In case you didn’t know, I have a 30 minutes radio show that airs on KLZ AM 560 every Thursday afternoon at 2:30 PM and replays on Saturday and Sunday. On October 18th, 25th and November 1st I discussed how to shop for a Home Equity Conversion Mortgage (HECM).This is the name for the FHA insured reverse mortgage.
But in case you don’t have time to listen, I’m providing a semi-brief summary below.
The three shows are broken down as follows:
1. Ask yourself - What it is that we are hoping to accomplish with a reverse mortgage?
- Do we just want to pay off an existing mortgage? Have more financial freedom by not having a mortgage payment? (You will still need to pay the property taxes and homeowners insurance as well as maintain the home).
- Maybe we’d like additional income from the reverse mortgage?
- Without a mortgage payment and/or additional income, maybe we could retire?
- Do we want to use a reverse mortgage to down-size/right-size and buy a home near family?
- Should we establish a Line of Credit (LOC) for financial planning purposes & long-term security?
Here are a few web-sites with good information that won’t harass you:
- Federal Trade Commission (FTC) -
- National Reverse Mortgage Lenders Association
- My Site
- HUD Counselor List
I don’t recommend going to the AARP web-site because it is out dated and does not reflect updates to the reverse mortgage program such as Financial assessment from 2015 or even the Non-Borrowing Spouse (NBS) rules from 2014. The most recent article I found there is dated May 2015.
3. Contact a HUD approved counselor. If you talk with a lender directly, they should be able to provide a list of local counselors along with another list of counselors that provide counseling over the phone. The lender should NOT give you just one counselor to call and should definitely NOT tell you that he/she will have the counselor call you. You choose who your own counselor and if you want to talk with them in person or over the phone.
4. Get a quote for your situation. Most web-sites that offer a calculator use it as a way to get your phone number but there is an on-line calculator at the NRMLA site at https://www.reversemortgage.org. The good thing about this one is that they do not require your information, but the down side is that the costs and interest rates they reflect are typically higher than most lenders. It’ll give you good general information about what the numbers will look like, but for the most accurate quote, you’ll want to call a lender directly for a quote.
5. It’s time to talk directly with a loan officer. But who do you call for a quote?
Whomever you decide on they should have these four attributes:
- Work with someone local and in person, who is willing to come to you.
- The loan officer should have at least five years’ experience in reverse mortgages. He or she should also be a Certified Reverse Mortgage Professional (CRMP). You can learn more about this designation on the NRMLA web-site above.
- Work with a company that’s been in business for at least ten years and has an “A” rating with the local Better Business Bureau (hint – they should be a member). They should also be a member of the National Reverse Mortgage Lenders Association, (NRMLA).
- Only work with someone you’re comfortable with and who has testimonials from satisfied customers.
*** Note ***
Steps #3 and #5 can be switched. More often than not, most people contact a lender before they visit the counselor, but it’s your call. Do what’s best for you.
Now that you have a quote, what do all these numbers mean? This is why I feel that meeting with a loan officer in person is so important. If you simply call and have the lender send you a quote over e-mail, it can be very difficult to make heads or tails of what you’re looking at.
I’m not going to go into specific forms in this article, but you want to look at closing costs and interest rates because the loan officer should be able to work with both to get you the best overall deal.
Closing costs can be broken down into three sections:
- Upfront Mortgage Insurance Premium
- Origination Fee
- Other Charges
Upfront Mortgage Insurance Premium (Upfront MIP) – This is a fee charged on all HECM loans. FHA charges an upfront fee equal to 2.0% of the
value of the homme up to the maximum claim amount of $679,650. For example, if you have a homme valued at $400,000, the upfront MIP would be
$8,000.00 ($400,000 x 2.0% = $8,000.00). This fee is charged no matter the actual amount of funds you draw from the reverse mortgage.
Origination Fee – This is one fee that can be negotiated with the lender although in some cases it may help maximize the cash available by getting a lower interest rate and being charged an origination fee. (I’ll talk more about that in a future blog).
FHA places limits on the amount a lender can charge for an origination fee. They can charge 2.0% of the first $200,000 in home value, and 1.0% of the value thereafter up to a maximum of $6,000.00. FHA allows a minimum origination fee of $2,500.00 regardless of value.
Other Charges – This line encompasses all other fees such as appraisal, title insurance, closing fee, credit report, flood certification, etc.
These three lines totaled together are the “closing costs” for a reverse mortgage. Some lenders may want you to pre-pay the appraisal and credit report while others will not ask you pay any money upfront.
You will want to make sure to take these costs into account when you look at the interest rate charged and the amount of money available from the reverse mortgage.
Borrowers who get HECM loans have three interest rate options:
- Fixed Rate – Rate will not change over the life of the loan.
- Annually Adjustable Rate – Rate will adjust annually.
- Monthly Adjustable Rate – Rate will adjust monthly.
One difference between interest on a normal “forward” mortgage and a reverse mortgage is that no matter if the borrower chooses a fixed or adjustable rate, they don’t have to pay it out of their pocket on a monthly basis. They are still charged interest, but they are not required to pay it. The interest accrues and is added to the loan balance and paid when the last homeowner permanently leaves the home.
While getting the lowest interest rate is important to try to keep the loan balance from growing so quickly, it is also important in order to receive the most money from the reverse mortgage.
The amount of money that a homeowner can qualify for on a HECM loan is based on three factors:
- The age of the youngest spouse/homeowner
- The value of the home up to the maximum lending limit of $679,650
- The “expected” interest rate
Since this article is about shopping for reverse mortgages, I’m not going to go into detail about anything other than the “expected” interest rate.
There are two interest rates you will see on every quote you receive. One Is called the “initial interest rate” and the other is called the “expected interest rate”.
If you choose the fixed rate option, these two rates will be always be the same. However, on the adjustable rate options, they will most likely be different.
The “initial” rate is the rate the borrower is charged once the loan is in place. The “expected” rate is the one we use to determine the amount of loan a borrower can qualify for.
FHA insures HECM loans so they try to project what the interest rates might be in the future when calculating the amount they will allow the lender to loan. They call these projections “expected” interest rates. These are longer term projected rates (10 years) than the shorter term “initial” rate (one month for the monthly adjustable and one year for the annually adjustable rate).
The lower the “expected rate”, the higher the loan amount. Conversely, the
higher the “expected rate”, the lower the loan amount.
Both rates are tied to an index called the London Interbank Offered Rate (LIBOR). Lenders add a “margin” to the index to arrive at both final rates. For example, if the lender margin is 2.00% and LIBOR index is 2.00% the resulting interest rate the borrower is charged would be 4.00%.
The margin is the same for both the initial and expected rates. The margin never changes once the loan is signed. However, the LIBOR index will. With HECM loans, the expected rate can be locked once the application is signed, which is good because if it increased while your loan is being processed, your loan amount would decrease.
When shopping for a reverse mortgage loan, prior to signing an application, you want to pay attention the “margin” because this is the portion of the equation that cannot change. Remember, the LIBOR index can change, but the margin cannot. If you contacted Lender #1 last week and received a quote with an expected rate of 4.25%, then contact Lender #2 this week for and received a quote with an expected rate of 4.375, you may assume Lender #1 has the better deal.
However, if you pay attention to the margin, you might notice both lenders have the same margin. How can this be when the rates are different? It’s possible the index increased by one-eighth of a percent from one week to the next. If you went back to Lender #1, their rate would now be the same as Lender #2 because they have the same margin.
I know this can all be very confusing, but it will become clear over time. Please take a few moments to listen to my podcasts or just call me directly at 303-467-7821.