Category: HECM Reverse Mortgage

Can a reverse mortgage help you reduce your debt in retirement?

One of the best ways to maximize your retirement resources is to spend as little of your retirement income on debt payments. Debt payments not only add significant cost to your monthly budget, but they also require interest payments, for which you the borrower receive nothing in return.

Unfortunately, many seniors, especially those in the middle class, have entered or will be entering retirement with a significant amount of debt.

According to the Pew Survey of American Family Finances, nearly 30 percent of middle-income Baby Boomers dedicate more than 40 percent of their monthly income to paying down debt. This is a substantial porting of a retiree’s monthly income hence the rise of popularity of reverse mortgages.

And while 44 percent of this generation own their homes outright, nearly one-quarter have more than 20 years remaining on their mortgages.

An up-to-date survey by the Society of Actuaries found that the principal form of debt for pre-retirees is mortgage debt, at 52 percent, followed by credit card debt at 48 percent, and car loans at 40 percent. The survey found that home repairs, dental expenses, and health care and prescriptions caused the most standard “financial shocks” among retirees.

Seniors should attempt to pay off as much debt as possible, including any mortgage, before retirement. In fact, financial experts recommend that a retiree’s debt should account for no more than 10 percent of income.

So how can one quickly retire debt — or at least the monthly payments that come with debt?

One option is a reverse mortgage.

What exactly is a reverse mortgage
A reverse mortgage is a sort of home equity loan that allows particular homeowners to convert their home equity into cash. It differs from a conventional home equity loan in that the owner is not required make monthly payments. Rather, a reverse mortgage loan is paid, with interest, when the property is sold, refinanced, or when the homeowner moves out of the house. This added flexibility was designed for seniors to increase their savings, reduce the stress, and be able to afford to retire in their existing homes as they age.

Determined by how much you can borrow from a reverse mortgage — that is based on your home’s equity, your age, and present interest rates — you could retire some or all your debt and eliminate those monthly payments using the proceeds from the reverse mortgage.

You’re not getting rid of debt, but you’re deferring the repayment of it to a later date. Also, reverse mortgages are typically repaid by selling your house once you no longer need it for your dwelling.

Using a reverse mortgage to settle your current one
Some homeowners, in fact, apply for a reverse mortgage for the sole purpose of removing the principal and interest payment on their homes from their monthly fundings. This is extremly popular for seniors with a substantial monthly mortgage payment to reduce debt in retirement and increase their savings.

In essence, what you are doing under this strategy is improving the amount of money you owe on your dwelling, but deferring the repayment of that debt until you pass away or move out of the property. Your entire mortgage debt increases, but you have more income available to spend on items besides home.

For example, in one scenario a 65-year old homeowner’s home is currently valued at $400,000, and he or she owes $75,000 on the mortgage. If the borrower just used the reverse mortgage incomes to finish paying off the original mortgage, after ten years the reverse mortgage balance, including fees and interests, would balloon to $135,000.

So if you’d to sell the house in ten years either because of death or move, the net income remaining after the reverse mortgage was refunded could be $265,000, and that’s assuming the home didn’t appreciate in value during those ten years.

In the same scenario, the borrowers would owe close to $210,000 if they remained in the house for 20 years after getting the reverse mortgage.

So again, the pick is:

Having less to pay in monthly expenses during this period by paying off the traditional mortgage, but owing a reverse mortgage lender a hefty amount once you pass away or move out of the house; or

Keeping the monthly payments on the first mortgage for as long as it takes to pay the balance in full but being able to pass along the property’s total worth to your heirs without having to pay a reverse mortgage lender.

In the end, you want to have options for your finances and retirement. There is no harm in knowing your options and figuring out which one will give you the most comfortable retirement. The reverse mortgage program requires you to be 62 or older, have equity, and good credit/income. IF you qualify and are interested in comparing your options feel free to give us a call and or get a free quote analysis.

Beware of misleading reverse mortgage advertising

Reverse mortgages are widely marketed to senior homeowners by well-known lenders, smaller brokerages and individual financial planners using most advertising channels, including TV, radio, print, Internet and social media. Many commercials have used well-known celebrities such as Fred Thompson, Henry Winkler, and more recently Tom Selleck to pitch the benefits of reverse mortgages.

According to the Consumer Financial Protection Bureau (CFPB), many of these advertisements and sales pitches contain “confusing, incomplete and inaccurate statements regarding borrowing requirements, governments insurance, and borrower risks.” The bureau has also conducted focus groups with seniors and discovered that many would-be reverse mortgage borrowers “had misconceptions about important features and terms of reverse mortgage loans.”

The CFPB and other consumer advocates caution senior citizens to be wary of false advertising on reverse mortgages and to seek reputable counsel if considering such a loan. Below are some of the common ways that homeowners can be misled into committing to a reverse mortgage that is not right for their situation.

Many unscrupulous firms push reverse mortgages as a panacea for the income problems seniors may be having without disclosing any of the risks or costs involved in these types of loans. Examples of advertising language or omissions that intentionally are designed to mislead senior homeowners include:

Claiming reverse mortgages are government giveaways. Many sales tactics try to lead individuals to believe that reverse mortgage are government programs that dole out free money to seniors with enough equity in their homes. Certain reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), are insured and regulated by the federal government, but they are not a federal program. They are private loans provided by for-profit businesses that must eventually be repaid. And the federal insurance applied to HECMs is mostly designed to protect the lender, and the premium for which is an added cost passed on to the bank.

Omitting that there are upfront fees and closing costs. This is a tactic typically designed to make the potential buyer believe a reverse mortgage is anything but a loan. Typical reverse mortgage fees include an origination fee, settlement costs, and mortgage insurance premiums. Also, interest will accrue for as long as the loan remains active, and reverse mortgage interest rates tend to be higher than conventional mortgages.

Misrepresenting risks. Many reverse mortgage sales pitches attempt to lead consumers into believing there is no risk of losing one’s home. This is false. Although there are no monthly payments to make with a reverse mortgage, there are several scenarios in which a homeowner can default on a reverse mortgage, such as failing to pay property taxes or insurance, or failing to maintain the property. This will lead to the loan being called and the lender demanding immediate repayment. Repayment is usually made by selling the home and using the proceeds from the sale. The lender can also foreclose on the home.

High-pressure sales tactics. In many cases, a salesperson will push potential borrowers into a reverse mortgage they don’t really need. They may advertise “special rates” that are supposedly set to expire, or they may use scare tactics such as making up claims about an impending drop in Social Security benefits. These tactics are usually very aggressive, and there is usually a demand to act immediately before it’s too late. There is never a reason to rush into a reverse mortgage. If you are considering one, you are advised to take as much time as necessary to weigh the pros and cons, conduct research, and look for alternatives.

Using a term life insurance policy to repay a reverse mortgage…

Some potential reverse mortgage candidates do not like the idea of having their homes sold to repay the loans. There may be several reasons why homeowners want the option of keeping their homes in their families after they move out or pass away, but the most common are:

• They have children who want to keep the home in the family.

• They have a spouse who was not included on the reverse mortgage loan because the spouse was too young at the time. The younger spouse is considered an Eligible Non-Borrowing spouse. Recent changes in reverse mortgage regulations allow these spouses to remain in the home if the borrowing spouse passes away first. However, non-borrower spouses will not have access to any remaining loan funds after the borrowing spouse has died. At the same time, interest will continue to accrue on the unpaid balance until the loan is repaid.

• They have remarried since obtaining the reverse mortgage and want their new spouse to be able to stay in the home if they pass away first.

The protection given to Eligible Non-Borrowing spouses only applies if the borrower and spouse were legally married at the time the reverse mortgage was obtained or in a same-sex relationship that wasn’t recognized by their state of residence at the time they entered the contract. There is nothing in the rules for reverse mortgages that addresses a marriage that occurred after the reverse mortgage started. Therefore, in this situation, the reverse mortgage must be repaid shortly after the borrower’s death. If the surviving spouse who married the borrower after the contract closed doesn’t have the funds to repay the loan, he or she will have to move and sell the property.

Repaying a loan using term life insurance

For each of the above situations, a potential option is for the borrowing homeowner to obtain a term life insurance policy. The policy could potentially provide the funds needed by the homeowner’s heirs or surviving spouse to repay the reverse mortgage without having to sell the property.

To determine if this is a viable option, the first step is to estimate how much you will borrow from a reverse mortgage. You can use a reverse mortgage calculator that will determine your maximum principal amount based on your age, the equity in your home and current interest rates.

You should then calculate the amortization on a reverse mortgage loan. This will give you an estimate of how much you will have to repay, factoring principal, interest, and fees, for a given period. Run a few scenarios based on your anticipated life expectancy.

With an estimate of how much you would potentially owe, you can then research term life insurance quotes to see how much a policy would cost with a death benefit large enough to repay the reverse mortgage. The number of years on the term policy should be at least equal to the years on the reverse mortgage amortization.

Is it financially feasible?

The key to making this strategy work is to find a life insurance policy with a premium low enough that you still have a considerable amount of your reverse mortgage monthly payment left over. It would defeat the purpose of getting a reverse mortgage if you spent most of your monthly payment on a life insurance policy designed to repay the loan.

Here’s one hypothetical example: A 65-year-old with a $300,000 home and no current mortgage balance could receive a tenure payment of around $800 a month for as long as the reverse mortgage remains active. Assuming a 4.5 percent average interest rate, the homeowner would owe about $315,000 after 20 years.

The same 65-year-old, assuming he is in good health and doesn’t use tobacco, could buy a 20-year term life insurance policy with a death benefit of $325,000 for a monthly premium of around $325. That would leave $475 a month in income from the reverse mortgage left over after paying the monthly insurance premium.

The potential downsides

This strategy won’t work for everybody. For starters, if you have poor health, a life insurance policy will be much more expensive and may not be worth it. Also, the older you are, the more expensive a policy will cost. Plus, depending on your age, you may not be able to find a term policy that will cover your life for more than 10 or 15 years.

One risk of this strategy is that you outlive your term policy. If you buy a 20-year term policy, but live beyond the term, you will have essentially spent hundreds of dollars a month in an attempt to avoid selling your home and still likely have to anyway. While there are whole life and other permanent life insurance policies that don’t expire, they are also more expensive and will use considerably more of your reverse mortgage proceeds.

The life insurance policy also won’t help you repay the reverse mortgage if you have to move out of your home due to health reasons. If that happens, the loan becomes due, in which case you will have to tap another source of funds or sell the home to repay the loan. The same will occur if you default on the loan by failing to pay your property taxes or homeowners insurance.

How reverse mortgage loan amount is calculated on an HECM
Reverse mortgage borrowers who opt for a federally insured Home Equity Conversion Mortgage (HECM) will be limited on how much they borrow.

A reverse mortgage principal limit is based on three factors at the time you apply for the loan: your age, the total equity of your home (its appraised value minus any mortgages or liens on the property), and market interest rates.

How is the specific principal limit determined? The Department of Housing and Urban Development maintains a chart that shows Principal Limit Factors (PLFs) for different ages and expected interest rates.

The impact of age and interest rates
Reviewing the charts can show a potential borrower the impact that age and interest rates have on the amount one can borrow.

For example, if the expected interest rate is 5 percent, a 62-year-old can borrow an amount equal to 52.4 percent of their home’s available equity because the PLF under that scenario is 0.524. The PLF increases to 0.542 for a 65-year-old, which means a borrower that age can get 54.2 percent of their equity. At 70, the PLF is 0.576 and it’s 0.657 by age 80. It maxes out at 0.750 at age 90, which means a 90-year-old can borrow a maximum of 75 percent of their home’s equity.

PLFs increase with age up to age 90; there are no increases in the PLF after age 90.

Changes in the expected interest rate have an equivalent impact on the borrowing amount. A 66-year-old borrowing at an expected rate of 5 percent can obtain an amount equal to 54.9 percent of their home’s equity. If the expected rate increases to 5.125 percent, the PLF falls to 0.533. At 5.5 percent, the PLF drops to 0.485 and at 6 percent it goes down to 0.421.

As its name implies, the expected interest rate is what the lender anticipates the loan rate averaging over the life of the reverse mortgage. It’s one of three factors, in addition to your age and the value of the home, that helps determine how much of your home’s equity you can borrow.

The lender will arrive at that rate based on the average yield for U.S. Treasury securities adjusted to a constant maturity of 10 years, or the 10-year rate on the London Interbank Offered Rate (LIBOR) Index. The expected rate is just a projection. The actual interest you pay when the loan becomes due will be based on actual interest rate movements during the course of the loan.

The interest rates used in the HUD PLF tables also factor the lenders margin, which is an amount added to market interest rates to determine the total variable loan rate for a given period. For example, a lender may set its margin at 2 percent. If the LIBOR Index is 2.5 percent, the variable loan rate charged during that period will be 4.5 percent (2 + 2.5). If the LIBOR Index rises to 5 percent, the reverse mortgage interest rate will also rise, to 7 percent.

Separate PLFs for Non-borrowing spouses
HUD has two charts. One is for scenarios in which one or both borrowers are at least age 62, the minimum age required to obtain a reverse mortgage. There is also a “Special Table” that provides PLFs for eligible borrowers with non-borrowing spouses who have not reached age 62.

Why does HUD maintain a PLF table for ages below the minimum of 62? A change in the law in 2014 provided increased protection to spouses who are not named on a reverse mortgage contract. Today, spouses who are not listed on the reverse mortgage because they had not reached age 62 can remain in their homes after the death of the borrower by being designated Eligible Non-Borrowing Spouses.

Although non-borrower spouses will not have access to any remaining loan funds after the borrowing spouse has died, they also do not have to repay the loan right away. However, interest will continue to accrue on the unpaid balance until the loan is repaid.

How much do younger spouses impact a PLF? A 64-year-old single borrower with an expected interest rate of 5 percent can obtain 53.6 percent of their home’s equity. If the same borrower with the same rate has a 58-year-old spouse, the borrowing limit drops to 50 percent. It falls to 44.3 percent if the non-borrowing spouse is between the ages of 45 and 49, and all the way to 31.7 percent if the non-borrowing spouse is age 18 or 19.

PLFs are periodically adjusted. In 2013, new PLFs introduced by HUD resulted in a roughly 15 percent reduction in principal limits for most borrowers. A year later, in addition to adding non-borrowing spouses, the PLF tables raised the amount of proceeds available for older borrowers in low-rate environments, while reducing PLFs for most HECMs set at higher interest rates.

Although a reverse mortgage can be a beneficial financial tool, many unscrupulous individuals and brokers use them as a vehicle to steal from seniors who need money and/or don’t fully understand how they work.

Reverse mortgage fraud can cost homeowners thousands of dollars and/or their homes without them receiving any benefits from a reverse mortgage. The scams can take many forms; here are the most common:

Equity theft. This scheme typically involves several crooks who purchase a home that is distressed or abandoned, then obtain an inflated appraisal on the property. They resell the home to a senior and convince the buyer to take out a reverse mortgage to help pay for it. Only once the transaction is complete, the perpetrator(s) steal the reverse mortgage funds, leaving the senior with no cash and no equity on a property they likely cannot sell.

Foreclosure rescue. This tactic involves the dishonest parties specifically targeting seniors at risk of losing their homes to foreclosure. With the help of a dishonest appraiser, the thieves inflate the home’s value. The homeowner is then convinced to obtain a reverse mortgage. Only the scammers trick the owner into transferring the title to them and collect the reverse mortgage proceeds.

In another version of this scheme, the perpetrators coax the homeowner into applying for a reverse mortgage, then inform them they don’t qualify. To remedy the situation, the thieves convince the seniors to take out a traditional mortgage. During the closing, they transfer the title away from the homeowners.

Contractor fraud. This is a more simple type of fraud in which a contractor convinces a senior homeowner that their property is in dire need of repair. When the homeowner balks because of cost, the contractor pushes him or her into taking out a reverse mortgage to pay for the project. Usually, the contractor overstates the need for repairs, overcharges on the work, or convinces the senior to use a reverse mortgage when a home equity loan or another type of funding would be better financially for the homeowner.

Flipping fraud. This type of fraud typically involves a real estate agent who markets a property in poor condition that has been given just enough of a facelift to look presentable. The pitch to the senior prospects is that they can buy a relatively low-cost home with no money down using a Home Equity Conversion Mortgage (HECM) for Purchase loan. The agent then finds a way to divert some of the proceeds to themselves.

Diverting funds reserved for paying off the mortgage. Many seniors use part of their reverse mortgage funds to pay off their traditional mortgage, thus eliminating a large monthly payment. Unfortunately, there have been instances in which an unscrupulous mortgage broker or title company has diverted the funds meant to pay the home mortgage into their own pockets. Unfortunately, seniors don’t find out until it’s too late, usually when their original lender contacts them to collect on past due payments.

In some cases, a con artist tricks the homeowner into signing documentation that enables the crook himself to apply for the reverse mortgage on the victim’s home, then disappear with the reverse mortgage proceeds once they’re paid out.

To avoid being a victim of a reverse mortgage scam, the FBI offers the following tips:

• Do not respond to unsolicited reverse mortgage advertisements or offers.
• Be suspicious of individuals making claims that sound too good to be true, such as buying a home with no downpayment or getting “free money” from your home.
• Do not sign anything that you do not fully understand.
• Seek out your own reverse mortgage counselor.
• Enlist the help of an FHA-approved lender.

Can I get a reverse mortgage if my home is in a flood zone?

If you own a home that’s at risk of flooding, you will likely have to carry flood insurance to obtain and maintain a reverse mortgage.

The National Flood Insurance Program aims to reduce the impact of flooding on private and public structures by providing and mandating flood insurance for properties deemed at high risk of flooding.

The Flood Disaster Protection Act of 1973 stipulates that mortgage lenders require flood insurance for properties located in Special Flood Hazard Areas (SFHAs). These areas are indicated high risk on Flood Insurance Rate Maps created and maintained by the Federal Emergency Management Agency (FEMA).

Lenders are required to determine if a property is located in a designated SPHA zone before making a loan. If so, the property must be covered by flood insurance during the entire loan term. If you are required to maintain flood insurance, then you must provide your loan servicer with evidence of this coverage and ensure that this policy is renewed upon expiration.

In the case of reverse mortgages, not maintaining flood insurance on a property located in a designated flood zone can lead to a default on the loan and immediate repayment owed. All reverse mortgages require the homeowner to stay current on property taxes, homeowners insurance, and utilities, as well as maintain the property to proper standards or risk default.

Keep in mind that even if you were not required to buy flood insurance when you originally bought your home, you could be required to buy flood insurance when you obtain a reverse mortgage. It’s also possible to be ordered to purchase flood insurance after getting a reverse mortgage even if you weren’t required to at closing.

That’s because FEMA constantly updates its flood zone designations, especially when there is new development in an area, updated flood data, or completed flood-zone projects. A property that was in a moderate risk area may be redesignated as being in an SFHA if FEMA determines it is at greater risk of flooding.

Conversely, if your home used to be in a high-risk area and is now at moderate to low risk due to better flood protections, you can cancel your flood insurance.

Your reverse mortgage lender may require a set-aside for your flood insurance premium. Set-asides in a reverse mortgage are similar to escrow accounts on a normal mortgage. They hold funds needed to pay for costs beyond the principal and interest of the loan. In the instance of a set-aside, the sum required to fund the account is deducted from the primary limit on your reverse mortgage.

For example, assume a homeowner could receive a maximum of $150,000 from a reverse mortgage based on their age and home equity, without a set-aside. But income and the debtor’s credit raises the chance he or she may have problem paying taxes and insurance, so the lender imposes a $30, 000 set aside to cover those costs over the life of the loan. That means the borrower is only going to receive $120,000 maximum from the reverse mortgage, but the loan sum will still be $150,000.

Set aside sums are based on the present and future projected costs of the item(s) the account will be paying (e.g. your present and planned property tax obligations), and how long the lender will pay the expense. If the set aside is created for the life of the reverse mortgage, the lender will use your age and life expectancy to determine the amount to set aside.

While set-asides are sometimes compulsory based on your own credit and income, you may also establish them voluntarily if you want to ensure that your taxes and insurance are paid. When you create a set-aside, the lender is accountable for paying those prices, just like they’re when you create an escrow account on a conventional mortgage.

Should I consider a life settlement or a reverse mortgage?

Seniors who have non-liquid assets but need income or an influx of cash have a few options. Two of the more common are reverse mortgages and life settlements.

A reverse mortgage is a kind of home equity loan that enables senior homeowners to convert their home equity into cash. It differs from a conventional home equity loan in the homeowner doesn’t make monthly payments to repay the loan. Instead, a reverse mortgage loan is repaid, with interest, when the homeowner moves out of the house, or when the property is sold, refinanced. Reverse mortgages are set up so that you never possess more than the house’s value at the time.

A life settlement involves selling an in-force life insurance policy to a third party. The buyer takes over the premium payments, then collects the death benefit when the policy insured passes away. The buyer will offer an amount that will help it earn a profit based on the policy’s death benefit minus the lump sum paid to the seller plus the premium payments it will pay for as long as the insured lives.

One of the key advantages of a life settlement is that there’s nothing to repay. It’s not a loan like a reverse mortgage; instead, you are simply selling an “asset” to a third party.

An advantage of a reverse mortgage is that it provides more payment options than a life settlement. Whereas the latter is only available in a lump sum, a reverse mortgage can be paid out as a lump sum, a line of credit or a series of monthly payments that can last for as long as you live in your home.

Are you eligible?
You may only have one option depending on your age, health, and the value of your home or life insurance policy.

Reverse mortgages are available to homeowners age 62 and over. The property being loaned against must be the borrower’s primary residence. It’s not required to own your home free and clear before applying for a reverse mortgage, but any mortgage balance you have should be a small percentage of the home’s value. That’s because you cannot maintain a conventional mortgage and a reverse mortgage simultaneously. You are allowed to use some of the proceeds of the reverse mortgage to pay the full balance on your conventional mortgage.

The property must meet FHA standards to be eligible. Reverse mortgages are typically limited to single-family homes.

Although there are no eligibility requirements related to your health, experts suggest that people who are in poor health not obtain a reverse mortgage. That’s because these loans have significant upfront costs, which you don’t necessarily want to pay if the loan will end in a few years because of your health.

Qualifications for life settlements differ by little settlement company. The company will assess the insured’s health and life expectancy, the amount of premium owed, and the policy’s death benefit.

While you can obtain a reverse mortgage at age 62, you likely will not qualify for a life settlement at that age unless you have a terminal condition. Even if you are in your 70s, you may need some type of chronic health condition that lower yours life expectancy to qualify, depending on the company’s requirements.

You will also need a life insurance policy that is favorable to a buyer. That means the contract allows you to transfer policy ownership, and has a high enough death benefit and premiums that are low enough that the buyer can still turn a profit after the insured passes away.

If both options are available to you, the following questions may help you make a decision as to the better choice.

Which one will net you the most money?
With a reverse mortgage, the amount you can borrow depends on your age, your home’s value, and the loan interest rate. In general, the older you are, the more you can borrow. As the home appreciates and the borrower grows older, they may qualify for more money, and the reverse mortgage may be refinanced to borrow more against the increased equity.

The amount you can receive from a life settlement will typically be higher than its cash surrender value and lower than its death benefit. The buyer will also factor your life expectancy and the amount of premiums they will have to pay based on that life expectancy.
The more your premiums and the longer your life expectancy, the less you will receive from a life settlement. Conversely, if you have a shorter life expectancy and pay less in premiums, the more you can expect from a life settlement.

What do you want to pass on to survivors?
In general, if you are trying to decide between a reverse mortgage and a life settlement and have a surviving spouse or children, part of your decision will be based on whether you want to pass along your home or the proceeds from your life insurance policy.

In this situation, a reverse mortgage may be the way to go because your beneficiaries can use the life insurance death benefit to repay the reverse mortgage after your passing. Therefore, they wouldn’t have to sell the property to pay back the loan.

How are reverse mortgages regulated

Because of their complexity and federal government involvement, reverse mortgages are heavily regulated to help protect consumers.

Home Equity Conversion Mortgages (HECMs) aka reverse mortgages are insured by the Federal Housing Administration (FHA) by both the U.S. Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB).

The FHA approves lenders who can participate in the HECM program and establishes guidelines for HECM reverse mortgages.

In the last several years, the FHA and CFPB have added several provisions to the HECM for additional consumer protection, including:

A limit on how much borrowers can obtain from a reverse mortgage in the first year. Typically, a homeowner can only receive 60 percent of the overall principal limit in the first year of the reverse mortgage.

Stricter income assessments. In the past, most homeowners with enough equity in their homes could typically get a reverse mortgage without an assessment of their income and credit. But a rise in defaults due to unpaid property taxes and homeowners insurance led the FHA to impose a requirement that lenders must assess a potential borrower’s income, cash flow, and credit history.

More powerful spousal protections. It used to be that if one partner was under the age of 62 at the time of getting a reverse mortgage, the younger partner was left off the contract. What used to happen often is that the old partner expired, and the demand and loan repayment would close. Unless the surviving partner had enough cash to repay the loan, she or he would be compelled to move out and sell the house, per the conditions of the contract.

A change in the law in 2014 supplied increased protection to partners who aren’t named on a reverse mortgage contract. Now, partners who aren’t recorded on the reverse mortgage can stay in their houses after the passing of the borrower by being designated Eligible Non-Borrowing Partners.

Additional oversight
In addition to federal oversight, state governments also impose regulations on reverse mortgage transactions. State laws are typically administered by the state’s housing and development or housing finance agencies.

All reverse mortgages, regardless of whether they are HECMs or proprietary loans, are subject to the same lender regulations and requirements that apply to traditional real estate lending, including:

Federal Trade Commission Act
Section 5 of the Federal Trade Commission Act forbids ‘‘ deceptive or unjust acts or practices in or affecting trade.” This applies to all business, including banks.

Where it an act or practice is unjust:
• will probably result in significant harm to consumers or Causes,
• Cannot be sensibly prevented by consumers, and
Isn’t outweighed by countervailing benefits to consumers or to competition.

A deceptive act or practice is defined as:
• A representation, omission, or practice that misleads or will probably mislead the consumer;
• A customer’s interpretation of the representation, omission, or practice and
• The misleading representation, omission, or practice is material.

Truth in Lending Act (TILA)
This law requires lenders to provide you with interest rate information and the overall cost of credit so that you can comparison shop for mortgages. For reverse mortgages, since the interest rates and finance charges will vary over the life of the loan, the lender will have to provide estimates.

TILA also provides consumers with a right of rescission, which lets you reconsider your choice and back out of the loan procedure without losing any cash. This right helps protect you against high-pressure sales tactics used by unscrupulous lenders.

Real Estate Settlement Procedures Act (RESPA)
Enacted in 1975, RESPA requires lenders to disclose fees and charges related to real estate settlements. It prohibits kickbacks between service providers, such as situations in which a bank makes a referral to another lender. The law was updated in 2008 so that lenders have to be approved by the FHA to participate in the HECM program.

National Flood Insurance Program
Lenders are required to determine if a property is located in a designated flood hazard zone before making a loan. If so, the property must be covered by flood insurance during the entire loan term. In the case of reverse mortgages, not maintaining flood insurance on a property located in a designated flood zone can lead to a default on the loan and immediate repayment owed.

Keep in mind that even if you were not required to buy flood insurance when you originally bought your home, you could be required to buy flood insurance when you obtain a reverse mortgage. The Federal Emergency Management Agency constantly updates its flood zone designations, especially when there is new development in an area, updated flood data, or completed flood-zone projects.

Paying your property taxes with a reverse mortgage

One of the leading causes of reverse mortgage defaults is the failure of the homeowner to pay property taxes on time.

When homeowners obtain a reverse mortgage, they maintain title and property ownership, and thus responsibility for taxes, as well as insurance, utilities, and other expenses.

Falling behind on property taxes can lead to a default on the loan. If this occurs, the lender will require immediate repayment, which typically means selling the property.

If you’re considering a reverse mortgage but having trouble paying your property taxes, you are not necessarily disqualified from getting one. In fact, for many seniors, reverse mortgage proceeds can help them stay current on their property tax bills.

Your eligibility for a reverse mortgage, however, may be impacted if you have already taken steps to deal with delinquent property taxes.

Reverse mortgage impacts on deferral and exemption programs
Many states and jurisdictions offer seniors who struggle to pay their property taxes a deferral option. These programs allow seniors to defer their tax payments to a later date. The accumulated amount of unpaid taxes plus interest are typically repaid when the homeowner dies or sells the residence.

According to the National Reverse Mortgage Lenders Association (NRMLA), you can only participate in a property tax deferral program at the same time you have a reverse mortgage if the lien created by the deferral program is subordinate to the reverse mortgage loan.

This is not the case in most areas of the country. One of the few areas that allow simultaneous participation in a reverse mortgage and a property tax deferral program is Massachusetts. You should speak with a reverse mortgage lender to determine if you’re allowed a property tax deferral in addition to a reverse mortgage.

Another option available to help seniors with their property taxes are tax exemption programs. These differ from a deferral program in that they provide a permanent reduction in a senior’s property tax bill.

Examples of property tax exemptions include homestead exemptions for people using their house as their primary residence, as well as those for seniors, veterans, and those who are disabled.

Having a reverse mortgage typically does not affect your eligibility for a property tax exemption, nor will having an exemption prevent you from qualifying for a reverse mortgage. In some areas, if you have a property tax exemption, you may need to reapply for it after you obtain a reverse mortgage.

With a property tax exemption, you’re not postponing tax payments and accumulating a large debt like you are with a deferral program. Instead, you are receiving a reduction in your tax bill. As long as you pay the taxes you owe to your taxing authority, you can also maintain a reverse mortgage.

Property tax set asides
If you struggle to pay your property taxes prior to obtaining a reverse mortgage, you may be required to set aside some of your loan proceeds to pay your future tax obligations.

Because of an increasing number of reverse mortgage defaults, the Federal Housing Administration (FHA) now requires potential borrowers to undergo income and credit assessments before they can obtain an FHA-insured Home Equity Conversion Mortgage (HECM).

To further minimize the possibility of defaults due to failing to pay taxes and insurance, lenders will often establish set aside accounts.

How a set aside works
Set asides in a reverse mortgage are similar to escrow accounts in a standard mortgage. They hold funds needed to pay for costs beyond the principal and interest of the loan. In the case of a set aside, the amount needed to fund the account is deducted from the principal limit on your reverse mortgage.

For example, assume a homeowner could receive a maximum of $150,000 from a reverse mortgage based on their age and home equity, without a set aside. But the borrower’s credit and income raises the possibility that he or she may have trouble paying taxes and insurance, so the lender imposes a $30,000 set aside to cover those costs over the life of the loan. That means the borrower will only receive $120,000 maximum from the reverse mortgage, but the loan amount will still be $150,000.

Set aside amounts are based on the current and future projected costs of the item(s) the account will be paying (e.g. your current and projected property tax obligations), and how long the lender will pay the expense. If the set aside is established for the life of the reverse mortgage, the lender will use your age and life expectancy to determine the amount to set aside.

While set-asides are sometimes mandatory based on your credit and income, you can also establish them voluntarily if you want to ensure that your taxes are paid. When you establish a set-aside, the lender is responsible for paying those costs, just like they are when you establish an escrow account on a standard mortgage.

Why is there an age requirement for reverse mortgages?

People who are familiar with reverse mortgages know that a homeowner must be at least age 62 to qualify. In cases where two homeowners are obtaining a reverse mortgage loan, both must be age 62 to be considered borrowers.

Why is there an age requirement to obtain a reverse mortgage? Why can’t younger homeowners who owe little to nothing on their homes take advantage of this type of loan?

The primary reason is that reverse mortgages do not have a specified term; they can stay active for as long as the homeowner lives in the property.

Most other loans and mortgages have a defined end date, be it five years, 15 years or 30 years. That makes it easier for a lender to determine an interest rate and repayment amount to ensure the loan is financially beneficial.

No defined end date
A reverse mortgage, on the other hand, does not have a defined end date. Instead, this type of loan typically ends either when the homeowner passes away or permanently moves out of the home. The borrower can also default on the loan by failing to pay property taxes and insurance, or by not maintaining the property.

Therefore, if reverse mortgages were granted to homeowners who are, say, 55 years old, the loan could be on the lender’s books for 40 or 50 years or more.

Like Social Security and annuity payments, reverse mortgage proceeds are based in part on the borrower’s life expectancy. The older the borrower(s), the more funds that are available because, actuarily speaking, the borrower will not be receiving loan payments as long as a younger borrower. If people younger than age 62 could receive a reverse mortgage, the payments or credit line would have to be set at a much lower amount.

Designed specifically for retirees
Another reason for the age requirement is that reverse mortgages were created to help retirees who have little income but significant equity in their homes. The design of a reverse mortgage helps these individuals turn their home equity into cash without the burden of making monthly loan payments.

Younger homeowners who want or need to tap their home equity have options such as home equity loans, home equity lines of credit, or mortgage refinancing. Plus, they typically still are earning income and can, therefore, make monthly payments on those loans.

The risk to lenders
Another reason for the age requirement is that lenders do not get paid back any funds until the loan closes. The longer the reverse mortgage stays active, the greater the risk the lender will not recoup the full amount owed.

With traditional mortgages and other types of loan, the borrower makes monthly payments that include some of the original principal as well as interest.

In fact, in a traditional mortgage, you will pay the most amount of interest in the first years of the loan. The longer you make payments, the less the amount of interest is required with each payment.

For example, if you borrowed $300,000 on a 5-percent, 30-year mortgage, your monthly principal and interest payment would be just over $1,600.

In the first year of the loan, you would pay almost $15,000 in interest while paying down only $4,400 in principal. In year 15, your monthly payments would reduce your principal by $8,900, while accounting for $10,425 in interest. In year 30, your interest payments would only amount to a little over $500.

In a reverse mortgage, your interest obligation will compound each year and become larger, thus adding to the total amount you will repay at the end of the loan.

For example, if you took a lump sum $100,000 reverse mortgage at a fixed 5 percent interest rate, the loan would accrue $5,000 in interest the first year. That would result in you owing the lender $105,000 after the first year.

Another 5 percent interest would be tacked on to that amount during the second year, resulting in a second-year interest amount of $5,250 ($105,000 x 5%). Added to the first-year balance, your loan repayment amount would be $110,250.

In year 25 of this hypothetical example, the annual interest accrued would be $16,125, and your reverse mortgage loan repayment would total $338,635.

Using the example of a hypothetical 55-year-old getting a reverse mortgage, after 40 years, you would owe $740,000. That’s money the lender would have to wait 40 years to collect, and even then it would have to sell the property for that amount or be reimbursed by the government if the loan was federally insured.

Now imagine you receive your reverse mortgage proceeds as monthly income.

If you completely own a home valued at $300,000, you can borrow about $162,000, minus fees and closing costs. If you don’t receive any of the money upfront, the reverse mortgage will pay about $785 a month as long as you live in the home.

According to a reverse mortgage amortization schedule, assuming an average annual interest rate of 3.5 percent, after ten years your reverse mortgage will have paid you a total of $94,200 while generating interest of $18,722. That means if the loan ended after ten years, you would owe $112,922.

After 20 years, the loan balance would be just over $273,000 ($188,400 in principal and $84,600 in interest). If the reverse mortgage lasted 40 years, the loan balance would be more than $822,000 with the interest payment for just that year equal to $28,000.

Because of how much interest compounds over time, it’s in the lender’s and borrower’s best interests, as well as the federal government insuring reverse mortgages, to minimize the length of reverse mortgage contracts by setting a minimum age requirement.