info sheet Selecting a Reverse Mortgage

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info sheet Selecting a Reverse Mortgage

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Many older people are house-rich and cash-poor.

They own a home, free and clear, that may be worth hundreds of thousands of dollars. Yet they have little income and can’t afford repairs, taxes, health care, or living expenses. They could sell their house and find a less expensive place to live, of course. But if they have lived in the home a long time, have friends and family living nearby, and feel comfortable and secure in the neighborhood, moving may be a very unpleasant option. For these people, a reverse mortgage may be the answer.

What is a reverse mortgage?

Reverse mortgages, also known as home equity conversions, allow homeowners over age 62 to convert home equity into cash, while continuing to live in their homes. In contrast to the conventional

“forward mortgage,” where you repay debt each month and eventually own your home, a reverse mortgage offers you a loan against the value of your home. This means that the amount of debt increases over time as payments are made to you and as interest compounds.

A reverse mortgage can provide cash as monthly payments, a lump sum, a line of credit, or a combination. The monthly payments may be for a specific number of years or for as long as you live in your home. If you use the loan to buy an annuity, the payments can continue for the rest of your life, no matter where you live.

These funds are not considered income for tax purposes and do not affect your Social Security or Medicare benefits. (Supplementary Security Income and Medicaid can be affected, however.) You retain title to your home, and you are responsible for taxes, repairs, and maintenance.

The loan is repaid with the funds received when the home is sold — either when you move or when you die. In some cases, you can keep receiving monthly payments as long as you live, even if you do have to move out of your home. Your loan might also become due if you fail to pay your property taxes, fail to keep up your homeowner’s insurance, or fail to maintain the property. But the lender may also be able to make extra payments to you to cover those expenses.

Who should take a reverse mortgage?

A reverse mortgage might make sense for you if

●you plan to stay in your home for several years. If you plan to stay only a short time, the up-front costs can make a reverse mortgage as expensive as a short-term loan.

●you are willing to use up some or all of the value of your home. A reverse mortgage leaves fewer assets for your future use or for the benefit of your heirs.

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Who is eligible?

To qualify for most reverse mortgages, borrowers must be at least 62 years old, and the home being borrowed against must be the owners’ principal residence (where they spend the majority of the year).

If the home has more than one owner, all must become borrowers.

The homeowners must either own the home free and clear, or else have only a small remaining debt, which is to be paid off immediately using a cash advance from the reverse mortgage. Most borrowers start by paying off their remaining debt.

Single-family, one-unit dwellings are eligible for all reverse mortgages. Multi-unit owner-occupied dwellings, condominiums, and manufactured homes are eligible for some but not all reverse mortgage programs. Mobile homes and cooperatives are not eligible.

How much can you borrow?

Reverse mortgage programs vary greatly. The amount you can borrow and the amount that must be repaid can vary by tens of thousands of dollars from one plan to another. Before applying for a reverse mortgage, decide how much money you need to borrow.

The amount you are eligible to receive is based on your age, the appraised value of your home, and the interest rate the lender charges.

Generally, the older you are, the more cash you can receive. Also, the greater the value of your home and the lower the cost of the loan, the more cash you are likely to receive.

If you choose a credit line rather than monthly payments or a lump sum, you can take cash when you

reverse mortgages include a credit line that steadily increases over time. Others include credit lines that do not increase, or that increase more slowly and for a limited amount of time.

How much does it cost?

The total amount you will owe at the end of the loan will be how much cash was paid out to you by the lender plus all the interest that has accumulated on that loan. However, you can never owe more than the value of the home at the time that the loan is repaid.

Let’s say that the home decreases in value so that when it is sold (or the last surviving borrower dies), it is worth less than the payments plus interest. In this case, the value of the home when it is sold is the most that will have to be repaid. Most reverse mortgages are

“nonrecourse” loans, which means that the lender cannot try to claim your (or your heirs’) income or other assets — only the value of the home.

The application costs should include only the cost of an appraisal for your home (usually $250 to $300) and the cost of a credit report (about $50). Other costs are usually paid for with an initial payment from the loan itself and become part of the total balance you owe.

(Many of these other costs are like those found in regular mortgages: interest charges, origination fees, title search, and so on.)

The best indicator of how much the loan will cost is the Total Annual Loan Cost (TALC). This figure includes all the costs, expressed as one interest rate.

This is the figure you can use to compare various loans. The TALC will usually be highest during the first years of a reverse mortgage, and then decrease over time. You may think that the TALC sounds a lot like the APR for a normal “forward” mortgage, but that impression is misleading. Forward and reverse mortgages are quite different. Reverse mortgages may appear to cost more, but they give you benefits that

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Federal Truth-in-Lending law (Regulation Z) requires lenders to show you a loan’s TALC rate after you have applied for it. If you want to compare TALC rates for various loans before you apply for any of them, you can order the National Center for Home Equity Conversion’s list of selected counselors and lenders who have the software that can show you comparative TALC rates. Send a self-addressed

stamped business-size envelope to the National Center for Home Equity Conversion, 360 N. Robert St., #403, St. Paul, MN 55101.

The TALC does have some limitations — there are some significant costs that may not be figured into it.

The National Center for Home Equity Conversion has information on these pitfalls. (See the “Resources”

section at the end of this infosheet.)

One cost you should not have is for a “service agreement” with anyone to help you find a reverse mortgage lender or to help you apply for a loan. This kind of help is available to you for free or at very little cost from your nearest HUD (U.S. Department of Housing and Urban Development) office or from HUD- approved housing counseling agencies. To find a housing counseling agency near you, call HUD’s Housing Counseling Clearinghouse at 1-888-466-3487.

Types of reverse mortgage plans

Home Equity Conversion Mortgage (HECM) loans

HUD, working through the Federal Housing Administration (FHA), insures reverse mortgage plans under the Home Equity Conversion Mortgage program. These mortgages are available from HUD-approved lenders across the country.

●To qualify, you must be at least 62 years old and live in a single-family home, a two- to four-unit dwelling, or a condominium in an FHA-approved development. You must either own your home free and clear, or have only a very small mortgage balance left.

●The loan is not due as long as you live in your home.

●You can receive monthly payments, a line of credit, or a combination of both.

●Fees include closing costs, a mortgage insurance premium, and sometimes a monthly servicing fee.

●Your credit line grows over time.

●For a small fee, you may change from one payment option to another.

●You must accept mortgage counseling from a HUD-approved counseling agency.

In general, the popular HECM program provides the most cash at the lowest cost if the value of your home is about average for your area. A list of HECM lenders is available from the Fannie Mae Public Information Office, at 1-800-7FANNIE (1-800-732-6643).

Fannie Mae loans

Fannie Mae, a quasi-governmental agency, offers its own reverse mortgage program, the Home Keeper Mortgage.

●To qualify, you must be at least 62 years old and live in a one-unit single-family home, a condominium, a unit in a planned-unit development, or a leasehold property or property held in trust that meets Fannie Mae’s standard guidelines. You must either own your home free and clear, or have only a very small mortgage balance left.

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●The loan is not due as long as you live in your home.

●You can receive monthly payments, a line of credit, or a combination of both.

●Fees include closing costs and a monthly servicing fee.

●Your credit line does not grow.

●The mortgage is an adjustable-rate loan so the interest rate can change. The monthly payments will not change.

●You must receive home buyer education.

If the value of your home is greater than the median for your area, a Fannie Mae-insured mortgage may be the best choice because the maximum is higher than for an FHA loan. Fannie Mae also offers a Home Keeper for Home Purchase mortgage, which allows you to use the payment from a reverse mortgage to buy an additional home. In addition, Fannie Mae offers the FHA-insured HECM loan discussed above.

Lender-insured loans

Also known as conventional reverse mortgages, lender- insured loans offer monthly loan advances or loan advances plus a line of credit. Be sure to check out the financial strength of the company offering the loan.

●You can choose to mortgage less than the full value of your home, thus saving home equity for later use by you or your heirs.

●Charges tend to be higher than those of FHA or Fannie Mae plans, but it’s also possible to find higher maximum loan advances.

●Some loans include an annuity that continues making monthly payments, even if you sell your house. (These annuity payments may be taxable and can affect your eligibility for Supplemental Security Income and Medicaid.)

Public sector loans

Many state and local governments offer loans, secured against the value of the home, to provide money for paying property taxes or for repairing or improving homes. These are somewhat limited in scope, and generally available only to low- or moderate-income homeowners.

●Payments can be used only for certain purposes.

●Costs are usually lower than those charged by private lenders.

Contact a representative from your city or state government for details.

Choosing a reverse mortgage plan

Before shopping around for reverse mortgage plans, you’ll need to decide the following:

●how much money you need

●how long you will need the money

●what form you would like the payments to take (lump sum, monthly payments, credit line)

Next, take the following steps to gather information:

●Put together a list of lenders offering reverse mortgages. Reverse mortgages are offered through banks, mortgage companies, savings associations, and credit unions, as well as through the government agencies discussed above.

●Contact three or more lenders (also called originators). Speak with loan officers by phone to get an idea of the options available. Ask for information by mail, including a breakdown of all costs and options.

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●Meet with lenders and ask questions. The Federal Truth in Lending Act requires lenders to inform borrowers about the plan’s terms and costs, including the Total Annual Loan Cost (TALC). Find out what itemized costs you will have to pay (origination fees, closing costs, servicing fees, interest charges, insurance premiums, and maturity fees) and how much equity will be left in your home at the end of the loan. On plans with adjustable rates, lenders must provide specific information about the variable rate feature. On plans with credit lines, lenders must disclose any charges to open the account, such as appraisal, credit report, or attorney’s fees.

●Ask if the reverse mortgage is insured. For insured mortgages, loan advances will continue and you may remain in your home as long as you live, even if the amount borrowed exceeds the value of the home. Fixed-term, uninsured loans are available in a few states, but are risky, since the balance is due at the end of the term.

If you are unable to refinance when that time comes, you could be forced to sell your home to repay the loan.

Don’t choose without counseling

Reverse mortgages can be an excellent option for some people, but you should be very careful to study all your options. It is strongly recommended that you take advantage of one of the readily available forms of consumer counseling before taking out a reverse mortgage.

If you seek FHA-insured or Fannie Mae reverse mortgages, you will automatically receive financial counseling from an independent, third-party agency at little or no cost. You will also be told about

alternatives and options that may be more appropriate for you than the reverse mortgage.

If you are looking at other kinds of reverse mortgages, contact a HUD-approved housing counseling agency (discussed on page 3) that will advise you at little or no cost.

You may also want to discuss the loan with a

investment professional or an attorney specializing in elder law who is familiar with reverse mortgages.

Resources for Further Information

AARP (The American Association of Retired Persons) Home Equity Information Center

601 E Street NW Washington, DC 20049 202-434-6042

Offers publications on reverse mortgage programs, on other home equity conversion options, and on finding reliable counselors and lenders. One useful publication is Home-Made Money: Consumer’s Guide to Home Equity Conversion. There is information on reverse mortgages on the AARP Web site at www.aarp.org/hecc/home.html.

Fannie Mae

3900 Wisconsin Avenue NW Washington, DC 20016-2892 202-752-7000

(or use the phone book to find your nearest office) www.fanniemae.com

Provides financial products and services that make it possible for low-, moderate-, and middle-income families to buy homes.

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The National Center for Home Equity Conversion www.reverse.org

An independent, not-for-profit organization

dedicated to reverse mortgage analysis and consumer information on reverse mortgages. Their Web site has a lot of very useful information, including

●“Frequently Asked Questions,” which gives a very thorough presentation

●“Calculator,” which will estimate the cash advances or credit lines you might receive, given your age, the value of your home, and where you live

●“Alerts,” which explains various pitfalls

●“Related Alternatives,” which has links to organizations that may provide alternatives, or supplements, to a reverse mortgage

The U.S. Department of Housing and Urban Development (HUD)

451 Seventh Street SW Washington, DC 20410 1-888-466-3487

www.hud.gov/rmtopten.html

Use the phone book to find your nearest office.

Scholen, Ken. Your New Retirement Nest Egg:

A Consumer Guide to the New Reverse Mortgages.

National Center for Home Equity Conversion, 1996, 342 p., $24.95. Call 1-800-247-6553 to order.

Money from Home: A Consumers’ Guide to Reverse Mortgage Options. Fannie Mae, 1996, 106 p., free. Call 1-800-732-6643 to order.

This material is not intended to replace the advice of a qualified attorney, tax adviser, investment professional, or insurance agent. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional. This material was prepared by Ceridian Performance Partners (CPP); accordingly CPP (not MFS Fund Distributors, Inc.) is solely responsible for the accuracy of the content.

Contact your investment professional for more information or to construct a personalized Heritage Planning Profile to help your parents, your children, or yourself.