Top Ten Things to Know if You're Interested in a Reverse Mortgage

Reverse mortgages are becoming popular in America. HUD's Federal Housing Administration (FHA) created one of the first. The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more. You can receive free information about reverse mortgages in general by calling AARP toll free at (800) 209-8085. Since your home is probably your largest single investment, it's smart to know more about reverse mortgages, and decide if one is right for you!

1. What is a reverse mortgage?

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA's HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

2. Can I qualify for FHA's HECM reverse mortgage?

To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are further required to receive consumer information from an approved HECM counselor prior to obtaining the loan. You can contact the Housing Counseling Clearinghouse on (800) 569-4287 for the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders within your area.

3. Can I apply if I didn't buy my present house with FHA mortgage insurance?

Yes. It doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured.

4. What types of homes are eligible?

To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.

5. What's the difference between a reverse mortgage and a bank home equity loan?

With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

6. Can the lender take my home away if I outlive the loan?

No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home.

7. Will I still have an estate that I can leave to my heirs?

When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.

8. How much money can I get from my home?

The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You can use an online calculator like the one on the AARP website to get an idea of what you may be able to borrow.

9. Should I use an estate planning service to find a reverse mortgage?

FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HUD-approved housing counseling agencies are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you.

10. How do I receive my payments?

You have five options:

• Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
• Term - equal monthly payments for a fixed period of months selected.
• Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit with monthly payments for as long as you remain in the home.
• Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

Refinance Home Loans

When interest rates fall, home owners rush to refinance mortgages, often without pausing to consider whether doing a refinance is a good idea or if it makes financial sense. Unfortunately, home owners can be easily lured by the siren song of lower mortgage interest rates; however, the rates themselves are only a tiny portion of the bigger picture.

Serial refinancers, as I like to call them, take out new mortgage loans every time rates drop a quarter point. I knew a lawyer who refinanced his home seven times in the past eight years. This was a person who should have been smarter than that because every time he refinanced, he added more principal to the end of his loan and extended the term of his loan.

What is a Refinance?

A purchase-money loan is an original loan secured by a borrower to buy a home. A refinance loan is a new loan taken out by a borrower to pay off the original loan or, in the case of a serial refinancer, the loan pays off the last refinanced loan. The refinanced loan is typically in first position; however, it is also possible to refinance a home equity loan.

Types of Refinance Mortgage Loans

Just because you may presently be paying on a fixed-rate mortgage, doesn't mean that you can't take out a different type of mortgage loan when you refinance. However, before you consider switching out a fixed-rate mortgage for another type, make sure you completely understand the terms of the new loan. Here are common mortgage loan types you may want to consider:

• Interest Only Mortgage.
• Option ARM Mortgage.
• Adjustable-Rate Mortgage.
• FHA Loans.
• Reverse Mortgages.

Refinance Mortgage Loan Costs

Although it is possible to obtain a no-cost refinance loan from a mortgage lender, remember that lenders are in the business of making money. If the lender is not making income by charging upfront costs to make the loan, those fees are either rolled into the loan or paid through a higher-than-market interest rate.

There are a few banks turning to true no-cost loans, but those are few and far between. Read your fine print and compare lenders. Get a GFE, a Good Faith Estimate. Demand the lender guarantee the GFE. These estimates are not required by law to be guaranteed, which makes a GFE virtually worthless. But lenders who want your business will guarantee their estimates.

Here are costs you may be required to pay:

• Loan Discount Points.
• Loan Origination.
• Processing.
• Administration.
• Application.
• Inspection.
• Document Preparation.
• Appraisal.
• Credit Report.
• Title Policy.
• Escrow Fee.
• Reconveyance.
• Beneficiary Demand.
• Notary.
• Loan Tie-in.
• Delivery and Courier.
• E-Mail Doc.
• Tax Service.
• Recording.

Lender charge what we in the business nickname "garbage fees," which means they can be negotiated by the borrower. Those fees are document preparation, administration, processing, application and the like. If you ask, the lender might waive them.

On top of these fees, you may notice an item marked "paid outside of closing" on your closing statement called a YSP. That is money the bank gives back to the mortgage broker for bringing the lender your loan. Bear in mind that if the lender did not pay a YSP to the broker, you might have received a lower interest rate on your loan or paid less in points. By the time you discover this, you are probably closing the loan. So, ask upfront.

Drawbacks to Refinances

• Costs. If you are paying fees to obtain the loan, it is costing you money to get the loan, which you might not recoup through a lower interest rate for a number of years. To figure this out, add up all the fees. Figure out the difference between your old mortgage payment and your new payment. Divide that difference into the loan fees, which will equal the number of months you must pay on your new loan to break even.

  If your loan fees are $4,000, for example, and the monthly savings will be $100 a month, it will take you 40 months to break even on the refinance.

• Longer amortization period. Although you have the option of shortening your amortization period, you might not qualify for the higher payment nor may you want to pay more each month just to pay off the loan faster. Borrowers generally extend the term of the loan. If you refinance a loan with 25 years remaining for a new 30-year loan, you have turned what was originally a 30-year loan into a 35-year loan.

• Bigger mortgage. By rolling the costs of your loan into the loan itself, you are taking out a bigger mortgage. A bigger mortgage eats away at your equity position. Moreover, if you take out cash, called a cash-out refinance, your loan balance will be increased.

  Some borrowers take out cash from a refinance to pay off bills incurred by unsecured purchases. If you bought furniture, for example, and you pay off the furniture store, you have now financed furniture for 30 years, which may have a useful life of ten.

  Paying off unsecured credit cards eliminates present debt but only if you never use the cards again. Consider cutting up your cards if you've managed to get yourself so far into debt that your only recourse is to refinance the roof over your head.

Refinance Benefits

• Lower monthly payment. If you plan to stay in the home long enough to break even on the refinance costs, a lower interest rate and payment will result in greater monthly cash flow.

• Shortening the amortization period. If your lower interest is substantially lower than your previous rate, you might want to consider shortening the term of your loan in exchange for a slightly higher mortgage payment. Before you do this, figure out if you could invest that extra principal portion elsewhere for a better rate of return.

• Cash in hand. Many obtain cash to invest at a higher rate of return than the new interest rate.

More Home Buying / Selling Quick Tips

Weintraub's Home Financing Advice

Ordering Free Credit ReportsWhat is a Beneficiary Demand?What is a Yield Spread Premium?

Weintraub's Mortgage Loan Advice

Types of Mortgage LoansInterviewing Your LenderMortgage Broker Representation

Mortgage Lender Tips from Elizabeth Weintraub

Where to Get a MortgagePredatory Mortgage LendersSub-Prime Mortgage Lenders