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Q: I am writing for my 80-year-old neighbor. She is mentally sharp and owns a lovely home, all paid for. But she says she is running out of money. When I suggested a reverse mortgage, she said her son is opposed. He says that when she dies, the reverse mortgage lender then takes the house and nothing is left for him. Is this true?
A: No. That son is either mistaken or greedy, maybe both. Your neighbor is a perfect reverse mortgage candidate so she will have plenty of money to enjoy her remaining years without cash worries.
When a senior citizen obtains a reverse mortgage, the lender receives a first mortgage lien on the residence. As the years go on, the reverse mortgage balance grows as the homeowner receives payments. No monthly payments to the lender are required during the homeowner's lifetime.
When the homeowner dies, or when she decides to permanently move out of the home, the reverse mortgage matures. That means its balance must be paid in full.
But the reverse mortgage lender doesn't take the house. Any remaining equity goes to either the homeowner or the homeowner's heirs. To illustrate, suppose your neighbor's house is worth $400,000 and at the time she permanently moves out or dies, she has received $150,000 from her reverse mortgage lender, including accrued interest. Presuming the son is the only heir, if he wants to keep the house he can refinance with a new $150,000 mortgage to pay off the reverse mortgage balance. Or, if he wants to sell the house, he then pays off the $150,000 reverse mortgage from the sales proceeds and keeps the remaining $250,000 cash for the equity.
Q: What are the “HECM” and “Home Keeper” mortgage programs?
A: These programs are special types of mortgage loans that enable you, as an older homeowner, 62 years of age or older, to tap into the equity you have in your home while giving you the maximum amount of flexibility to address your particular financial needs. You may choose a lump sum payment to pay off debt, fix up your home or other expenses. You may wish to receive regular monthly payments to supplement your income or a line of credit that you can tap into at any time. You may be able to combine the cash, monthly payment or credit line options if that fits your needs. With the Home Keeper program you can also get cash to help you purchase a new home.
Unlike traditional home equity loans, no repayment of the HECM or Home Keeper mortgage is required until you no longer occupy the home as your principal residence. At that time, the loan becomes due and payable.
With either of these reverse mortgage programs, you borrow against the equity of your home, and receive loan proceeds according to the payment plan that you select. These plans are described on the following pages. As a borrower, you may change payment plans as many times as you wish, unless you take the full amount available in a lump sum at closing.
When you sell you home or vacate it for other reasons, the accrued interest plus what the lender has paid to you or on your behalf through the years is due and payable, usually out of the proceeds from the sale of your home. Any proceeds in excess of the amount owed on the loan belong to you or your estate.
Q: How do the HECM and Home Keeper differ from a home equity loan?
A: While both programs and a home equity loan enable you to turn the equity in your home into spendable dollars, there are some important differences between the two types of mortgages. With a home equity loan, you must make regular payments to repay the loan. These payments begin as soon as the loan is originated. To qualify for such a loan, you must earn a monthly income great enough to make those payments. If you fail to make the monthly payments, the lender can foreclose, and you could be forced to sell your home. In addition, you may be required to requalify for a home equity loan each year. If you do not requalify, the lender may require you to pay the loan in full immediately.
With a HECM or Home Keeper, you do not repay the loan as long as the home remains your principal residence. Your income is not considered when qualifying for the loan. There is no requirement that you requalify each year.
Q: Who is eligible for a HECM or Home Keeper?
A: You, and any co-borrowers, must be at least 62 years old. The home must be owner occupied. You must own your home free and clear or with no more debt than could be repaid from the proceeds of the new reverse mortgage. You must also agree to accept (free of charge) mortgage counseling from a HUD-approved counseling agency. We encourage family members, friends or other advisors to attend this counseling session with you.
Q: Must I pay off any loans or liens that are against the property?
A: All prior loans or liens must be paid off to get a HECM or Home Keeper; but they can be paid off with the proceeds from the reverse mortgage.
Q: What are the minimum and maximum amounts that I can borrow?
A: There is no minimum borrowing amount. The maximum amount you can borrow from the HECM plan differs from the Home Keeper. Both plans factor in the age of the youngest borrower, the expected interest rate and the “maximum claim amount" (for the HECM) or the “adjusted property value” (for the Home Keeper). The maximum claim amount or the adjusted property value is the lesser of the appraised value of your home or the maximum loan amount for a 1 to 4 unit residence as determined by FHA or Fannie Mae in your area. There is no upward limit on the value of your home.
Q: What types of payment plans are available with the HECM and HomeKeeper?
A: The HECM program offers five payment options:
Term, Tenure, Modified Term, Modified Tenure, Line of Credit or Cash.
Under the term option, you may receive equal monthly payments for a fixed period of time selected by you.
Under the tenure option, you may receive equal monthly payments for as long as you own and occupy the home as your principal residence.
Under the line of credit option, you may withdraw at times, and in amounts of your choosing, up to the maximum amount of cash available; as long as you own and occupy the home as your principal residence.
The modified term plan allows you to set aside a portion of loan proceeds as a line of credit and receive the rest in the form of equal monthly payment for a fixed period of time.
Under the modified tenure option, you may set aside a portion of loan proceeds as a line of credit and receive the rest in the form of equal monthly payments for as long as you own and occupy the home as your principal residence.
If you select either of the term plans, you can remain in your home after the end of the loan term without starting repayment. The same is true if you have withdrawn the maximum amount under the line of credit or modified tenure payment plan. Remember, repayment is not required until you no longer own and occupy your home as your principal residence.
With the Home Keeper Mortgage you have three payment options: (1) Tenure (monthly payments for as long as you own and occupy the property) (2) Line of Credit you may withdraw at times, and in amounts of your choosing, up to the maximum amount of cash available; as long as you own and occupy the property) (3) A combination of the two, called a Modified Tenure option.
Q: How will the amount of the monthly payment be calculated?
A: Your payments will be calculated using the HUD/FNMA computer software. Factors that affect the amount of money you will receive include: the age of the youngest borrower, current interest rate, maximum claim amount, and the length of time that you will be receiving payments, whether it be for a fixed period of time (term option) or for as long as you live in the home (tenure option). The older you are, the larger your monthly payments are likely to be.
Q: Will HECM payments affect my Social Security, Medicare Supplemental Security Income, or Medicaid benefits?
A: HECM payments do not affect your Social Security or Medicare benefits. Those benefits are not based on assets of the recipient.
HECM advances may be added to your liquid assets under some programs if not spent in the month received, and may affect your eligibility for some programs. We suggest you consult the local offices for these programs or any others to determine how HECM payments may affect your particular situation.
The FannieMae HOME KEEPER MORTGAGE program provides two basic payment options. The first option is similar to the HECM program, which does not require an equity percentage payment to the lender upon repayment of the loan. The second option, the “Equity Share” option, allows you, as the borrower, to receive significantly more cash or higher monthly payments in exchange for an additional fee (Equity Share) paid to the lender at the time the loan is repaid.
The Equity Share is typically 10% of the property value at the time the loan becomes due and payable. The actual Equity Share percentage is established according to the property value at loan origination. For homes valued higher than the FNMA maximum “Adjusted Property Value” (at origination), the percentage is adjusted downward. If the sum of the loan balance and the computed Equity Share is greater than the property value (at the time the loan becomes due and payable), you or your estate would repay only the amount equal to the property value. The Equity Share is not charged if the loan is repaid in the first 24 months.
Q: Will I have to pay fees to obtain a HECM or Home Keeper Mortgage?
A: Yes, however, your out-of-pocket expense is only $300, paid at the start either loan. All other closing costs and fees can be financed into your loan. Both loans have an origination fee, mortgage insurance premium, and other normal closing costs.
Q: Are there any ongoing fees after closing?
A: Yes, both loans have a monthly servicing fee. The HECM also has an annual insurance fee. These fees will be included in your loan balance as the charges occur.
Q: Can I be forced to sell or vacate my home if the money I owe on the loan ever exceeds the value of my home?
A: Absolutely not, as long as you continue to occupy the property as your principal residence. You cannot be forced to sell or vacate the property, even if the total amount you owe on this loan exceeds the value of the property; or if the fixed term over which you received monthly payments has expired. No deficiency judgement may result from your loan. FHA and FannieMae insurance covers any further obligation to the lender.
Q: Will my heirs owe anything to the mortgage lender if I die?
A: Upon your death, the loan balance consisting of principal paid to you or on your behalf, plus any accrued interest, becomes due and payable. If you choose the Home Keeper with Equity Share, that will be added in as well. Your estate may choose to repay the loan by selling the property or they may want to pay it off be other means so they can keep the home. If the loan should exceed the value of your property, your estate will owe no more than the value of the property; the mortgage insurance will cover any balance due to the lender. No additional financial claims may be made against your heirs or estate. You will never owe more than your property is worth!
Q: If my home appreciates in value during the mortgage term, who will be entitled to that money?
A: You or your estate are legally required to pay back to the lender only the outstanding balance due. Any money remaining after the mortgage is paid belongs to you, or upon your death, to your estate.
Q: What if I decide to sell my home?
A: If you choose to sell your home, the outstanding balance becomes due and payable to the mortgage lender. Any proceeds left over once the loan is paid belongs to you.
Q: Can I sell my home to my children and continue to live in it?
A: If you sell your home to your children or any other individual (or simply give them title), the loan will become due and payable. After the loan is repaid, any arrangement for your continued occupancy of the property must be made with the new owners.
Q: Is this a fixed rate loan?
A: There are no fixed rate HECM or Home Keeper loans. Both programs provide for adjustable rate mortgage (ARM) plans. Both programs feature a monthly rate adjustment that cannot increase more than 10% (HECM), 12% (Home Keeper) over the life of the loan. The HECM also has a 2/5 ARM with annual adjustments.
Q: Where can I learn more about reverse mortgages?
A: Senior HomeOwner Equity™
Equal Housing Lender. Copyright 2006. All rights reserved. Not all products and options are available in all states. Consult Tax Advisor. Consult Appropriate Government Agencies.