1. Reverse Mortgages (HECM)
Presented by
Facility
You need a room that has enough space for people to move around the room. This presentation should take approximately 1 hour.
Audience
Master Financial Education Volunteers and public presentations.
Instructional Objectives
Participants will:
Understand the basics of a reverse mortgage
Understand the costs of a reverse mortgage
Understand the advantages and disadvantages of a reverse
mortgage
Materials and Equipment
Multimedia projector
Laptop computer with PowerPoint
VCE Publication – Home Equity Conversation: Reverse your Mortgage
Source of information: FHA Reverse Mortgages (HECMs) for Consumers found at
Developed by Celia Ray Hayhoe, Ph.D., Associate Professor and Family Resource Management Specialist
Virginia Tech
Glenn Sturm, AmeriCorps VISTA Volunteer
425

2. Overview What is a reverse mortgage? Types of reverse mortgages
Who qualifies?
How much can you borrow?
When can you receive the money?
What happens when you leave the house?
Are you and your spouse 62 or older? Do you know someone that is? If so this is information you need to know as it may help you or someone you know stay in their home longer.

3. Reverse Mortgage What is it?
A way to provide money by releasing your home’s equity
Mortgage must be repaid once the last surviving borrower has sold the home, vacated the home, or died
Hand out VCE Publication – Home Equity Conversation: Reverse your Mortgage
What is a reverse mortgage?
A way to provide money to the homeowner by releasing their home’s equity; essentially selling a part of your home for cash now.
The homeowner must repay the loan once the last surviving borrower has sold the home, vacated the home, or has died
427

4. Reverse Mortgage is Not a Home Equity Loan!
Home-equity loans require that a homeowner has enough income to pay back the loan, and the payments are made in monthly amounts
A home-equity loan would not work for the majority of senior adults who are living on limited fixed incomes and who could not afford a loan payment
428

5. All Reverse Mortgages are Not the Same
They have different eligibility requirements, income amounts, timing of payments, interest rates, and/or initial costs
Homeowners should compare the different options, keeping in mind their goals and needs
429

6. 3 Types of Reverse Mortgages
single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations
federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD)
proprietary reverse mortgages, private loans that are backed by the companies that develop them
Single-purpose reverse mortgages are the least expensive option. They are not available everywhere and can be used for only one purpose, which is specified by the government or nonprofit lender. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.
HECMs and proprietary reverse mortgages are more expensive than traditional home loans, and the up-front costs can be high.
430

7. Borrower Requirements FHA HECM
All owners must be 62 years of age or older
Own the property outright or
have a small mortgage balance
Occupy the property as your principal residence
Not be delinquent on any federal debt
Participate in a consumer information session given by an approved HECM counselor
431

8. Property Requirements FHA HECM
Single family home or 2-4 unit home with one unit occupied by the borrower
HUD-approved condominium
Manufactured home that meets FHA requirements
432

9. Financial Requirements
No income or employment qualifications are required of the borrower
No repayment as long as the property is your principal residence and the obligations of the mortgage are met
Closing costs may be financed in the mortgage
433

10. Amount You Can Borrow Age of the youngest borrower
Current interest rate
Lesser of the appraised value of your home, the HECM FHA mortgage limit of $625,000, or the sales price
The initial Mortgage Insurance Premium (MIP) option you choose (2% HECM Standard option or .01% HECM Saver option)
Here are a list of factors affecting the amount you can borrow with an HECM reverse mortgage
434

11. Payments Received 4 Ways
Lump sum
Monthly installments
Line of credit
Combination of monthly payment and line of credit
Payments for a reverse mortgage are typically received in one of four ways:
Lump sum
Money received in one large amount
May result in very large interest costs when repaid since the entire amount accrues compound interest once the lump sum is paid
Monthly installments
Money received in equal increments every month
equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence or
equal monthly payments for a fixed period of months
Also accrues interest, but less interest than a lump sum because not all of the money is received immediately
Line of credit
Gives the homeowner a line of credit to pull from in case of emergency, or even for discretionary spending
Many lines of credit will increase by a certain growth rate if the funds go unused
Amount of interest you pay may increase over time as you use the funds
Combination of monthly payment and line of credit
435

12. Right to Cancel
With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty
Some third party costs may not be refundable
To cancel, you must notify the lender in writing
Send your letter by certified mail, and ask for a return receipt
This will allow you to document what the lender received and when
Keep copies of your correspondence and any enclosures
After you cancel, the lender has 20 days to return any money you’ve paid to them for the financing

13. Costs Origination Fee Closing Costs Mortgage Insurance Interest
Servicing Fee
These terms are discussed in detail in the following slides.
437

14. Origination Fee
You will pay an origination fee to compensate the lender for processing your HECM loan
A lender can charge a HECM origination fee up to $2,500 if your home is valued at less than $125,000
If your home is valued at more than $125,000 lenders can charge 2% of the first $200,000 of your home's value plus 1% of the amount over $200,000
HECM origination fees are capped at $6,000
Origination fee example:
$300,000 house
2% of $200,000 = $4,000
1% of remaining $100,000 = $1,000
The most you can be charged for origination fee in this case is $5,000

15. Mortgage Insurance Premium (MIP)
You will incur a cost for FHA HECM insurance
You can finance the mortgage insurance premium (MIP) as part of your loan
You will be charged an initial MIP at closing, which is either 2% (HECM Standard) or .01% (HECM Saver) of the lesser of the appraised value of your home, the FHA HECM mortgage limit for your area, or the sales price
Over the life of the loan, you will also be charged an annual MIP that equals 1.25% of the mortgage balance
The HECM insurance guarantees that you will receive expected loan advances. The insurance also guarantees that, if you or your heirs sell your home to repay the loan, your total debt can never be greater than the value of your home.

16. Closing Costs Closing costs from third parties can include
an appraisal
title search and insurance
surveys
inspections
recording fees
mortgage taxes
credit checks
other fees
Some of these fees are not refundable if you cancel

17. Interest Rate HECM borrowers can choose
adjustable interest rate, or
fixed rate
If you choose an adjustable interest rate, you may choose to have the interest rate adjust monthly or annually
Lenders may not adjust annually adjusted HECMs by more than 2 percentage points per year and not by more than 5 total percentage points over the life of the loan
FHA does not require interest rate caps on monthly adjusted HECM

18. Service Fee
Lenders or their agents provide servicing throughout the life of the HECM
Servicing includes sending you account statements, disbursing loan proceeds, and making certain that you keep up with loan requirements such as paying taxes and insurance
HECM lenders may charge a monthly servicing fee of no more than $30 if the loan has an annually adjusting interest rate and $35 if the interest rate adjusts monthly
At loan origination, HECM lenders set aside the servicing fee and deduct the fee from your available funds
Each month the monthly servicing fee is added to your loan balance

19. Repayment
A HECM loan must be repaid in full when all owners die, vacate or sell the home
However, the lender can only look to the proceeds from the sale of the house for repayment – they cannot go to your heirs if the house sells for less than what was borrowed

20. Loan Becomes Due and Payable If:
You do not pay property taxes or hazard insurance or violate other obligations
You permanently move to a new principal residence
You, or the last borrower, fail to live in the home for 12 months in a row
An example of this situation would be if you (or the last borrower) were to have a 12-month or longer stay in a nursing home
You allow the property to deteriorate and do not make necessary repairs

21. Advantages of a Reverse Mortgage
Eligibility based on value of house, not income
Flexibility in receiving payments
Do not have to sell home and move
Will not result in foreclosure
Cannot owe more than the proceeds from the sale of the house
Money can be used for any purpose
Income is not taxable
Will not affect Medicare eligibility or benefits
Advantages
The value of your house, not your income, is used to determine eligibility.
You can receive a lump sum, a line of credit, or a monthly amount, without having to make a monthly repayment.
You do not have to sell your home and move to receive additional money, and can continue to live in the same familiar surroundings.
You do not have to worry about losing your home to foreclosure since the payments are made out of your equity in the home, not from your income.
The loan must be repaid when the house is no longer used as your personal residence. However, the lender can only look to the proceeds from the sale of the house for repayment. They cannot go to your heirs if the house sells for less than what was borrowed.
Money can be used for any purpose.
Income from a reverse mortgage is not taxable.
Will not affect Medicare eligibility or benefits.
445

22. Disadvantages
Interest for a reverse mortgage is compounded, and cannot be deducted on income taxes until you repay it
The income you receive decreases the equity in your home, and the equity may not be adequate for your future needs or for your estate
Interest rates and initial costs (application fees, points and closing costs) are usually higher for a reverse mortgage than for other equity loans
Income ends when you sell your home or no longer use it as a principal residence

23. Disadvantages Continued
Payments may affect Supplemental Security Income and Medicaid payments
You may need to pay off your existing mortgage out of the proceeds of your reverse mortgage
You will be required to maintain the house, pay the taxes, and carry property insurance

24. Analyzing a Reverse Mortgage
When comparing Reverse Mortgages Ask yourself three questions:
How much would I get?
How much would I pay?
How much would be left at the end of the loan?
Every reverse mortgage consists of
The loan advances paid to you
The loan costs paid to the lender
Leftover equity, if any, in the house – which will change over time as the value of the house changes
Source:

25. Alternatives Tapping other resources Refinancing Downsizing
Refinancing
Downsizing
Sharing your home 
Relocating
Here are some alternatives to reverse mortgages.

26. Beware of being asked to use a reverse mortgage as a way to pay for goods or services
Beware of being pressured to buy other products such as long-term care insurance or annuities
Always consult a HUD certified housing counselor
The bottom line:
If you don’t understand the cost or features of a reverse mortgage or any other product offered to you, or if there is pressure or urgency to complete the deal, walk away and take your business elsewhere.
Caveat: Consider seeking the advice of a family member, friend, or someone else you trust. But remember they may not always understand the reverse mortgage and family members have a vested interest in advising against use of a reverse mortgage because such a mortgage uses up equity the family member stands to inherit.

27. Report Fraud The Federal Trade Commission – FTC State Attorney General
Virginia State Attorney General
Download complaint form

28. Questions?
Does anyone in the audience have a question they would like to ask? If not, thank you for coming!