Presuming you own and live in a qualifying residence, the next step is to consider which reverse mortgage lender is best for you.
1 – FHA HOME EQUITY CONVERSION MORTGAGE (HECM). Approximately 90 percent of new reverse mortgages being originated today are insured by FHA. Called HECM loans, these reverse mortgages have low FHA loan limits, which vary by county (currently $160,176 in low-housing-cost counties and up to $290,319 in high-cost areas for 2004). There are higher limits for two-, three-, and four-family owner-occupied buildings, as well as in Alaska, Guam, Hawaii, and the U.S. Virgin Islands. FHA/HECM reverse mortgages are available in all states (except the credit line alternative is not available in Texas).
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FHA/HECM reverse mortgages have adjustable interest rates, tied to the one-year U.S. Treasury bill index. The borrower can select annual or monthly adjustments; the annual adjustment is the T-bill rate, plus 2.1 percent, whereas the monthly adjustable uses the T-bill rate plus 1.36 percent.
EXAMPLE: If the T-bill rate were 2 percent, the FHA/HECM annual rate would be 4.1 percent. But the monthly adjustable rate would be 3.36 percent. These rates have maximum 2 percent annual increases and maximum 5 percent lifetime increases. Either choice is a “good deal.”
FHA/HECM loans incur an origination fee of 2 percent of the approved amount, with a $2,000 minimum, plus annual mortgage insurance premiums (MIP), closing costs, monthly servicing fee not more than $35, and accrued interest. Up-front fees at the time of borrowing usually include an appraisal fee, credit report charge, title insurance, recording charges, property survey, termite inspection clearance, repairs (if needed), and septic system, gas line, or well inspections. Most of the up-front costs can be financed to avoid out-of-pocket payments, except for fees paid to third parties, such as for the appraisal and title insurance.
2 – FANNIE MAE “HOME KEEPER” REVERSE MORTGAGE. The primary advantage of Fannie Mae reverse mortgages is the higher $333,700 maximum loan limit for 2004. This limit changes each January, based on nationwide home sales prices. The Fannie Mae advantages include the higher loan limit and no FHA/HECM expensive MIP insurance premiums. Closing costs are similar to FHA/HECMs.
The Home Keeper index is the one-month secondary market CD index, plus a margin, with a lifetime maximum of 12 percent above the initial interest rate. A disadvantage is there is no growth rate for lines of credit as there is for the FHA/HECM. Fannie Mae’s reverse mortgages are available in all 50 states (but the credit line is not available in Texas).
Fannie Mae “Home Keeper” Reverse Mortgage for Home Purchase. A unique variation is Fannie Mae makes reverse mortgage loans for senior citizens to purchase homes with no monthly payments required. Fannie Mae is the only lender with this type of reverse mortgage. It is ideal for a senior citizen who has some cash for a substantial home down payment, such as proceeds from the sale of a previous residence.
EXAMPLE: In 1997, Fred and Marion Vallier, then age 89 and 86, of Ames, Iowa obtained the first Fannie Mae “Home Keeper” reverse mortgage for home purchase. They bought their new $154,000 house with a $93,000 Fannie Mae reverse mortgage, which requires no monthly payments. The balance of their purchase price, about $61,000, came from the sale of their previous residence. Their reverse mortgage need not be paid off until after the surviving spouse dies, sells, or decides to move out of the home.
3 – FINANCIAL FREEDOM PLAN REVERSE MORTGAGES. These reverse mortgages have no limits so they are usually the most desirable for residences with high valuations. However, they are not available in all states. This non-government lender offers two “cash account” choices: the standard option and the zero point option.
The standard option has an up-front 2 percent origination fee, an open-end credit line, annual growth rate on unused funds, and a $500 minimum draw payment. But the zero-point option has no origination fee, maximum closing fees, annual growth rate on unused funds, and a $500 minimum draw payment. However, 75 percent of the maximum available zero-point option funds must be withdrawn initially and partial prepayment is not allowed during the first five years.
Financial Freedom Plan’s adjustable interest rate is tied to the LIBOR (London Interbank Offering Rate), plus a margin. The lifetime maximum increase cap is 6 percent above the starting rate.
HOW MUCH REVERSE MORTGAGE MONEY CAN BE OBTAINED? The exact answer depends on (a) your age and (b) your home’s appraised (fair market) value. As a very general rule, your maximum reverse mortgage will be between 25 percent and 65 percent of your home’s current market value. To be more specific and to obtain your personal estimated calculations for all three reverse mortgage types of loans, the best source is the www.financialfreedom.com Web site.
The younger you are, the less you will be able to obtain from your reverse mortgage. But there’s a very sound reason. Not only must lenders consider the actual principal amount advanced to the homeowners, but also the accrued interest which will build up over the term of the reverse mortgage. A 65-year old “young whippersnapper” has a life expectancy of 14 years for men and 18 years for women. But a 90-year-old “geezer” has only a life expectancy of 3.9 years for men and 4.7 years for women. However, as reverse mortgage lenders have learned, nobody is average and homeowners tend to live longer than non-homeowners. For that reason, they presume everyone has a 100-year life expectancy!
HOW MUCH WILL A REVERSE MORTGAGE COST IN UP-FRONT FEES? A major stumbling block for most reverse mortgage borrowers, and their adult children, is the up-front costs. Although reverse mortgages aren’t as bad as traditional mortgages for unexpected junk or garbage fees, which some lenders try to impose on borrowers, reverse mortgage lenders are far from perfect.
Over the years, there have been many lawsuits against dishonest reverse mortgage lenders. Fortunately, all those early reverse mortgage lenders with “shady” operations are now out of the reverse mortgage business. However, occasionally you’ll still hear about them because their loan servicing was taken over by several reverse mortgage lenders which are in business today.
As a very general rule, the up-front costs of obtaining a reverse mortgage will be about 5 percent of the maximum reverse mortgage available. About 2 percent of this is the lender’s loan origination fee. To illustrate, on a $200,000 reverse mortgage, the origination fee will be around $4,000 and total charges shouldn’t be more than $10,000. Although that might seem like a lot of money, all or most of it won’t be cash out of the homeowner’s pocket because most of the up-front fees become part of the reverse mortgage balance which is paid after the homeowner dies or sells the home.
Don’t get a reverse mortgage if you expect to stay in your home less than five years. Every reverse mortgage lender is required by federal law to provide the senior homeowner with a Total Annual Loan Cost (TALC) written estimate based on the borrower’s age(s) and the residence value. This computerized TALC estimate chart considers annual home appreciation rates of 0 percent, 4 percent, and 8 percent, as well as the first two years (VERY expensive as a percentage), at the borrower’s life expectancy (more reasonable), and at 40 percent beyond the borrower’s life expectancy.
There are so many variations that it is impossible here to show meaningful TALC calculations for your personal situation. Before a homeowner obtains a reverse mortgage, the lender must provide an exact TALC chart for the homeowner’s personal situation.
To generalize, if you don’t expect to stay in your home at least five years, a reverse mortgage will be very expensive for you, as a percentage of the funds you actually receive (even if you take the lump sum choice). You might be better off with a home equity loan if you plan to stay in your home less than five years.
Of course, none of us knows when we will die – wouldn’t it be awful if we knew in advance when we will die and how? Also, if I might become a philosopher for a moment, wouldn’t it be horrible if we didn’t die? That would mean the world’s greatest people would still be alive, and the world’s worst people would still be causing trouble. There would be little room available for innovators because the world would be so crowded!
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