Reverse Mortgages for
Senior Homeowners
Cindy Stokes
Utah State University
(adapted from AARP information)
A Little History
 1979
 1989
 1989
 1996
 1998
Federal Home Loan Bank creates
Reverse Mortgage concept
HUD/FHA introduces HECM
Fannie Mae agrees to purchase
HECM loans
Fannie Mae creates
HomeKeeper®
HECM becomes permanent
program
Home Equity Conversion Mortgage
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Designed by HUD
Insured by FHA
Payments continue as
long as one homeowner
remains in home
Loan balance not due
until borrowers die or
leave the home
Total due lender cannot
exceed value of home at
time of sale
HECM Basic Requirements
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Borrowers must be at least 62 years old
Home must be FHA approved
Borrowers must live in home as principal
residence
At least one homeowner must reside in home at
time of closing
Home must be free of debt or nearly paid off
Borrowers must receive reverse mortgage
counseling
Owners must not be in, or filing for, bankruptcy.
Owners can be in foreclosure.
HECM Counseling Required

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2-hour session
HUD-approved
counseling agency
Free of charge
Includes discussion of
other alternatives
Certificate of HECM
Counseling issued,
good for 180 days
Safeguards
 Loan
never becomes due until last
homeowner leaves the home
 Payments continue even if payments
exceed value of the home
 No repayment required of amount paid out
in excess of value of the home
 If lender fails, FHA will make payments
 FHA covers any shortfall if amount due
exceeds value of the home
Forward vs. Reverse

Forward Mortgage
on $100,000 loan
Each payment
from borrower
to lender:
Principal decreases

Reverse Mortgage
with $100,000 loan
Each payment to
borrower from
lender:
Principal increases
“Up the Down Staircase”
Reverse Mortgage Features
 No
income-qualifying requirements
 Title to property remains in borrower’s
name
 Borrower remains responsible for payment
of taxes and insurance
 Total loan balance not due until last
homeowner leaves the property
 Total amount due lender cannot exceed
value of home at time loan is repaid
HECM Eligibility Requirements
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All owners must be at
least 62 years old
Home must be their
principal residence at
least 6 months of year
At least one homeowner
must reside in home at
time of closing
Borrowers must receive
reverse mortgage
counseling
The Homeowners
HECM Eligibility Requirements
The Home

Can be single-family,
1 to 4 unit owner
occupied, FHAapproved
condominium, PUD,
or manufactured
home
 Must meet minimum
FHA property
standards
HECM Eligibility Requirements

Any existing
mortgage must be
paid off at closing
 HECM must be first
mortgage but can be
used to pay off
existing debt
 FHA mortgage
insurance required
 Origination and
Servicing fees
The Loan
How Much Can Be Borrowed
Total amount available is based on:

Age of borrowers

Value of property

Average interest rate
“How Much Can I Get?”
 Location,
Location, Location
 Market value at time of closing
 Maximum loan limits
 Equity in the home
 Age of borrowers
 Interest rate
Reverse Mortgage Calculator

When were you born?

When was your spouse
or co-owner born?

How much is your house
worth?

Your ZIP Code

http://www.rmaarp.com/
Four Basic Plans

Tenure -
Monthly payments for life
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Term -
Monthly payments for set number
of years

Line of Credit - Draws in amount and time of
borrower’s choosing

Lump Sum -
Total amount available drawn at
closing
Tenure Plan
 Monthly
payments for life
 Advances are secured by mortgage or
deed of trust
 Amount of payment remains fixed
 Interest, insurance, and servicing fees
added each month
 Total loan balance increases every month
 No payment due until last homeowner dies
or leaves the property
Term Plan
 Amount
available calculated same as for
Tenure Plan
 Payments made for set number of years
 Borrower designates number of years
 At end of term, payments stop
 Repayment of total loan balance not due
until last homeowner leaves the home
 Monthly amount received depends on
length of time payments are desired
Amount of Monthly Payment
Actual amount to be
received monthly is
based on:
 Location of home
 Value of home
 Equity in home
 Age of youngest
homeowner
 Interest rate at time of
closing
Line of Credit Plan
 Line
of credit established based on equity
 Homeowner can draw any amount at any
time until available principal is depleted
 Interest is charged only on amount drawn
 No repayment is required until last
homeowner either dies or leaves the home
 Amount of cash available increases
 Needs to be used to be cost-effective
Lump Sum Plan
 Calculated
same as Tenure or Term
 One lump sum of all available funds drawn
at closing
 Can be combined with tenure or term plan
 Interest is calculated and charged each
month along with insurance and servicing
 Total balance becomes due whenever
property is sold
The Process
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Step 1:
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Counseling
2-hour session
Certificate of HECM
Counseling good for
180 days
Step 2: Find a
Lender
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www.hud.gov
www.fanniemae.com
www.aarp.org
Things to Consider
 Cost
-
Origination & Servicing Fees
 Experience
 Servicing
- Number of Reverse Mortgages
-
 Commitment
Administrative Costs
- Professional Relationships
Closing Costs for RM Loan
 Total

Annual Loan Cost (TALC)
Application Fee
• Appraisal and Credit Check

Origination Fee
• Preparation and Processing

Closing Costs/3rd Party Closing Costs (varies)
• Title search and insurance, survey, inspection, recording
fees, property tax

Mortgage Insurance Premium
• HECM loan
 2% of value or $2000 – can be financed
Monthly Costs for RM Loan

Adjustable Rate Interest
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Mortgage Insurance
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Adjust monthly or annually
U.S. Treasuries plus margin
HECM: ½% of loan amount charged monthly
HomeKeeper®: averages .8% annual, charged monthly
Service Fee

Ranges from $25 to $35 per month
All costs charged monthly and added to principal loan balance.
Periodic status statements sent out every 3 months.
No payment is due until mortgage loan is paid off.
Additional Costs

Homeowner
Insurance and
Property Tax

Maintenance and
Repairs
Due & Payable
 When
last homeowner dies, sells the
home, or permanently moves out
 Failure to pay Property Taxes
 Failure to pay Homeowners Insurance
 Failure to Maintain and Repair home
Other Default Conditions
 Declaration
of Bankruptcy
 Perpetration of fraud or misrepresentation
 Eminent Domain or condemnation
 Renting
out part of the home
 Trying to add a new owner to the title
 Trying to take on new debt against home
Repayment
 Pay
off loan balance and keep home
 Sell home and pay off loan balance and
keep any difference
 Hand over the home to the lender to sell
 Time frame:
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6 months
two 3 month extensions
Key Decisions
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Who else should I involve in considering this
loan?
Which counselors should I choose?
Have I given due consideration to all my
choices?
When would be the best time to take out a
reverse mortgage?
What interest rate should I choose?
Which lender should I choose?
How should I use this loan?
AARP Booklet:
Home Made Money
 To
order a complimentary copy by
phone:

Call 1-800-209-8085.
 To

order a complimentary copy online:
http://www.aarp.org/money/revmort/revmort_b
asics/a2003-04-07-homemademoney.html