Should my loved ones get a Reverse Mortgage LOAN?

What Every Family Should Know About Reverse Mortgage Loans.

The older we get, the more life becomes about having difficult conversations—regarding health, finances, end-of-life decisions, and the legacy to be left for future generations. Often, one of these emotional discussions is about the family home. Will mom and dad be able to continue living there? Do they have enough saved for a comfortable, safe and secure retirement? What is the strategy for financing long-term care? Can you afford to help out without impacting your own finances? Home equity is the largest store of savings for most households entering retirement, yet it’s typically an underutilized retirement asset.1 So what’s the best way to leverage home equity to be better financially prepared in retirement? We created this guide to help families better understand how reverse mortgages work, and the role they can play in smart financial planning strategies for not only older homeowners, but also their adult children. It also addresses common questions and concerns that adult children have as they assist their parents in the decision-making process.

Understanding the Basics

What is a Reverse Mortgage Loan?

It’s a versatile home equity loan created specifically for older homeowners and homebuyers, allowing them to turn part of the equity they’ve built up in their home into funds they can use as they choose.

A reverse mortgage is a lot like a mortgage you’d get from a bank or credit union. However, there are key differences that make reverse mortgages better suited for people who are retired or looking ahead to retirement. One major advantage is its flexible repayment feature, which allows the borrower to make any size monthly mortgage payment, or even none at all.* Most reverse mortgages are FHA-insured** Home Equity Conversion Mortgages (HECMs). The typical reverse mortgage candidate is at least 62 years old, has 50% or greater equity in their home, and wants to:

Reduce or eliminate monthly mortgage payments
Consolidate other debt,such as credit card balances
Make home improvements, or purchase a new home
Establish a line of credit for unplanned expenses

With a HECM, the borrower can choose to take their funds as a line of credit, lump sum, monthly advances, or a combination of these.† In addition to HECMs, some lenders have also introduced proprietary loan products to accommodate a broader array of borrowers. For example, we also offer Equity Elite®, which is available to those as young as 60.‡ It is designed specifically for borrowers who want lower up-front costs, own or want to purchase a condominium that is not FHA-approved**, or those looking to access the maximum loan proceeds for their higher-valued home. See page 4 for additional details.

What are the costs involved?

Except for a fee for required reverse mortgage counseling, most of the fees can be financed with the loan, so out-of-pocket costs are minimal. Or, the borrower can choose to pay them out of pocket.

The costs are added to the loan amount (“principal”) and paid along with the accrued interest when the loan becomes due. Depending on the loan option chosen, there may be an origination fee, closing costs, a mortgage insurance premium (required for HECM loans) and a monthly servicing fee. However, there are also options (such as EquityElite® Zero) that offer a lender credit to be applied towards most closing costs.* Speak to one of our loan specialists for more information.

How is a Reverse Mortgage Loan Repaid?

It must be repaid when the last surviving borrower sells the home, moves out, or passes away. Typically, the home is sold to repay the loan, and the homeowner or their heirs keep any remaining equity. If the homeowner or family members wish to keep the property, the loan can be repaid using a traditional mortgage or other funds.

If the loan balance exceeds the home’s value when my parents pass, am I responsible?

No. Reverse mortgages have a non-recourse feature: Neither the borrower nor their heirs will have to pay more than the loan balance or the appraised value of the home at the time the loan is repaid, whichever is less. When the last surviving homeowner passes away (or the home is no longer the borrower’s primary residence), the loan must be repaid. If you are the heir, you can satisfy the debt by either selling the home, or purchasing the property for 95 percent of its appraised value. If the home depreciates in value to the point that the balance owed exceeds the value of the home, you will not be responsible for repaying more than what the home is worth at the time the loan is repaid.

What are the Loan Obligations?

It is extremely important to us and the entire reverse mortgage industry that borrowers and their families understand their obligations. As with any mortgage, the borrower has certain obligations under the loan: 1. Keep the home in good condition 2. Keep current with property taxes and insurance 3. And with a reverse mortgage, the borrower(s) must live in the home as the primary residence (there is an annual certification) Failure to meet these loan obligations can lead to the loan becoming due and payable. The details of the borrower obligations are discussed during an independent counseling session that is required before your application can be processed. The counselor’s responsibility is to certify that the prospective borrower understands the terms and conditions of the loan. At the conclusion of a successful session, the counselor will issue a counseling certificate. Without the certificate, the lender cannot move forward with the loan application.

Exploring Your Family’s Options

Are there alternatives to Reverse Mortgage Loans?

Yes, many families look at refinancing with a traditional mortgage loan or a Home Equity Line of Credit (HELOC). However, for older homeowners, in many cases a reverse mortgage is a more suitable option. That’s because it’s designed to be sustainable for those on a fixed or reduced income—be it now, or in the future.

Which financing option is right for your family?

What if there’s an existing mortgage on the home, or an outstanding home equity loan?

The homeowner may still be eligible. In fact, many people refinance their existing mortgage(s) with a reverse mortgage in order to substantially reduce their monthly bills. As with any mortgage, the borrower must continue to keep current with property taxes, insurance and maintenance as part of their loan obligations. Proceeds from the reverse mortgage would first be used to pay off any existing mortgage(s).

Common Family Concerns

Will the bank own the home?

No. This is the #1 misconception. In fact, the borrower holds the title to the home. As with any mortgage, the borrower must meet their loan obligations, keeping current with property taxes, insurance and maintenance. Just like a traditional mortgage, failure to meet loan obligations could result in property foreclosure. That is why we clearly define the terms and set the borrower’s expectations.

Isn’t a Reverse Mortgage a loan of last resort?

Recent product advances have made reverse mortgages more attractive, and academic researchers and financial advisors have developed effective strategies for using a reverse mortgage as part of an overall retirement plan. Just as there are loans specifically designed for students and for first-time homebuyers, a reverse mortgage is another type of “life stage” loan. Increased longevity and rising healthcare costs have also changed the retirement landscape. The ability to access home equity through a reverse mortgage can provide tremendous peace of mind for families who want their older loved ones to live safely and comfortably as long as possible.

What about our inheritance?

Many older homeowners choose to live frugally so that they’re able to leave their house to their children. Meanwhile, adult children may want their parents to live more comfortably and not worry so much about stretching their funds to cover mortgage payments, healthcare costs, or other living expenses. That’s why it’s important to have a candid conversation about finances sooner rather than later. Also, keep in mind that when the home is sold, once the loan is repaid any remaining equity belongs to the homeowners or their heirs.

What protections are there for borrowers and their families?

Reverse mortgages come with built-in safeguards to help ensure borrowers are making wise choices. These include: Financial Assessment. All reverse mortgage lenders are required to conduct a financial assessment to ensure the borrower has adequate cash flow to pay ongoing costs, such as property taxes and homeowners insurance, over the life of the loan. Borrowers must provide documentation, such as tax returns and bank account statements for all sources of income.

Mandatory loan counseling by an independent, FHA- approved counselor. As part of the loan process, each potential borrower must meet with an independent, FHA-approved* counselor to objectively ensure that they understand the reverse mortgage process, what it entails, the specific program’s details, and the individual terms of their loan. Non-recourse feature. Borrowers will never owe more than the home is worth when the loan is repaid. No matter how large the loan balance, borrowers (or their heirs) will never have to pay more than the total debt or the appraised value of the home at the time the loan is repaid (whichever is less). And no assets other than the home must be used to repay the debt. Borrowing limits. To help their home equity last as long as possible, HECM borrowers are limited in the amount of funds they can access at closing and during the first 12 months of the loan. Equity Elite® is structured differently. Please reach out to one of our loan specialists for details.

How to Choose a Lender

For most people, a mortgage is one of the biggest financial commitments they’ll ever make. So it’s important to do your homework and find a lender that makes everyone feel informed, confident and comfortable in the decision-making. Asking probing questions—and hearing straightforward, honest answers—will help a family feel that the they are heading down the right path in securing a comfortable retirement. If you work with a financial advisor, bring them into the process.

Here are three major areas to keep in mind when selecting a reverse mortgage lender: 1. Fees and interest rates of a Reverse Mortgage. As with a traditional mortgage, the borrower will pay interest on their reverse mortgage loan. The interest rate can make a big difference in the total cost of the loan, so choosing a lender with better rates can save the borrower significant expense over the life of the loan. Rates can be fixed or adjustable, and the borrower will need to decide which is best for their unique needs and goals. 2. Reverse Mortgage up-front and ongoing costs. With a HECM, applicants receive mandatory counseling, with the fee paid directly to an independent counseling agency. Other fees include a mortgage insurance premium, an origination fee and closing costs. Ongoing costs include an annual mortgage insurance premium and interest. Some lenders also charge a monthly servicing fee. Be sure to ask for estimates for the fees and costs from your lender. Borrowers can get a written estimate up-front by providing certain basic information. Afterwards, the lender is required to provide the borrower with detailed disclosures regarding costs twice during the loan process—when they submit their application and again when their loan closes. 3. Reputation and Reliability. When it comes to choosing a lender, it’s important to go with someone you can trust. If this is your first time dealing with a lender, make sure to do some research. Are they rated by the Better Business Bureau or do they have other accreditations? Also, check to see if they have online reviews or customer testimonials available. In the end, what is most important, however, is the relationship that you build with your loan officer. Remember that they will be the one to walk you through the reverse mortgage application and guide you through the process. Your loan officer should be someone that you feel comfortable with, and has enough training to answer all of your questions from day one until the closing of the loan.

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(561) 208-1717

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