Today, HUD issued Mortgagee Letter 2011-29 which extends the existing reverse mortgage loan limits of $625,500 through December 31, 2011. In an earlier blog post, we spoke about a possible reduction in reverse mortgage loan limits. A reduction is still a possibility. So, for those homeowners with higher home values who are on the fence should seriously consider either starting a reverse mortgage or understand that if limits to decrease, the amount of proceeds available will decrease as well.

The letter states that FHA-insured HECMs will remain at $625,500 through 12/31/11. However, if legislation is enacted to extend the current FHA-insured loan limits, the Department will publish a Mortgagee Letter which defines the most recent loan limits for both FHA-insured forward mortgages and HECMs.

Again, we always advice using our reverse mortgage calculator to determine the amount of proceeds available to you. Please check back periodically as we will update our blog as we learn more information.

Ever since the first day our company started originating reverse mortgages, we’ve been asked the question; why not just get a HELOC instead of a reverse mortgage? In this article we explore benefits and drawbacks of reverse mortgages and HELOCs to help guide the consumer to make an educated decision about which loan type, if any is right for them.

The Players:

HECM or Home Equity Conversion Mortgage is a Government insured reverse mortgage program that allows senior homeowners aged 62 or older to convert the equity in their homes into cash flow, either by a line of credit, monthly draws, lump sum of cash or a combination of the options. With a HECM, there are no credit or income requirements.

HELOC or Home Equity Line Of Credit is a mortgage that allows the borrower to draw on a line up to a limit approved by the bank. There are no age restrictions; however, this loan does require that the borrower meet certain credit and income requirements.

Round 1: Qualifying For the Loan

HECM: Qualifying is simple. All borrowers on title must be 62 or older. The property should be in good repair, although repairs can be made after closing. The home must be the primary residence. Borrowers must undergo an independent HUD counseling session that lasts about 45 minutes. Currently there is no income or credit qualifying.

HELOC: Qualifying for a HELOC requires an analysis of income, assets and home value. The lender will look at current debt to income to determine if the borrower can afford to make payments on the new loan.

Round 1 goes to HECM reverse mortgage for minimal credit and income qualifying requirements.

Round 2: Cost of Reverse Mortgage vs. HELOC

HECM: The costs involved in a reverse mortgage include an origination fee, an upfront Mortgage Insurance Premium (MIP) and other costs such as title, escrow and appraisal. The maximum origination fee on a HECM is $6,000, however borrowers have the option to choose a rate that may lower these fees. The upfront MIP on the HECM Standard is equal to 2% of the maximum claim amount (lesser of the sales price, appraised value, or FHA mortgage limit of $625,500). The upfront MIP on the HECM Saver is equal to 0.01% of the maximum claim amount. Other fees vary based on property value and location but are in line with what one would expect on a typical “forward” mortgage.

HELOC: The costs involved with a HELOC are minimal. Typical fees run around $500 and are often times waived. Many HELOCs will have an early closure fee which is designed to recoup any upfront costs the bank may have paid on the borrowers behalf to originate the loan.

Round 2 goes to HELOC for lower costs.

Round 3: Amount of Money That Can be Borrowed

HECM: Proceeds for a reverse mortgage are based on age, property values and existing interest rates. The factor currently ranges between 62% loan to value (LTV) for a 62 year old to 77% LTV for a 90 year old when utilizing a 5.0% interest rate. Our reverse mortgage calculator will give more specifics.

HELOC: Most current HELOCs will not lend beyond 80% of the value of the home. However, borrowers will need to qualify using income and debt, so many will not qualify for an LTV that high.

Round 3 is a tie.

Round 4: Loan Terms

HECM: A reverse mortgage has no set “due date.” The loan is payable at a maturity event such as the passing of the last surviving spouse, if the home is sold or if the home is no longer the borrowers primary residence.

HELOC: A HELOC is typically due at the end of 10 years, after which the loan needs to be repaid or refinanced.

Round 4 unanimously goes to HECM.

Round 5: Line of Credit Behavior and Unused Lines

HECM: Both the reverse mortgage and HELOC will only accrue interest on the money drawn or borrowed. Only the reverse mortgage’s line of credit will allow the unused portion to grow at the same rate the borrower is paying on the used portion of the line.  This will give the borrower greater borrowing power.

HELOC: A HELOC can be drawn on and repaid over the life of the loan. The downside is that with the current housing market, many lenders are closing borrower’s lines of credit so they can no longer access the funds that were once available to them. A HECM line will always remain open as long as the homeowner continues to meet the guidelines.

Round 5 goes to HECM for the credit line growth rate and the fact that the line cannot be closed like a HELOC at the banks discretion.

Round 6: Interest

HECM: Reverse mortgages have the option of a fixed rate or an adjustable rate. Only the adjustable rate will allow for a line of credit. The rate is based on the 1 month LIBOR plus a margin. The loan has a life cap of 10% above the start rate. So, for example, if the starting rate is 2.50%, the max the interest rate can go to is 12.50%. Interest paid on a reverse mortgage is only tax deductible the year it’s been paid, which for most people will not be until the loan is paid off. Consult a tax adviser.

HELOC: HELOCs are typically tied to Prime plus a margin. Many have a life cap like the HECM, however not all HELOCs are created equal. Many offer a lower introductory rate, which will increase shortly after closing. Be sure to read the fine print. Some HELOCs may allow interest rates to climb to 18%. Interest paid on a HELOC may or may not be tax deductible. Your CPA will know that answer.

Round 6 goes to HECM due to more specific terms.

Round 7: Required Loan Payments

HECM: A reverse mortgage requires NO monthly mortgage payments until the loan terminates. This is one of the main reasons seniors will choose a HECM over a HELOC. No payments frees up much needed cash for day to day living expenses.

HELOC: Typical HELOCs will require that at minimum an interest only payment be made. Payments will increase as the loan balance increases.

Round 7 goes to HECM for no monthly payments.

Round 8: Annual Fees to Keep Account Open and Active

HECM: A reverse mortgage will not charge a fee to keep the loan open.

HELOC: Many HELOCs charge an annual fee to keep the line of credit open.

Round 8 goes to HECM for no additional annual fees

Who won the bout in your eyes? Each individual’s situation is unique and can’t be addressed by blanket statements. In general, the main benefit of a HECM reverse mortgage over a HELOC is that reverse mortgages do not require monthly mortgage payments, while a HELOC does. A reverse mortgage need only be paid back at a maturity event such as the death of the last surviving spouse, if the property is no longer the borrowers primary residence, the borrower fails to pay taxes and insurance and/or fails to maintain the property. With a HELOC, the bank has the right to close the line anytime they choose.

The main advantage of a HELOC is the lower upfront costs. Although, the reverse mortgage has evolved to include the HECM Saver, with reduces upfront Mortgage Insurance Premiums (MIP), lowering the overall cost.

When trying to decide between the two loan types, the first question you should ask yourself is if you have the financial capacity to make monthly payments on a HELOC. If the answer is no, then odds are, you may not even qualify for the loan in the first place. Another important question is how long you plan on staying in your home. A short-term solution may be a HELOC. A HECM may be better for homeowners who plan on staying in their home for longer periods of time.

Ultimately, the decision rests in your hands to determine which loan best meets your needs.

The American Recovery and Reinvestment Act (ARRA) of 2009 set our current reverse mortgage lending limits at $625,500. This temporary increase in the HECM loan limits is set to expire September 30, 2011.

The loan limits beginning on October 1, 2011 for HECM loans are currently under review by the Federal Housing Administration (FHA). FHA will provide guidance to the industry and consumers in the near future. We are unsure as to whether or not they will stay the same or will be lowered to previous levels. Currently the limit applies to the entire country. Previously, the limits were based on where the property was located, with higher value areas having a higher limit.

What does this mean to reverse mortgage consumers?

For those seniors who are on the fence and have higher home values and higher mortgage balances should consider starting their reverse mortgage sooner than later. By using our reverse mortgage calculator, you can determine the amount of benefit currently available.

When we refer to loan limit or lending limit being $625,500, we are referring to the maximum value that we will give a property when determining loan proceeds. For example, if your property appraises for $725,000, we will calculate your benefit using $625,500. Conversely, if your home appraises below $625,500, we will use the lower value. Now, if the loan limits are lowered to $417,000, for example, we will only assign that much value when determining benefit, even if your home does appraise higher than the new limit.

To find out more details or to apply ahead of the change call us toll free at 1-888-888-4834.

It’s rather fitting to talk about financial independence on the day our beautiful country gained its independence. The Fourth of July has become synonymous with fireworks, parades, barbecues, family, friends and more, but we want to use this day to help senior homeowners find a way to achieve financial independence. In 1988 Ronald Reagan signed the bill that authorized the Department of Housing and Urban Development (HUD) to insure Reverse Mortgages through the Federal Housing Administration (FHA). So was born an amazing program to help senior homeowners live day to day independently without concerns of a limited fixed income.

Many of the seniors we talk to day in and day out feel trapped by their fixed incomes. Every expense, such as health care, gas, insurance and food among others seems to be on the rise, while retirement incomes remain flat. Pensions and savings are dwindling at an alarming rate. Social Security has not kept up with the cost of living and perhaps the death of a spouse or significant other has resulted in the loss of income. Financial independence seems unattainable to many.

A reverse mortgage is designed for homeowners age 62 and older to access the dormant equity in their homes. Proceeds can be taken in any manner chosen by the borrower. All liens against the property must be satisfied at the closing of a reverse mortgage. So, if the mortgage payment has become a burden, the reverse loan will pay it off, assuming the homeowner qualifies for enough to satisfy the lien. Once that mortgage is paid off, no monthly payments are required as long as the home is occupied as the primary residence. Taxes, insurance, HOA dues and any other fee associated with the property will need to be kept current, but imagine the relief of no more mortgage payments. That alone is enough to provide financial independence to many.

Many senior homeowners are finding that they are generating enough from their reverse mortgage proceeds to repair their homes, pay for medical expenses, pay off credit card debt and help family. The money has no restrictions on how it can be used. A reverse mortgage is a wonderful tool to help borrowers age in place, in the home they love and feel most comfortable in.

This independence day, while you are enjoying friends and family, take a moment to think how nice it would be for you or a loved one to live truly financially independent. A reverse mortgage may be just the missing ingredient to a well-rounded, holistic approach to retirement and financial independence.

Wells Fargo, the leading originator of reverse mortgages, announced today that they will discontinue offering Home Equity Conversion Mortgages (HECM). This comes after their March 1, 2011 announcement that they were exiting the wholesale reverse mortgage business.

There is a lot of speculation as to why Wells Fargo reverse mortgage would make this move. In their press release the company stated that “the decision was made based on today’s unpredictable home values along with the restrictions associated with reverse mortgages that make it difficult to determine seniors’ abilities to meet the obligations of homeownership and their reverse mortgage, e.g., payment of property taxes and homeowners’ insurance. The government’s HECM or reverse mortgage program was designed in a different economic time.”

We are going to see some pricing increases as we saw when Bank of America left the reverse mortgage business. If fact, it happened already today. The reason is that the secondary market becomes very uneasy when such a large originator of reverse mortgages decides to stop offering the product.

Here’s an email we received from one of our wholesale lenders today:

“I’m sure you all have seen the pricing drop from all Reverse Mortgage lenders and what I’ve been told by secondary is due to the recent announcement of Wells Fargo exiting the reverse mortgage arena most banks have dropped pricing until they see exactly what the investor community will do here… I think we will be OK, but it is going to take a little time to process and settle into the new landscape. Hopefully, it won’t take too long.”

Many seniors rely of reverse mortgages to improve their every day quality of life. MLS Reverse Mortgage is available to help any seniors who may have began a loan with Wells Fargo or were looking into a loan with them. We offer competitive rates and fees and are very proficient at reverse mortgages.

Wells Fargo will continue to service their existing HECM reverse mortgages. For anyone who may have been working with Wells Fargo reverse mortgage, be sure to check out our reverse mortgage calculator to see how much money you could qualify for.

As this is a new story, we will be sure to post more details as we receive them.

The last article we wrote about reverse mortgage pros and cons was in February of 2009.  Since then, there have been a lot of changes, both good and bad, that we feel need to be addressed.  2010 was the year of regulation of the mortgage industry coupled by falling home prices.  Now we’re half way through 2011 and have added additional regulations to the mountain of legislation created in 2010, let’s delve into which of the regulations have provided a benefit to borrowers and which have proven to be a hindrance.

Let’s address the pros first:

Wide range of available rates

As I write this article, interest rates on the HECM fixed standard product are ranging from 4.0% – 5.75%. This gives borrowers the ability to choose a rate that best fits their needs. For example, someone who is concerned mainly with the increasing loan balance over time would more than likely choose a rate of 4.0% and pay a higher origination fee. The result is higher costs at closing, but a slower growing loan balance over time.

HECM saver

Reverse mortgages have always been expensive. Granted with the strong secondary market, brokers have been able to cover a lot of costs for their borrowers. Now there’s a new option. In October of 2010, HUD released the HECM Saver. This program dramatically reduces the upfront cost of reverse mortgages, which is why it’s the biggest reverse mortgage pro to come out of 2010.

The HECM Saver is for borrowers who do not require as much money at closing and were turned off by the high closing costs of the Traditional HECM. HUD’s upfront mortgage insurance on a traditional reverse is 2% of the appraised value or HUD’s lending limit ($625,500), which can equate to as much as $12,510. The HECM Saver only charges 0.1%, which means the maximum is $62.55. This is perfect for borrowers who wanted to leave their money in a line of credit or didn’t want all the funds. It is available in both adjustable and fixed rates.

Higher Loan Proceeds

HUD also lowered the interest rate floor, which is one factor in determining the amount of money available under the program. The new floor is at 5.0% and with most lenders offering rates at 4.0% – 5.06%. that’s a pro for borrowers looking to get additional monies from their reverse mortgage. Since the floor is at 5.0%, the amount of benefit will be the same with any rate from 5.06 and lower.

$625,500 Limit Extended for 2011

In 2009, Congress passed the American Recovery and Reinvestment Act. One of the provisions is that it increased the HUD lending limit on reverse mortgages from $417,000, set by the Housing and Economic Recovery Act of 2008, to $625,500. Congress recently voted to extend the temporary increase through 2011. This is a big pro for those will higher home values.

New Counseling Protocol

HUD has made changes to the required counseling protocol that overall is a positive change. Counseling is required as a safeguard for those obtaining a reverse mortgage do to the complex nature of this financial instrument. The idea is to make certain that borrowers completely understand the nuances of reverse loans. The new protocol tests the borrowers knowledge of the product and digs in a little deeper to their personal finances, and delves in further to reverse mortgage alternatives.

Now let’s explore the cons:

Reg Z

The current changes to Regulation Z completely impact the way we do business with fixed rate reverse mortgages. The adjustable rate product isn’t affected by the change since it’s open ended credit. So, what’s negative about the change? The main reason is it makes it difficult for us to negotiate with borrowers in regards to the origination fee. We can no longer give a special deal to one borrower and not offer it to all borrowers. This really hurts those who are short funds to close. In the past, we have closed reverse mortgages with next to zero origination fees in order to help someone who really needed it. Now we can’t offer that anymore.

Falling home values / increased foreclosure rates

A major con for the reverse mortgage industry in 2011 is the fact that many housing markets have not recovered from the mortgage melt down.  Nationwide foreclosures are still high, which directly affects market values and as we all know, the amount of money available from a reverse mortgage is based on the value of the home, the borrowers age and the expected interest rate.  As home values decline, borrowers are limited in the amount of money they can borrow.

This con does not affect those homeowners who have already taken out a reverse mortgage. Reverse mortgages are not affected the same way that Home Equity Lines of Credit (HELOC) have been affected. What I mean is that once a line of credit is established with a reverse mortgage, the amount is guaranteed, even if home values decline. Borrowers must still live in their home.

Appraiser Independence (AMC’s)

Fannie Mae (FNMA) and Freddie Mac (FHLMC) enacted the Home Valuation Code of Conduct (HVCC) in May of 2009 as a result of New York Attorney General, Andrew Cuomo. The idea of HVCC  is to remove the broker from contact with the appraiser. The goal is to provide for appraisals without influence on value from the originator. FHA followed suit and named it Appraiser Independence.

This sounds like a great idea, and in theory it is. The con comes into play when we examine how most Appraisal Management Companies (AMC) pay appraisers. Brokers order their appraisal through an AMC who then assigns the appraisal order to an appraiser. There currently is no regulation on the AMC when it comes to paying appraisers. So, often times, appraisers will be paid half (or even less) of what they would typically earn. As such, the quality of the appraisal is directly affected. In addition, many reverse mortgage appraisers are refusing to take the assignment due to the decrease in income. Often times appraisers will bid for jobs, so the lowest bid wins. For example, if an appraiser bids $100 that’s all he/she will receive from an appraisal where the borrower pays $450. The result is that inexperienced appraisers and appraisers from out of town often earn the jobs. By the way, the AMC keeps the difference for doing nothing more than hiring an appraiser on behalf of the broker.

Reverse mortgage appraisal values are often coming in low and there’s little that brokers can do to refute. Brokers are allowed to send a rebuttal to the AMC, who will then forward the information to the appraiser. More often than not the rebuttal is denied.

New Monthly Insurance Factor

A reverse con is that the new monthly Mortgage Insurance (MI)is now 1.25%. Before October of 2010, it was 0.50%. That’s a huge increase. The impact is seen over time when looking at the amortization schedule since the monthly MI is added to the balance.

Summary

All in all, 2010 and the first half of 2011 has turned out to be a very positive period for reverse mortgages, especially in the area of decreasing reverse mortgage closing costs. So, now is the time for you to explore your low cost reverse mortgage!

Suze Orman on her CNBC show recently responded to a viewer question by stating that a reverse mortgage is a better option than selling stocks.

During the segment, a caller stated that his 85 year old father had been liquidating stocks over the past few years to pay for larger ticket items, including the upkeep of his home. His question was, “is it better for him right now to continually unload his portfolio and incur capital gains on the stocks he sells or risk borrowing, in a sense, against his kids future during these crazy times?” The father would like his two kids to inherit the home and his investments after he passes.

Suze says that a reverse mortgage would be the better option. Her reasoning is as follows:The heirs will have a better chance of recouping the lost value of stocks over the years since the stock market recovers faster than the real estate market. Reverse mortgage interest rates are low and the mortgage relief bill that came into effect in October makes reverse mortgages far more beneficial than ever to take out today than ever before because of fees being limited.

This segment highlights how a reverse mortgage can help extend the value and life of other assets when they are provided additional time to gain value before being drawn down.

When looking at retirement plans, older homeowner’s need to take a holistic approach. There is no one size fits all solution. A reverse mortgage will not be the right solution for everyone, however it should not be overlooked as part as the overall retirement plan. When consulting a retirement planner be sure to bring up the option of a reverse mortgage. After all, the home is more than likely the largest source of untapped capital for most senior home owners.

We are pleased to now be able to offer the fixed rate HECM at 5.49% without monthly service fees or service fee set-asides. The net benefit to the borrower will be the same as the 5.56% fixed rate at closing, however the lower rate will allow for slower accrual of interest over time. To learn more contact us toll free at 1-888-888-4834.

Relates Stories:

Fixed Rate Service Fee is Now $0

Reverse Mortgage Rate Costs

My Reverse Mortgage Costs How Much?

In an effort to remain competitive in today’s market, we have eliminated our monthly service fee on the fixed rate reverse mortgage. Traditionally, this fee would range from $25 – $30. This change will provide additional cash benefit toward the Principal Limit and help those  those just short of qualifying, in obtaining a reverse mortgage that provides more for them than most lenders can offer. This change will also benefit those looking to use a reverse mortgage for home purchase.

We are very excited to offer this benefit to our clients! In fact, with the 5.56% fixed rate reverse mortgage, someone at age 70 with a home value of $225,000 would see an increase in net benefit of about $5,000 when compared to the $30 monthly service fee.

Let’s look at an illustration:

* The above example if for illustrative purposes only. Everyone’s situation will differ. For an exact quote, please visit: Reverse Mortgage Quote.

Links of Interest:

Fixed Rate Reverse Mortgage

Reverse Mortgage Rates

Other Articles of Interest:

Reverse Mortgage Rate Costs

My Reverse Mortgage Costs How Much?

By NRMLA

The continuing resolution (CR) that was passed by Congress yesterday and is now headed for the President’s signature extends the $625,500 national loan limit for HECM through calendar year 2010. Although the CR is a temporary measure providing funding thru 12/18/09 to allow a little more time for the appropriations bills to be completed, Congress was asked to act now to make sure that the marketplace is not disrupted by uncertainty about the continuation of the higher forward mortgage loan limits that were enacted in the President’s economic stimulus package back in February.

When we saw that this request by the Home Builders and Realtors to extend the stimulus mortgage limits was being addressed earlier this week–but HECM was not included–our legislative team swung into action and got HECM added in. We are pleased to report that Congressional appropriators were responsive to our effort.

Similar Stories:

FHA Officially Raises HECM Loan Limit

New Reverse Mortgage Loan Limit: $625,500

Final Version of Economic Stimulus Package Raises HECM Loan Limits to $625K

Stimulus Bill Compromise Includes Higher HECM Loan Limit