senior is made fully aware of the costs incurred
  in obtaining the reverse mortgage.
• Independent Counseling. Before a reverse mortgage 
  application can be processed, the prospective borrower
  must first meet with an independent counselor. Both HUD
  and AARP oversee a network of counselors whose job is to
  review the transaction, answer any questions the borrower
  may have about reverse mortgages and suggest alternative options.
• No Maturity Date. A reverse mortgage cannot become
  due during the homeowner’s lifetime. It is a permanent  tool.
  The fact that there are no required payments and there is
  a lifetime right to occupy the home provides great protection
  against unforeseen or unanticipated future circumstances,
  rendering reverse mortgages vastly safer than other loan alternatives.
• No Prepayment Penalty. Although the loan is not due and
  payable until the senior permanently moves out of the home,
  it can be paid-off at any point prior with no additional fees or costs.
• No Penalty for Canceling the Loan. After the loan closes,
  a senior has up to three days to cancel the transaction, the
  so-called “right of rescission,” for any reason whatsoever.
• Asset Protection. The HECM is a “non-recourse” loan.
  This means that the amount due can never exceed what the
  home is worth. Title to the home always remains with the
  borrower. When the loan becomes due, the lender is repaid the
  sum of funds advanced plus the accrued interest, but never
  more than the value of the house. If there is remaining value,
  it belongs to the homeowner or the estate.
• No Shared Appreciation. No reverse mortgage product in the
  marketplace has “equity-sharing” or “shared  appreciation”
  features. In some earlier reverse mortgage products,
  the senior could obtain more money in exchange for giving
  up a percentage of the future value of the home. Such
  products are no longer offered.

Steps to Getting a Reverse Mortgage

1. AWARENESS
Homeowner learns about the reverse mortgage program from a news article, advertisement, word-of mouth, etc.

2. ACTION
If necessary, homeowner seeks additional information by contacting a reverse mortgage lender or the National Reverse Mortgage Lenders Association.

3. COUNSELING
Homeowner seeks counseling from a HUD-approved counseling agency, or AARP-trained telephone counselor. Counseling is mandatory regardless of which reverse mortgage product you choose. Counseling is usually conducted face-to-face, unless you use an AARP counselor. The counselor provides supplemental information on reverse mortgages, determines whether you're eligible to get a reverse mortgage, and discusses other options that may be available to assist with your daily living. The homeowner will be given a certificate to give to the lender as proof they were counseled.

4. APPLICATION / DISCLOSURE

Homeowner fills out loan application and selects payment option: fixed monthly payments, lump sum payment, line of credit, or a combination of these. Lender discloses to homeowner the estimated total cost of the loan, as required by the federal Truth in Lending Act. Lender collects money for home appraisal. Homeowner provides lender with required information, including photo ID, verification of Social Security number, copy of deed to home, information on any existing mortgage(s) on property, and counseling certificate.

5. PROCESSING
Lender orders appraisal, title work, lien payoffs, etc. An appraiser comes to your home. The appraiser assigns a value to the home and determines the physical condition of the property. If the appraiser uncovers structural defects that require repair, the homeowner must hire a contractor to complete the repairs after the reverse mortgage closes.
 

6. UNDERWRITING
After receiving all pertinent information and data, lender finalizes loan parameters with homeowner (i.e., determining payment option, frequency of loan interest rate adjustments) and submits loan package to underwriting department for final approval. Currently, it can take anywhere from 4-8 weeks (sometimes sooner) to complete the underwriting of a loan package.

7. CLOSING

8. DISBURSEMENT

Homeowner has three business days after signing papers in which to cancel the loan. Upon expiration of this period, the loan funds are disbursed. Homeowner accesses the funds in the form of the payment option selected. Any existing debt on the home is paid off. A new lien is placed on the home. The homeowner may use the loan proceeds for any purpose. During the life of the loan, the loan "servicer" disburses monthly payments to the homeowner (if this option is chosen), advances line of credit funds upon request, collects any repayments on the line of credit, and sends periodic statements.

9. REPAYMENT
Homeowner doesn’t make any monthly mortgage payments to lender during the life of the loan. The loan is repaid when the homeowner ceases to occupy the home as a principal residence. The loan may be repaid by the homeowner or the heirs/estate, with or without a sale of the home. The repayment obligation can’t exceed the home’s value or sales price.