Reverse Mortgage Blog

The most common and important discussion I have with my clients is regarding the payment plan and interest rate option.  Someone I’ve been talking with over the past 2 years announced she was ready to do the reverse mortgage and wants the most money she can get.  She stated very emphatically that she wanted the fixed rate with a lump sum draw.  So I suggested we talk further and I started asking questions. 

How long do you intend to stay in your home?  She felt five years was the maximum time she would live there as the home is large and property maintenance is demanding.  She had tried to sell her home but the market was too poor and she didn’t want to ‘give away’ the home that was the result of built up equity in all the homes she and her husband (now deceased) had bought and sold over their lifetime together.  She had a mortgage to pay off that amounted to about one-half of the reverse mortgage proceeds.  The lump sum she would have to draw with the fixed rate option would just be put into the bank earning less than one percent interest, where she would be accruing interest and mortgage insurance over 6% on the reverse mortgage loan. 

I suggested we look at the variable rate option because she could keep the extra funds in the line of credit which would not be charged interest until she took draws.  In addition, the available money in the line of credit grows at the same rate of interest plus mortgage insurance as charged on the balance, currently 3.77%.  And if rates increase, she would benefit from more growth in her line of credit.  She said she was terrified of variable rates as she heard people have lost their homes because of mortgages where rates went up and they could no longer afford the payment.  I pointed out that since no payments are required, you don’t have the same risk as forward loans.  Of course, higher interest rates cause the loan balance to increase more rapidly and she would owe more at the end (when she leaves the home permanently or sells).  On the other hand, her line of credit would increase more.  She liked that idea because that increasing available line of credit is a hedge against the home dropping in value.  Even if the home value was less than the line of credit in the future, she could still take all of the money out.  It’s not like a conventional HELOC where the lender can cancel the credit line at any time.  Also, since she expected to be in the home for no more than five years, the risk of high interest rates is lower.

Then we compared amortization schedules between the fixed rate with the lump sum draw and the variable rate where she just drew the amount of the mortgage and upfront fees that were financed.  It wasn’t too many years before the fixed rate balance was twice that of the variable rate, even using a higher rate than today’s rate on the variable option. 

In many cases the fixed rate lump sum is best, especially if you expect to stay in your home for a long time or the rest of your life and if you have a large mortgage to pay off.  You will find the upfront costs are typically lower with the fixed rate option also.

Knowing your goals, what is important to you and understanding the programs in depth helps you choose the best option for your needs.  Let’s have a conversation!

If you get your education on reverse mortgages from what you hear in mainstream news, you are missing out on a very important fact.  Reverse mortgages are not expensive.  The media loves to tell you that it is a program of last resort and the costs are too high, but in reality, reverse mortgages can have lower cost than conventional loan programs.  The HECM Saver option was introduced recently and it really does save a lot of money in upfront costs.  It makes sense to do a reverse mortgage even if it's a relatively short  time frame you are looking at.  Maybe you want to sell your home but the market is just too poor right now.  A reverse mortgage can step in and fill a financial void.

The HECM Saver fixed rate option has no origination fee and the upfront mortgage insurance is just .01%.  (for a $200,000 home, that's just $20)

Please don't rely on the misconceptions you hear and read when you can get the facts and details from a reverse mortgage expert.

 I suggest you request a quote to find out exactly what is currently available.

          Send your request for details here:  request proposal 

I’m been in a reflecting mood lately, maybe because it’s almost Christmas or maybe because my father recently passed away and it’s the 20 year anniversary of my mother’s passing. Whatever it is, I’m taking advantage of this time to look back and truly be grateful for the upbringing I had and be grateful for what my parents did for me and what I had to do for myself. We certainly weren’t wealthy, I suppose we would have been considered lower middle class. We ate well as my mom was an expert in preparing a healthy meal with pennies. Schools were good, even had music departments and small enough that I could participate in any sport or club. There wasn’t a lot to do so sitting at the table after school to complete homework and practicing the piano or trumpet didn’t make me feel like I missing out on anything. Stepping out to the basketball hoop in the driveway for a game of ‘around the world’ or ‘pig’ with one my brothers provided a good release (and I became a pretty good shot) Everyone dressed average so there was no feeling of being substandard, and when I reached an age to learn to sew, I had a variety of clothes … something that surely would not be ‘accepted’ in today’s standards.

My Dad was the sole wage earner as a barber with the price of a haircut very low. Family vacations were hitching up the little trailer and heading for a mountain lake or wooded creek with plenty of fishing, fun swimming, camp fires, running around the woods and just a wonderful time. gave me a great love for the mountains and nature. I didn’t stay in a hotel until I was out of the house and on my own. Even our big trip to Disneyland found us in the trailer park across from the park. That was fine…. and it had a pool! (Although I always wondered what staying in a hotel was like). And we never went on an airplane. We didn’t even go to places like Yosemite, although it wasn’t that far away….” too touristy”. My Dad had never been to Yosemite in the 70 years he lived in California…. and he didn’t care. But we fished the most out of the way trout streams you could imagine.

Christmas was always magical and fun. Santa stayed alive far longer than he does for today’s kids. I’ll never forget the Christmas when I kind of thought I would get a new bicycle and there under the tree was a box. Of course, a bicycle could not fit in that box, and when I opened it, there was an air mattress. I knew it would be great fun on the lake next summer and I thanked my parents and gave them hugs (even though it was used!) Then a smile came on my parent’s faces and they led me to the garage and there was a shiny new bike with a leopard banana seat and streamers hanging from the handlebars. It even had shiny fenders so I could ride on wet streets. What a great Christmas that was! What a great childhood…. lucky me!

I spent the weekend writing Christmas cards to my past reverse mortgage clients.  It provided an opportunity to reflect .... the joy I felt knowing how the program I introduced to my clients that made their lives better in so many ways, the privilege I continue to enjoy as I enter their homes and become a part of their lives. Often, as result of referrals, particularly Rob Black’s recommendation, people developed a trust in me quickly.   It made me uncomfortable as I felt and continue to feel they must learn the details of the program and trust themselves in the decision.  But at one meeting, a gentleman said he trusted me and I blushed and worked harder to help him understand the topic and he interrupted and said, “You should say thank you when someone says they trust you, that's the highest compliment you can receive”.  Now, every time someone says they trust me, I smile and look into their eyes and express a sincere appreciation for the complement they just gave me.... and go back to an even more concentrated effort to help them understand fully the details of the important program they are considering.  They are about to make one of the most important decision of their lives….  “At a time when they can't afford to make a mistake.”  (A comment a past client made). 

I am so very blessed to get to know such a wide variety of people with so many experiences that later generations can’t and will never experience ever again.  I gain a first hand knowledge of their lives and how they live now and overcame obstacles during their lives, the hardships they faced and challenges they continue to face as they age. Working in California and the San Francisco Bay Area with the incredible variety of people that I got to personally know and become involved in their lives has been a blessing for me.   I have been able to witness many different cultures, from the black woman in Oakland who had two social security numbers because of her childhood work in the cotton fields in the south with their bosses walking up and down the rows assigning numbers as they went.  The world war II vets who experienced unthinkable and heroic actions during the war but live simple lives wanting no more than paying their bills, maintaining their modest homes and making sure their wives will be okay if they die first.  The woman who quickly warned me that she lived alone so when she talks, it’s like opening the flood gates, but all so interesting.  This was a European woman in her beautiful home in the hills of Santa Barbara who surprisingly had 2 concert grand pianos, tucked together like a puzzle in her living room.  My lifelong learning at the keyboard came to fruition when we dug through her piano benches and played duets throughout the afternoon and every time I visited the city joined her for our afternoon soirée.  She commented, you’ll easily find me… I’ll be the one jumping up and down as you approach!   The elderly woman in Daly City whose daughter was looking for a source of funds to pay for her home care as the most important thing was to keep her in her home…. to allow her to die peacefully in her own bed…. the beautiful piano in her living room…. the Beethoven piece I conveniently had memorized provided a profound sense of joy that you could see in her face and tears…..  The German woman in the Sunset district of San Francisco with the cold fog outside, and just as cold inside because she couldn’t afford heat (by the way… her home valued at $800,000) who kept music active in her life as I could see her spinet piano in the center of her living room with music and lighting that made it obvious this was the most important piece of furniture in the home.  After commenting on her piano, I quickly learned she played, but her greatest love was singing, and she even wrote her own songs with the aspirations of recording them.  We put off the main reason I was there and I sat at the piano playing the introduction to her love song she recently wrote…. Her shaky voice starting in…. the tenderness she expressed, the joy in her tone. How blessed I am! 

 My past clients understand what a reverse mortgage can provide…. And remind me over the years how important that money has been for them.  The Walnut Creek woman who invited me to her home after remodeling…. stating “I polish my equity every day” as she stood in her beautiful new kitchen, leaning over her lovely granite countertops.  The woman who was facing foreclosure and the lender relentlessly sending notices and refusing to give her more time …. as she made numerous trips to the emergency room with a heart condition…. who now happily announces her health has improved dramatically and her blood pressure back to normal since the reverse mortgage closed and she no longer has the stress of losing her family home of 60 years.

 These memories mean so much to me, Merry Christmas to All!

We received great news from HUD that the HECM Lending Limits will remain at the high level of $625,500 through 2012.  This means that seniors with high value homes can receive a percentage of their home value, up to $625,500.  If the home appraises for more than that amount, we will use $625,500 as the home value and provide reverse mortgage funds based on the age of the youngest homeowner.  The minimum age for a reverse mortgage is 62 years old and the older you are, the higher principal limit or amount of funds is available.  There are no payments required on the loan as long as one borrower remains in the home. So go ahead and retire!

At the National Reverse Mortgage Lender’s Association annual meeting, The FHA Acting Commissioner, Carol Galante told reverse mortgage lenders that HUD plans to keep the lending limits or maximum claim amount at the current $625,500 level.  This is great news for potential HECM reverse mortgage borrowers with high value homes and those who wish to purchase high value homes using a reverse mortgage.

The current lending limit was raised as part of the stimulus package in 2009 and recently extended through December 31^st, 2011.  We are still waiting for HUD to issue a mortgagee letter making this new extension official.  I’ll keep you posted.

 First, let’s review a standard ‘forward’ mortgage.  You borrow money and promise to pay it back (typically monthly & amortized over 15 to 30 years).  You allow a Deed of Trust to be recorded against your property as a security instrument. The deed of trust allows the lender to foreclose if you don’t pay according to the terms.  A reverse mortgage works exactly the same except the terms of how the loan is paid back is different.  Instead of making monthly payments, you let the interest accrue onto the loan balance.  You agree to pay the lender when you move away permanently, sell or the last remaining borrower passes away.   You also agree to pay your property taxes, homeowners insurance and keep up the general maintenance of your home. With both types of loans, there is no transfer of title.

To be eligible, you and your spouse must be at least 62 years old and have substantial equity in your home, or in the case of a reverse mortgage for purchase, a large down payment.  For the exact loan to value (LTV) for a reverse mortgage, please request a personal profile.  Because there are no mortgage payments required, the lender isn’t interested in your ability to make payments so your income or credit are not a determining factor in qualifying for the reverse mortgage.  Although judgments must be addressed and you can’t be delinquent on any federal loan.

If you meet these qualifications, your home will be appraised and the amount available to you will be based on the appraised value or maximum claim amount, whichever is less.  Currently, the national HECM maximum claim amount is $625,500 until Dec. 31, 2011, and scheduled to drop to $417,000 on January 1, 2012.  The amount available to you will be a calculation based on your appraised value or maximum claim amount, the age of the youngest borrower and the expected interest rate at the time the loan documents are drawn. 

You decide on the rate type, fixed or variable and the payment plan that suits you best, lump sum, line of credit, monthly payment or combination.  The fixed rate option requires a lump sum draw at closing.

“But what about my heirs?” That’s a question I hear all the time.  Please understand that you are not putting any liability on the heirs of your home.  There are two possibilities when your loan matures (upon sale, move, or death) either you have equity left or you don’t, your loan balance may even be higher than your home value depending if your home appreciates or not.  If there is equity remaining, your heirs may sell the home and keep the profits or keep the home and pay off the reverse mortgage, probably through refinancing.  There are no deficiency judgments as the home alone stands for the debt.

A reverse mortgage is safe! With an FHA-insured HUD Reverse Mortgage, you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."  You must understand your obligations, including occupying your home as your primary residence, keeping up maintenance of your home and keep property taxes and homeowners insurance current. 

Once you decide you want to get a reverse mortgage, the next important decision is the rate option selection.  For people with large mortgages to pay off, it’s a fairly easy choice with the fixed rate lump sum option.  But if you need little cash initially and want to use the funds gradually over time, the line of credit or monthly payment option may be best and for this you must choose a variable rate option.  Then there’s the choice of standard or saver.  If you want the maximum dollar amount you must pay the full 2% MIP.  If you can get by with a lower amount of money, you can save quite a bit by opting for the saver option.  Remember, all of the closing costs are financed into the loan except the cost of the appraisal.

HECM Standard Fixed Rate This program has a fixed rate for the life of the loan.  Rate options begin in the mid-4% range.Lower rates tend to have higher origination fees although currently we offer zero origination fee on very low fixed rate options.  The only payment plan for the fixed rate program is a lump sum at closing.

HECM Standard Monthly Adjustable Rate The interest rate on this program can adjust every month with a lifetime rate cap of 10 points above the start rate. It is tied to the one month LIBOR index with margins ranging from 1.75% to 2.5%.  Some ARM programs carry a $25 monthly servicing fee.

Payment plan options include line of credit, monthly payments (term or tenure), lump sum of cash or a combination.  Interest accrues only on the amount taken out so the loan balance does not rise as rapidly as with a lump sum draw.  The available credit line has a growth rate equal to the interest and mip charged on the balance.

HECM Saver Program (Fixed or Adjustable Rate) This program became available Oct. 1, 2010.  It works like the above rate options, the difference is that the MIP is set at 1/10 of 1% of the home value or lending limit (.01%).  The money available is reduced from the ‘standard’ options.

Mortgage Insurance Premium MIP HUD/FHA charges 2% of the principal lending limit or appraised value (whichever is lower) for up front mortgage insurance on the standard option and .01% on the saver option.

The ongoing mortgage insurance is added to the unpaid principal balance at a rate of 1.25%.  This mortgage insurance goes to HUD/FHA and makes the HECM program possible as it removes the risk from the lender who can offer very competitive interest rates and provides safety for borrowers.

I often spend a lot of time talking with my clients about each option as every scenario is different and it is very important to explore these choices thoroughly. 

It’s been almost a year since the HECM Saver came on the reverse mortgage market so I thought it was appropriate to write about my experiences with this program.  The HECM Saver is designed for senior borrowers who want to reduce the up front fees and in exchange take a lower line of credit, lump sum or monthly payments.  The up front mortgage insurance is reduced to .01% of the home value or maximum claim amount which is a drastic reduction from the standard 2.0%.  On a home valued at $600,000, the MIP goes from $12,000 to $60.  The amount of money available to the borrower is reduced to approximately 10% to 18% from the HECM Standard option.

It’s taken a while to catch on, but I’m noticing more people interested in the saver option lately.  A reason it is becoming more popular could be because of the lower rates available now.  A few months ago, fixed rates for the lump sum option and variable rates for the line of credit or monthly payment option, were a ½ point to ¾ point higher than the standard option.  Currently, we offer the HECM Fixed Saver at 4.75% and the ARM Saver at a 2.25% margin.  With the 1 Month LIBOR index at .206% the fully indexed rate is 2.456% + 1.25% annual mortgage insurance premium.  The total charge is 3.706% and this low index option has a $25 servicing fee and a set aside for the servicing fee.  There are variable rate Saver HECM’s with no servicing fee, although the margin is higher and the lower rate option with the fee is a wiser choice.  Just like the standard option, the available line of credit increases at the same rate that’s charged on the loan balance, 3.706%.  If you think about it, this is a good way to secure your equity from further drops in home value.  Some of my clients have secured a line of credit and not used it.  Because they took it out when values were high, they now have a credit line availability actually higher than their home values.  They have full access to it and it cannot be taken away because of the FHA mortgage insurance protecting reverse mortgages. 

The HECM Saver seems to suit people who want to preserve their equity but also provide a financial cushion for themselves.  Many pay off mortgages and get rid of mortgage payments forever.  So now, when you hear someone say,  “Don’t get a reverse mortgage, the fees are too high” you can tell them to get educated before they spout off!  The HECM Saver is an excellent alternative to standard Home Equity Lines of Credit.    

The FHA maximum claim amount for HECM Reverse Mortgages has been $625,500 since President Obama increased it in the stimulus package in 2008.  It is schedule to go back to $417,000 on December 31^st 2011 unless Congress votes to extend it.  In the San Francisco Bay Area, this means many older homeowners will not qualify for a reverse mortgage as their existing mortgage to be paid off will be higher than the reverse mortgage will allow.  For example,  72 year old homeowner with a home valued at $600,000 would now get $392,000 or pay off a mortgage up to that amount without bringing in additional cash.  On October 1^st, that same $600,000 home will only provide $272,000. Folks, that’s $120,000 less!  If that isn’t a good enough reason to start your reverse mortgage now, consider this:  fixed rate reverse mortgages are in the mid 4% range (may even go back down to and some fixed rate options have no origination fee. 

Consider a reverse mortgage as part of your smart financial plan.  If you are drawing money from your retirement plan (paying taxes) and paying towards mortgage payments, it’s smart to get a reverse mortgage and get rid of those mortgage payments forever.  Draw less funds, lower your taxes and enjoy life more. 

 Give me a call, Maggie O’Connell and let’s talk.  No sales talk, but good solid information and ideas on how to structure your retirement in a better way utilizing a FHA government insured reverse mortgage. (800) 489-0986 and for more information go to www.ReverseMortgageStore.com