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The quick answer to why reverse mortgage loans have 2 Deeds of Trust and 2 Notes is that the first deed of trust secures the lender’s position and HUD assumes the second position because HUD is insuring that the homeowner will continue to receive loan payments in the event that the lender becomes incapable of making said payments.

Going a little deeper into the explanation, the following quotes are direct from HUD Handbook 4235.1 REV 1. They discuss that every HECM reverse mortgage, fixed or adjustable, shall have a first and second Mortgage and Note. The borrower must only be presented with a copy of the first Note during the application process, but the existence and relationship of the second Note must be fully explained.

“A. Mortgage and note. The lender must provide a copy of the first mortgage and the appropriate first note (fixed or adjustable rate) for review by the borrower during the application process (see Paragraph 4-7), but not later than when the borrower signs the URLA.

B. Second mortgage and note. The lender must complete a second mortgage and second note (fixed or adjustable rate) to secure any payments made by HUD to the borrower. A copy of the second mortgage and second note need not be provided for review by the borrower during the application process, however, their relationship to the first mortgage and first note should be fully explained. The second mortgage and second note secure any mortgage payments which might be made by HUD to the borrower in the event that the lender fails to make the payments under the loan Agreement.”

What the above quote says is that if the lender is unable to make payments to the borrower, then due to the second mortgage and note, HUD can step in and continue making the payments.

Additionally, the lender has the right to assign the reverse mortgage to HUD when the outstanding balance is equal to or greater than 98% of the Maximum Claim Amount, or when a request for a line of credit draw will cause the outstanding balance to equal or exceed 98% of the max claim amount. After assignment, HUD will be responsible to making all future loan advances. The second Note and Deed make this assignment possible.

Without having 2 mortgages and notes, HUD would not insure the loans and without HUD insuring the loans, lenders would not be willing to make them.

Moving on, the reason for the larger loan amount on the loan docs is that due do the fact that there is no maturity date with a reverse mortgage, HUD has designed a calculation by increasing the amount on the deed of trust by 150% of the maximum claim amount or appraised value, whichever is less.

Since reverse mortgages require no payments and the loan balance increases over time, HUD policy does not require a maximum mortgage amount to be stated in the mortgage; however most states do require an amount be stated. If the beginning balance of the loan was stated, then no amounts beyond this balance could be forwarded to the borrower.

Using an example, if a home appraised at $300,000, the amount recorded on the Note and Deed would be for $450,000. Similarly, if a home was valued at $625,500, the amount on the Deed would be $938,250. Since the current lending limit is $625,500, any home that appraises beyond $625,500 will also have $938,250 recorded.

The most important item to note is that the amount of money you owe on your reverse mortgage is equal to the money you borrow plus and accrued interest, mortgage insurance and financed fees.

So, when you go to sign your final paperwork remember that reverse mortgages have 2 Notes and 2 Deeds of Trust (or Mortgages), the amount on the loan documents will be equal to the 150% of the lesser of the maximum claim amount or appraised value and you owe only what you borrow, plus accrued interest, mortgage insurance and financed closing costs.

If you’re interested in finding out more about a reverse mortgage don’t hesitate to contact us by calling 1-888-888-4834.

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Adjustable rate reverse mortgages (also referred to as variable rate reverse mortgages) offer much more product flexibility than fixed rate loans for the simple fact that fixed loans require that the borrower take all the available proceeds in a one-time lump sum draw at closing, while adjustable rate loans allow for several draw options with the loan proceeds.

The options available with the adjustable loan include a lump sum draw, a line of credit that can be used as needed that allows for the unused portion to grow over time, a monthly payment for a specific term or for life, or a combination of all of the aforementioned.

There can be several benefits or pitfalls to choosing the adjustable reverse mortgage. Whether or not it’s a good choice for you relies heavily on your specific situation, which leads to everyone’s question, “is a variable rate reverse mortgage the right choice for me? To answer that question, let’s first look at who it’s not right for.

Homeowners, who require a draw of most or all of the monies available to them under the reverse mortgage program, would be better suited to choose the fixed rate option. The only choice the borrower has with the fixed rate is a lump sum payment. It will also provide the security of knowing exactly what the interest rate will be for the life of the loan.

However, many homeowners would like a little more flexibility in their reverse mortgage and may want to explore the adjustable rate. One nice feature about the adjustable rate is that you only accrue interest on the money borrowed. For example, you take $25,000 at closing and put the rest in a line of credit you would only be accruing interest on the $25,000 plus closing costs, fees and accrued interest.

If you don’t have a desire to take a lump sum, know that you don’t need a large sum of money in the near future, prefer monthly payments, like the idea of a line of credit and are not concerned about the potential of rising rates, then you may be a good candidate for the adjustable.

The adjustable rate can adjust monthly based on the index plus the margin. The index currently used is the LIBOR rate. This simply is the rate at which banks lend to each other. The LIBOR is used for all adjustable Home Equity Conversion Mortgages (HECM) and will be the same from lender to lender. To this index, the margin is added to get the actual accrual rate.

Different lenders may offer different margins. When shopping for a reverse loan, the margin is a very important piece of the rate pie. For example, one lender offering a margin of 2.25% and another offering a margin of 2.5% will show the same principal limit amount on the comparison page (based on today’s rates). Because of this, borrowers often fail to see the rate difference of 0.25%.

The difference of 0.25% may not seem like much, but over time that will cause the loan balance to grow at a faster rate, which reduces the equity in the estate quicker.

The last important item to know is the interest rate cap. The adjustable reverse mortgage loans have a life cap of 10%. This means that the rate will never go more than 10% above the start rate. As an example, the LIBOR today is 0.248%. Assume a margin of 2.25%. The start rate on the loan will be 2.498% (index plus margin). The life cap would be 12.498% (2.498% + 10%).

Historically, over the past 10 years, the highest the 1 month LIBOR has been was 5.497% in August 2007. The fully indexed rate would have been 7.747%, assuming a 2.25% margin. The chart below shows the history of the 1 Month LIBOR since 1989. The LIBOR rate is charted in blue. The red line represents the LIBOR plus a margin of 2.25%.

What it all boils down to is making sure you educate yourself through the process. The loan originator you choose to work with should provide several comparisons for many different situations to aid in your decision. Education is king. Be sure that your loan officer presents a fair representation of all available programs and doesn’t steer you to the program they want to sell, but helps to guide you to the program that is right for you based on your needs.

Here’s a quiz for you. A 75 year old borrower owes $20,000 on a home valued $250,000. She would like to pay off her mortgage and receive $500 per month for the remainder of her life. She also has no immediate need for additional money. Which is the better choice, fixed or variable? In this situation, she would pay off $20,000, receive $500 per month and she would also have a line of credit for over $75,000. The adjustable would appear to be the best option. Ultimately it will be the borrower’s decision to make. Many borrowers are afraid of variable rates and may opt to take a one-time lump sum fixed rate for the security of knowing exactly what the rate will be. This decision is one that should be explored with friends, family, a financial advisor or someone trusted to help navigate the complexities of the decision.

If you have any other questions about a fixed rate loan vs a variable loan, or are interested in learning more, don’t hesitate to contact us or call 1-888-888-4834.

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As the number of baby boomers entering retirement continues to grow, many are faced with the challenge of figuring out how to use their assets wisely. There are a wide range of considerations when planning for retirement, including figuring out where you want to live and how much money you need to retire comfortably.

While a reverse mortgage might not be the answer for everyone, more financial planners are including it as an option to help seniors age in place during retirement.

Reverse Mortgages and the Overall Financial Picture

A major part of retirement planning is assessing your expected costs of living, and how your monthly expenses compare with your monthly income, which could come from a variety of sources including reverse mortgage proceeds, savings, Social Security, investment proceeds, or a pension.

A federally-insured reverse mortgage, taken as a lump sum, monthly payments or line of credit (or some combination) may be able to improve your financial picture depending on your needs.

A lump-sum reverse mortgage could help eliminate the burden of monthly mortgage payments by paying off the remainder of your existing mortgage balance.

Choosing to receive reverse mortgage payments on a monthly basis instead could supplement your income to cover food, utility, or medication costs, along with your other expenses.

A line of credit, which grows over time, is a third option, and it can be used under the standard government reverse mortgage program, or under the new “Saver” product, which offers lower upfront fees and a lower amount that can be borrowed.

Regardless of the type of reverse mortgage, recent studies have shown an improvement in retirement preparedness for those who plan to take advantage of the loans as a comprehensive approach.

“The conventional wisdom holds that home equity, drawn upon in the form of a reverse mortgage or similar product, should be used as a last resort, only if and when the [retirement] account is exhausted,” wrote financial experts Sacks and Sacks, who recently conducted a study on reverse mortgages and financial planning, published in the February 2012 Journal of Financial Planning.

“This is a rather passive approach. We show that the probability of cash flow survival is substantially enhanced by reversing the conventional wisdom.”

Do You Want to Age in Place?

A 2010 AARP study reports that nearly 90% of people over age 65 indicate they want to stay in their home as long as possible and a reverse mortgage can help make that happen.

Using the equity from your home, you can make various repairs around the house, such as updating your kitchen, installing a new furnace, or repairing your roof.

The loan proceeds can also be used to install ramps, a stair lift or even an elevator, or to make bathrooms safer with accessible tubs/showers and well-placed grab bars.

Getting health care at home is also a growing trend that can be much more affordable than entering a designated retirement community, and reverse mortgage proceeds can also be used to help pay for in-home health care.

Medicare and Supplemental Security Income

Eligibility for certain means-tested benefits programs is something else to think about when considering a reverse mortgage and deciding what kind of payment system is best for you.

Because you must be at least 62 years old to qualify for this type of loan, many reverse mortgage borrowers are also at an age where they may qualify for benefits programs such as Medicaid or Supplemental Security Income (SSI). They’re both means-tested programs, meaning your income and assets are considered when determining if you qualify.

Reverse mortgage proceeds are not considered income, as you are simply drawing down your home’s equity.

However, if you have opted to receive a lump-sum payment from your reverse mortgage, and have those proceeds sitting in a bank account, those funds may be considered an asset and could affect your eligibility for Medicaid and SSI, according to a NeighborWorks, a national organization that provides reverse mortgage counseling to prospective borrowers. It’s important to talk with a tax advisor to ensure a reverse mortgage will not disqualify you from receiving current benefits.

Your Heirs and Estate

Before taking out a reverse mortgage, it’s important to understand the impact of a reverse mortgage on your family and estate. If you decide to take out the loan, it must eventually be repaid.

When you pass away or leave your home permanently, the loan becomes due. Often, your heirs will be left to repay the loan through the sale of the home. Often, there’s enough remaining home equity that your heirs could sell your house, pay back the lender, and keep any money that is left over.

Even if the loan balance exceeds the value of the home, your heirs will not be required to pay more than the home is worth. This is one of the biggest benefits of obtaining a reverse mortgage insured by the Federal Housing Administration.

If you do plan on leaving your home to your kids through a will, some financial planners suggest putting the home in a revocable trust (which allows for reverse mortgages, although irrevocable trusts do not), or setting up a transfer-on-death designation (TOD).

Doing either of these options allows heirs to avoid the cost of probate and federal estate taxes. Placing your home in a trust or having a TOD designation means that your assets will automatically transfer to a trustee or designated beneficiary upon your death, without having to go through the probate process.

Your beneficiaries will still be responsible to settle your debts and repay your reverse mortgage loan, but they won’t be faced with probate court costs.

How Does a Reverse Mortgage Fit Into Your Retirement?

There are many factors that play into retirement planning, and it’s important to learn how reverse mortgages could impact key considerations such as location, cash flow, and your beneficiaries.

If you’re interested in finding out more about how a reverse mortgage retirement plan could help make retirement possible for you, don’t hesitate to contact us

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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.

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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.

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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.

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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.

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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?

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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?

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