Reverse Mortgages

Seniors who find themselves strapped for cash to meet the daily costs of living but who have built up a lot of equity in their home might want to consider a reverse mortgage. A reverse mortgage is a loan against the borrower’s home that the borrower does not have to repay for as long as the borrower lives there. The amount of cash the borrower can get from a reverse mortgage depends on the program the borrower selects and - within each program - the borrower’s age, the amount of equity in the home, and interest rates. It can be paid to the borrower all at once, as a regular monthly advance, or at times and in amounts that the borrower chooses. Eligible property types include single-family homes, manufactured homes (built after June, 1976), qualified condominiums, and townhouses.

Types of Reverse Mortgages

HUD/FHA Home Equity Conversion Mortgage

There are several reverse mortgage products on the market. The most popular reverse mortgage is known as the HUD/FHA Home Equity Conversion Mortgage, or HECM, a government-insured program. HECMs are available in all 50 states for single family, owner occupied homes/condos. To be eligible for a HECM, all owners of the property must be at least 62 years of age.

Prior to closing or settlement on this type of loan, all homeowners must discuss the HECM with a counselor (lists of counselors available from HUD and HECM Resources.

HECMs must be first mortgages on the property so that if there is an existing mortgage on the property, it must be paid off at closing with the HECM mortgage loan. Once the property has a HECM mortgage, the homeowner is unable under the terms of the loan to obtain any additional mortgages on the property unless the HECM loan is paid off.

For 2008, the FHA loan limit varies from a low of $271,050 (for rural areas) to a high of $729,750 (for high-cost metropolitan areas). If a person’s home value exceeds the FHA lending limit, the amount of money they are eligible to receive will be calculated as if the value of the home is the area limit.

As part of the closing costs, the homeowner must pay a mortgage insurance premium (MIP), equal to 2% of the loan amount up-front, plus an annual premium thereafter equal to 0.5% of the loan amount. The insurance premium guarantees that if the company managing the account goes out of business, the government will step in to ensure continued access to loan funds.

Fannie Mae HomeKeeper

Another type of reverse mortgage is the Fannie Mae Home Keeper, a government-sponsored program. The Home Keeper was developed to address unmet needs that could not be served by the HECM program, such as individuals with higher property values, condominium owners, and seniors wishing to use a reverse mortgage to purchase a new home. Eligible home types include owner-occupied single-family homes, condominium units, and units in qualified planned unit developments. Properties held in trust and qualified leasehold properties are also eligible. Cooperative units, however, are not an eligible property type for Home Keeper.

The amount of funds available to the borrower is determined by a formula and varies with: (1) the age and number of borrowers at the time of application; (2) the adjusted value of the home; and (3) current interest rates. Home Keeper loans can be larger than HECMs because Fannie Mae’s maximum mortgage limit of $417,000 is larger than the locally applied FHA maximum mortgage limit.

Home Keeper borrowers are charged an origination fee that may not exceed 2% of the adjusted value of the home, a monthly servicing fee ($15-$30) and other closing costs. Many of these can be financed and included in the mortgage. The interest rate charged on a Home Keeper mortgage adjusts monthly and is equal to a fixed spread above an index rate – the current weekly average of the one-month secondary market CD rate, which is published by the Federal Reserve. The rate may never rise by more than 12% above the initial rate; there is no cap on a monthly adjustment other than the lifetime cap.

Financial Freedom Cash Account

Financial Freedom Senior Funding Corporation, based in Irvine, CA, administers a “jumbo” proprietary reverse mortgage product called Cash Account to benefit homeowners living in higher-priced homes valued above the FHA and Fannie Mae lending limits. The program is offered by most reverse mortgage lenders in most states.

Financial Freedom also administers the Simply Zero Cash Account, which eliminates all up-front costs. With the Simply Zero Cash Account, borrowers are required to draw 100% of their maximum available benefit at loan closing. Financial Freedom Cash Account is the only “jumbo” reverse mortgage product available.

Payment

Homeowners can receive the money in a lump sum all at once, in equal monthly installments, as an available line of credit to be accessed when needed, or as a combination of these choices. The amount of money obtained from a reverse mortgage depends upon the homeowner’s age (or age of youngest borrower in the case of couples), appraised home value, current interest rates, and location. In general, the older the homeowner is and the more valuable the home (and the less owed on the home), the more money the homeowner can receive.

The funds from a reverse mortgage are tax-free. A reverse mortgage does not affect regular Social Security or Medicare benefits. As of November 2005, the money a homeowner receives from a reverse mortgage loan is not countable as an asset or income under the Medicaid program. This means that a reverse mortgage will not impact one’s eligibility for Medicaid under current law. The loan proceeds should be placed into a bank account solely used for the loan proceeds and may be a checking or savings account. The loan proceeds should not be placed into a CD account.

Please note, however, that there are some reverse mortgage products on the market where in connection with the mortgage the homeowner takes the loan proceeds and buys an annuity. This is known as a reverse annuity mortgage. This type of reverse mortgage, and only this type of reverse mortgage, will impact one’s Medicaid eligibility because the income from the annuity is counted as available income and would be used towards the cost of one’s long term care. The HECM product is NOT a reverse annuity mortgage.

Contact the Elder & Disability Law Center through this Web site, by phone at 202-452-0000, or by e-mail.