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Reverse Mortgages for Senior Homeowners. Cindy Stokes Utah State University (adapted from AARP information). A Little History. 1979 Federal Home Loan Bank creates Reverse Mortgage concept 1989 HUD/FHA introduces HECM 1989 Fannie Mae agrees to purchase HECM loans

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Reverse Mortgages for Senior Homeowners

Cindy Stokes

Utah State University

(adapted from AARP information)


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A Little History

  • 1979 Federal Home Loan Bank creates Reverse Mortgage concept

  • 1989 HUD/FHA introduces HECM

  • 1989 Fannie Mae agrees to purchase HECM loans

  • 1996 Fannie Mae creates HomeKeeper®

  • 1998 HECM becomes permanent program


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Home Equity Conversion Mortgage

  • 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


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HECM Basic Requirements

  • 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.


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HECM Counseling Required

  • 2-hour session

  • HUD-approved counseling agency

  • Free of charge

  • Includes discussion of other alternatives

  • Certificate of HECM Counseling issued, good for 180 days


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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


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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

Forward vs. Reverse

“Up the Down Staircase”


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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


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HECM Eligibility Requirements

  • 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


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HECM Eligibility Requirements

  • Can be single-family, 1 to 4 unit owner occupied, FHA-approved condominium, PUD, or manufactured home

  • Must meet minimum FHA property standards

The Home


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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


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How Much Can Be Borrowed

Total amount available is based on:

  • Age of borrowers

  • Value of property

  • Average interest rate


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“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


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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/


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Four Basic Plans

  • Tenure - Monthly payments for life

  • 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


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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


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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


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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


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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


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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


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The Process

  • Step 1: Counseling

    • 2-hour session

    • Certificate of HECM Counseling good for 180 days

  • Step 2: Find a Lender

    • www.hud.gov

    • www.fanniemae.com

    • www.aarp.org


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Things to Consider

  • Cost - Origination & Servicing Fees

  • Experience - Number of Reverse Mortgages

  • Servicing - Administrative Costs

  • Commitment - Professional Relationships


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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


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Monthly Costs for RM Loan

  • Adjustable Rate Interest

    • Adjust monthly or annually

    • U.S. Treasuries plus margin

  • Mortgage Insurance

    • 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.


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Additional Costs

  • Homeowner Insurance and Property Tax

  • Maintenance and Repairs


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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


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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


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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:

    • 6 months

    • two 3 month extensions


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Key Decisions

  • 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?


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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_basics/a2003-04-07-homemademoney.html