What You Should Know about Reverse Mortgages
Welcome and Why We Are Here Idriys Abdullah Consumer Protection Advocate DISB Reverse Mortgages Presentation 2
Mission Statement DISB’s Mission is Two-Fold • Protect consumers by providing equitable supervision of the financial services providers operating in the District of Columbia; and • Develop and improve market conditions to attract and retain financial services firms to the District of Columbia. DISB Reverse Mortgages Presentation 3
Presentation Topic What You Should Know about Reverse Mortgages: DISB Reverse Mortgages Presentation 4
What is a reverse mortgage? • A loan against your home that allows you to access a portion of your equity as cash • A loan that does not need to be repaid as long as you live in your home • A loan that will accrue interest and fees and continue to grow as long as you have it • It is the opposite of a forward (1 st trust) mortgage. In a forward mortgage you have decreasing debt and increasing equity. In a reverse mortgage you have increasing debt and decreasing equity. DISB Reverse Mortgages Presentation 6
Who qualifies for a HECM? • Homeowners 62 years of age and older and possibly a non-borrowing spouse borrowing against their primary residence • People who own their homes without a mortgage or • People with mortgages and/or lines of credit whose home equity is enough to pay off those debts • People with no federal claims, liens, defaults or debts • People with sufficient resources to continue paying their property taxes and home insurance • People who have completed HECM counseling and received a certificate DISB Reverse Mortgages Presentation 7
Why is HECM Counseling Required? • To educate borrowers about using a reverse mortgage • This includes – The financial implication – Alternatives – Borrower obligations – Costs of obtaining the loan – Repayment conditions DISB Reverse Mortgages Presentation 8
What are the Financial Requirements? • The lender will verify your income, assets, monthly living expenses, recurring monthly payments and credit history • Your timely payment of real estate taxes and property insurance will be verified, too • You need to have enough income or assets to continue paying your real estate taxes and property insurance • This is a fairly new requirement. If you are hearing advertisements that say no credit history and no income are required, they are out of date. DISB Reverse Mortgages Presentation 9
How Much Money Can I Borrow? • To determine how much money is available to a borrower, the lender considers – The age of the youngest borrower – The appraised value of the home – The interest rate prevailing at settlement – The appropriate principal limit factor (a percentage predetermined by FHA) This amount is called the original principal limit DISB Reverse Mortgages Presentation 10
What Upfront Costs Are Associated with HECM? • Loan origination fee – 2% of the first $200,000 of appraised value, plus 1% of additional home value – At least $2,500, but no more than $6,000 • Private mortgage insurance – If the borrower’s mandatory obligations are less than 60% of the original principal limit, .5% of the appraised value – If the borrower’s mandatory obligations exceed 60% of the original principal limit, 2.5% of the appraised value • Third party closing costs – Title search and reissue of title insurance – Settlement company charges DISB Reverse Mortgages Presentation 11
Set Aside Accounts • In addition to the upfront costs, accounts may be established and set aside for other purposes – Monthly service fees – Required repairs – Payment of property taxes and home insurance for the first year of the loan • These costs will vary depending on the lender, the condition of the home and the financial situation of the borrower DISB Reverse Mortgages Presentation 12
Mandatory Obligations • Upfront costs • Set aside accounts • Pay off amount of first and second trust mortgage • Pay off of home equity loan • These amounts are added together and then subtracted from the original principal limit. This is how the percentage of loan used is determined for the purpose of charging for mortgage insurance. DISB Reverse Mortgages Presentation 13
Recurring Costs • The amount owed on your reverse mortgage is growing because of – Interest charges – Annual mortgage insurance – Possibly servicing fees DISB Reverse Mortgages Presentation 14
Out of Pocket Expenses • All of the costs and fees mentioned so far are deducted from the loan itself • The only charge paid upfront and out of pocket is the appraisal fee • An appraisal by an FHA approved appraiser is required DISB Reverse Mortgages Presentation 15
After the Mandatory Obligations • Once all of the mandatory obligations have been deducted rom the original principal limit, two amounts of money will be specified. • The first is the amount of money that will be available to you during the first year after the loan closes. • The second is the total amount that will be available over the life of the loan. • Current HECM regulations are deliberately designed to encourage you not to use more than 60 percent of the original principal limit during the first year. • If payment of your mandatory obligations exceeds 60 percent, you are allowed to take up to 10 percent more of the original limit during the first year. DISB Reverse Mortgages Presentation 16
How Can I Take the Money? If you have chosen a monthly adjustable rate mortgage • You may take all or part of your proceeds available during the first year as a lump sum. The rest can be accessed in year two. • You may take all or part of it as a monthly salary for as long as you live in the home or for a specified period of time. • You may put all or part of it in the line of credit that is offered with HECM. • You may combine these choices to suit your own particular situation. DISB Reverse Mortgages Presentation 17
If you have chosen a fixed rate mortgage, you will be able to access only the amount of money that is available to you in the first year. Any other amount will be designated as unusable funds. DISB Reverse Mortgages Presentation 18
The Line of Credit • The line of credit which goes along with the HECM is like a savings account. • The growth rate on the LOC is the same as the interest rate accumulating on the loan. If the loan is at 3.9 percent a month, the LOC is growing at 3.9 percent a month. • The LOC is accessed by giving the lender written notice of the amount you wish to withdraw. The lender has 5 business days to provide your funds. • Withdrawals from the LOC increase the balance of the loan. • However, you can reimburse your LOC. DISB Reverse Mortgages Presentation 19
Repayment of the Loan • The loan is due and payable when none of the borrowers lives in the home. – The borrowers may sell the home and repay their HECM – They may need to move to some sort of senior or assisted living for a year or more and not be able to return to their home – Someone else may have inherited the property DISB Reverse Mortgages Presentation 20
Inheriting a Home with a HECM • The heir to a property with a HECM is responsible for repaying the loan. • This can be done by selling the home or by putting a new first trust loan on it. • In either case, the heir cannot be held responsible for more than 95% of the appraised value of the property. In other words, you will not leave your heir in debt for your property. DISB Reverse Mortgages Presentation 21
Do I Need a Reverse Mortgage? • If you need a limited amount of cash for repairs or a dream vacation, a home equity line of credit or a personal loan may be a better option. • If someone is trying to sell you another financial product like an annuity or trying to sell you something and recommending that you use a reverse mortgage to pay for it, you probably don’t need a reverse mortgage. In fact, you may be the target of a SCAM! DISB Reverse Mortgages Presentation 22
Other Options • Selling your home – How much cash would you get? Could you afford to buy or rent a new home? – How much money could you earn on the money left over after buying a new home? – Would an apartment, condo, assisted living facility or other alternate housing be a better option for you? Renting a part of your home to increase your income DISB Reverse Mortgages Presentation 23
Can You Afford a Reverse Mortgage? • The amount you owe grows larger all the time. The younger you are when out take out a reverse mortgage, the longer compound interest will grow and the more will be owed. • Should you decide to sell and move in just a few years, the loan is especially costly because of the upfront costs. DISB Reverse Mortgages Presentation 24
Are You Old Enough to Do This? • The younger you are when you take a reverse mortgage, the less money you will get. Pay out calculations are based on like expectancy of 100 years. • Do you really need the money now or should you wait a few years until you health care needs and living expenses may have increased? DISB Reverse Mortgages Presentation 25
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