Journal CSA. Using a Reverse Mortgage to Age in Place in One s Home Number 68 Vol. 1, Patricia Whitlock, CRMP

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1 CSA Journal Using a Reverse Mortgage to Age in Place in One s Home Number 68 Vol. 1, 2017 Patricia Whitlock, CRMP This document is authorized for use only by Patricia Whitlock. Copying or posting is an infringement of copyright. Please contact journal@csa.us or for additional copies.

2 PAGE 36 Many older homeowners may not know how much flexibility and financial help a reverse mortgage offers, especially for those on fixed income. BY PATRICIA WHITLOCK, CRMP

3 [ financial ] Using a Reverse Mortgage to Age in Place in One s Home Many older adults face a three-fold dilemma: past market conditions reduced the value of their life savings; health care costs are increasing; and they want to live independently in their own homes, and receive health and medical care there as they age (AARP 2013). But how to pay for living independently, especially if one has a fixed income? Many older adults may not have long-term care insurance, or may not be eligible for Medicaid, and Medicare does not cover long-term services and supports. People are looking for practical answers to these and other financial issues of living longer. Many do not know a reverse mortgage could be their answer. Or, if they know about reverse mortgages, they may have mistaken beliefs, or lack accurate and complete information, about how a reverse mortgage works and its benefits. For instance, borrowers have flexibility in choosing and changing their payment options; and they can use the funds in many ways, including paying expenses to live independently in their own home. A reverse mortgage is not the answer for all older adults, but for those who qualify and have personal goals that align with reverse mortgage features and requirements, it could open a door of possibility and financial hope. Reverse Mortgage Overview The first ever reverse mortgage in the United States was issued in 1961 by a savings and loan company in the northeast. Other lenders followed with their products, but reverse mortgages never really took off until the US Department of Housing and Urban Development (HUD) created the Home Equity Conversion Mortgage (HECM) under the federal Housing and Community Development Act of The Federal Housing Authority (FHA) insured the first HECM in 1989 to Marjorie Mason of Fairway, Kansas. Since that time, the HECM program has undergone many changes; some big, some small. The basics have remained the same. A HECM is a non-recourse loan, the dollar amount of which is determined by the borrower s age, the value of the property, and the prevailing interest rates. Payments are not required, but if a borrower chooses to make payments, there is no pre-payment penalty. Interest and mortgage insurance (MIP) accrue on the amount actually drawn, while unused funds grow at a rate tied to the interest rate charged. The FHA publishes a table of Principal Limits used by lenders to determine the loan amount (HUD 2014). The property must be a primary residence, and may be a single family home, a multiple family home with up to four units, or a condominium that has been approved by the Department of Housing and Urban Development (HUD). Borrowers must 2016 COSTS OF ASSISTED LIVING OR NURSING HOME CARE Without a doubt, today s Americans would prefer to stay in their own homes into old age, if at all possible. The cost of an assisted living facility or nursing home far exceeds the cost of homebased care, and this may be reason enough to consider a reverse mortgage to fund aging in place. Genworth s 2016 Cost of Care Survey details rates for home care versus facility care state-by-state. The median yearly cost for home health aide services is $46,332 nationwide, while a semi-private room in a nursing home averages $82,128 annually. CSA JOURNAL 68 / VOL. 1, 2017 / SOCIETY OF CERTIFIED SENIOR ADVISORS / PAGE 37

4 be 62 years old or older; they keep the title to their home and must continue to pay certain expenses such as utilities, property tax, homeowners insurance, maintenance and repairs, and homeowner association fees. The non-recourse feature ensures that the house is the only collateral for the loan. Required federal mortgage insurance guarantees that the amount to be repaid may not exceed the home s value at the time the loan becomes due and payable. A HECM reverse mortgage does not come due until the last borrower (or nonborrowing spouse) ceases to reside in the home permanently, at which time the heirs must decide if they will pay off the loan and keep the property, or sell and pay off the loan with sale proceeds. Recent Changes Significant changes were made to the HECM program from 2015 to January 2017, prompted by the number of foreclosures due to technical defaults; some homeowners were borrowing most of their available funds to pay off existing debt, leaving little to cover mandatory obligations, in particular, property taxes and homeowners insurance. First, in 2015, limits were placed on how much of their available funds borrowers could use in the first year of the loan (60 percent in 2015). This was followed by the introduction of today s Financial Assessment, a process through which potential borrowers are qualified on the basis of their (documentable) income and the conversion of any assets to be used as income. This ensures that borrowers are able to continue living in their homes, paying ordinary expenses such as utilities, as well as real estate taxes and hazard/homeowners insurance. Part of the recently established Financial Assessment includes a Life Expectancy Set Aside (LESA) designed to ensure that loan funds for the payment of real estate taxes and homeowners insurance premiums remain for the lifetime of the borrower. A LESA may be required if an applicant s other resources are insufficient to cover living expenses after property charges are paid, essentially limiting access to credit line funds set aside for property charges. Another other important change was made in 2016 the way a Non-Borrowing Spouse is considered. This resulted from a well-publicized lawsuit pressed by AARP against HUD on behalf of several plaintiffs in The case of Bennett vs. Donovan alleged that reverse mortgage foreclosures on the homes of surviving Non-Borrowing Spouses of HECM borrowers were illegal. Surviving Non-Borrowing Spouses were subsequently granted a deferral period where they would be LIVING INDEPENDENTLY Rosemary s son Nicholas contacted the family attorney to get financial help for his mother and aunt. Aunt Carol, a widow, suffered from emphysema and diabetes. Her sister, Rosemary, long divorced, lived with Nicholas in his home, helping with his mortgage and utility bills; but she was spending more and more time at Carol s house, less than a mile away, helping her sister with daily activities: cooking, cleaning, and caring for the dog. Neither of them had any pension income apart from Social Security. The attorney suggested a reverse mortgage. Carol applied for one, with Rosemary as a coapplicant. To qualify, Rosemary moved in with Carol. She was required to change her legal residency to Carol s address, and have utility bills come to both her and Carol at Carol s home. This simple process was accomplished with a visit to the Department of Motor Vehicles and a few phone calls. Rosemary and Carol now had sufficient income with the reverse mortgage to make them feel more secure that they could pay the bills and live comfortably. They continued to receive a fuel oil subsidy under New York State s Home Energy Assistance Program, as well as claim the senior rebate on property taxes. The move also made it easier for Rosemary to offer Carol 24-hour care and companionship. And, Nicholas, now better established in his job, was able to take full responsibility for his home. As a result, Rosemary had more ability to share expenses with Carol. Carol passed away last year, and Rosemary continues to live comfortably in the home they shared. permitted to remain in the home, and the loan would not become due and payable, as long as they met eligibility criteria and paid up-to-date property charges. HUD s definition of a Non-Borrowing Spouse is a person who meets all three of the following eligibility criteria the person must: 1. Have been the spouse of a HECM borrower at PAGE 38

5 the time of loan closing and have remained the spouse of this HECM borrower for the duration of this person s lifetime 2. Have been properly disclosed to the lending party (mortgagee) at loan origination and specifically named as a Non-Borrowing Spouse in the HECM documents 3. Have lived in, and continue to live in, the home securing the HECM as the Principal Residence of the Non-Borrowing Spouse (HUD 2014). HUD has issued a series of Mortgagee Letters clarifying the position of Non-Borrowing Spouses, the latest of which extended the rights to eligible Non- Borrowing Spouses with HECM case numbers assigned before Aug. 4, 2014 (HUD 2015). The most recent change in the HECM program was effective January 1, 2017, when the lending limit went up to $636,150 (HUD ). The lending limit for any loan is the lesser of the appraised value of the home or this value, from which the principal limit, or maximum loan amount, is calculated based on the younger borrower s age. The Many Uses Of A Reverse Mortgage A reverse mortgage can be used for virtually anything. Bear in mind that, with the exception of mandatory obligations (mortgages and other liens), only sixty percent of the loan proceeds may be drawn in the first year after closing. The remaining funds become available in year two. Following are examples of how borrowers can use their reverse mortgage funds: Home modifications. A host of uses present themselves in the form of home improvements. A disbursement from a reverse mortgage might be used to pay for modifying a home for aging or disability needs: wheelchair ramps, wider doorways, grab bars, etc.; or to create a caregiver s suite. On the most basic level, funds from a reverse mortgage can be used to remedy deferred maintenance on a home, such as interior and/ or exterior paint, a new roof, or a new heating system. Health care costs. Many homeowners who might benefit from health care insurance cannot afford rising premiums. However, they could self-fund their health care costs with a reverse mortgage. Funds in a line of credit can be drawn to pay for large unexpected expenses, while a regular monthly disbursement can be used for the recurring cost of a home health aide, medications or equipment. Increased cash flow. A reverse mortgage may be used in several ways to increase cash flow to age HOME OF HER DREAMS When Marian divorced, her children were already grown and had moved away. She was awarded the house, and decided she wanted to spend the rest of her life in the home where she had raised her family. To create the home of her dreams, however, she decided that some upgrades were in order. Marian did careful research into a reverse mortgage. She had seen the TV commercials, and decided that a reverse mortgage line of credit would provide the funds for the remodel. She chose to receive her loan payment as a line of credit. With her daughter s design input, she did a complete upgrade of her kitchen and living area. There is still plenty of money in the line of credit, which, to Marian s delight, grows at a rate of almost 5% per year. Her Social Security payments are sufficient to cover her living expenses, including property taxes and insurance, so she only taps her credit line when she needs money to travel and visit her children. in place. One way is by paying off debt to decrease monthly expenses; another, to increase income to meet everyday expenses. In recent years, financial planners have suggested more sophisticated uses: A reverse mortgage might be used to pay off a home mortgage. Regular monthly income from a reverse mortgage can be used to delay Social Security until an optimal retirement age of 70. Strategic use of a reverse mortgage can manage a retiree s tax bracket and preserve other investments for legacy purposes. Financial Flexibility Flexibility is one of the great advantages of a HECM. Once it is in place, the borrower s options for disbursement include lump sum withdrawals from a standby credit line, or equal lifetime tenure payments. Funds can also be maximized using term payments as needed: if, for example, $2,500 is available monthly to a 75-year-old borrower, he may choose to receive $3,000 CSA JOURNAL 68 / VOL. 1, 2017 / SOCIETY OF CERTIFIED SENIOR ADVISORS / PAGE 39

6 or $4,000 or more per month for a fixed period of time (term), after which payments will stop. The loan is not due, but he will no longer receive his monthly check. A plan like this can benefit an older borrower with failing health, whose expenses for health care are high. An experienced reverse mortgage loan officer can help configure a plan, and the plan can be changed at any time for a nominal fee (around $20) by getting in touch with the loan servicer through contact information provided on every monthly loan statement. Cautions Like other financial decisions, potential borrowers should carefully consider whether a reverse mortgage is the right decision for them. As mentioned earlier, borrowers must be able to afford to continue paying certain home-related expenses such as tax and insurance. HUD counseling is required for prospective HECM borrowers for these and other good reasons. HUD counselors help ensure prospective borrowers understand the specific terms of a reverse mortgage; for instance, the amount of the up front and ongoing fees, interest rate, and conditions that may result in a default on the loan. Typically, borrowers should have other financial resources and consider the reverse mortgage a supplement to those. Potential borrowers should also consider other financial options that may be less expensive than a reverse mortgage, such as selling their home and moving into a smaller residence (as an owner or renter), a home equity loan, or refinancing their current mortgage. Also, a family member or friend might become a roommate to help with expenses and housekeeping, as well as becoming a valued companion. Perhaps most importantly, a potential borrower must consider whether they plan to remain in their current home as long as they are physically able, as the use of a reverse mortgage may potentially use up all their home equity. Where To Start A good place to begin is with education. Reverse mortgage counseling, a required step in the process, may be completed by making an appointment to meet in person or speak over the phone with a HUD-approved HECM counselor. (See Resources below for an online roster of HUD counselors.) An experienced HECM lender is another great source of information and educational materials. AARP also offers numerous resources to help people understand reverse mortgages and the pros and cons compared to their individual circumstances; and the National Reverse Mortgage Lenders Association (NRMLA) website has a Locate a Lender feature (see Resources). The Certified Reverse Mortgage Professional (CRMP) logo indicates an additionally-qualified loan originator, who has personally closed at least 50 HECM loans, earned 12 hours of continuing education, completed NRMLA s Ethics Course and passed a rigorous exam and a background check. CSA Patricia Whitlock, a Certified Reverse Mortgage Professional (CRMP) with FirstBank, has been originating reverse mortgages exclusively since She writes for the Reverse Review Magazine and Reverse Mortgage Magazine; serves on the board of directors of the Suffolk County Retired and Senior Volunteer Programs; and is active in the Long Island Chapter of the National Aging in Place Council. Contact her at or pwhitlock@ firstbankonline.com. REFERENCES AARP (2013). Livable Community Indicators for Sustainable Aging in Place. publications/studies/2013/mmi-livable-communities-study. pdf. US Department of Housing and Urban Development (HUD): HECM Principal Limit Factor Tables - Effective August 4, Tables_18-99.xls. HUD Mortgagee Letter ML hudportal/documents/huddoc?id=14-07ml.pdf. HUD Mortgagee Letter ML hudportal/documents/huddoc?id=15-15ml.pdf. HUD Mortgagee Letter hudportal/documents/huddoc?id=16-19ml.pdf. Genworth 2016 Cost of Care Survey. about-us/industry-expertise/cost-of-care.html. RESOURCES AARP. Reverse Mortgages. (Accessed Feb. 22, 2017.) Home Equity Conversion Mortgages for Seniors. US Department of Housing and Urban Development (HUD). hudportal/hud?src=/program_offices/housing/sfh/hecm/ hecmhome. PAGE 40

7 IMPORTANT TERMS HECM Home Equity Conversion Mortgage Initial Principal Limit the amount of money a borrower is eligible for based on home value, age, and Expected Interest Rate (EIR), before closing costs are deducted Expected Interest Rate (EIR) The interest rate used to calculate the principal limit. It equals the 10-year CMT or the 10-year London Interbank Offered Rate (LIBOR) rate plus a margin. Interest Rate = Index plus Margin Index: Reverse mortgage interest rates are tied to either the Constant Maturity Treasury (CMT) rate or the London Interbank Offered Rate (LIBOR) Margin: An amount that is added to the Index to determine the Expected Interest Rate and the Actual Interest Rate. The loan investor decides the margin. Maximum Claim Amount The lesser of a home s appraised value or the maximum loan limit that can be insured by FHA, currently $636,150. FHA Mortgage Insurance (MIP) A fee that borrowers pay at loan origination, which is equal to a small percentage of the maximum amount claimed, plus an annual premium based on the loan balance every year after. (If the lender goes out of business, the MIP protects the borrower. The FHA steps in and ensures the borrower can continue to access his or her funds; the MIP also guarantees the borrower will never owe more than the value of the home when it is sold to pay back the reverse mortgage.) Tenure Payment Option A fixed loan amount the borrower receives every month for as long as he or she lives in the home. Term Payment Option A fixed loan amount every month or payment for a specific period of time. Open End Line of Credit A line of credit borrowers can use to withdraw funds. This may be replenished by making repayments to the lender, and used for further withdrawals at a later date. There is a growth rate feature to the line of credit. HUD approved HECM counselors. html/hecm_agency_look.cfm National Reverse Mortgage Lenders Association. Locate a Lender. Reverse Mortgage Loans: Borrowing Against Your Home. AARP. Reverse%20Mortgage%20Loans.pdf. (Accessed Feb. 22, 2017.) FirstBank is a TN State chartered Depository Bank regulated by the TDFI and the FDIC. A Reverse Mortgage is an FHA-insured loan. Homeowners must be 62 years of age of older and live in the home as their primary residence. Homes must meet FHA/HUD minimum property standards. Borrowers must maintain hazard and flood insurance premiums, property taxes, utilities and make any property repairs. Although there are no monthly principal and interest mortgage payments, interest accrues on the portion of the loan amount disbursed. Reverse mortgages can use up all or some of the equity in your home and the amount you owe on a reverse mortgage will increase over time. Loan must meet underwriting requirements. Program rates, fees, terms and conditions are not available in all states and subject to change. FirstBank Mortgage is a division of FirstBank. All products and services offered through FirstBank NMLS# This document is written by Patricia Whitlock NMLS#64560 from FirstBank and is not from FHA/ HUD. This document is not approved by any government agency. A reverse mortgage is a loan. FB FirstBank-3500 Blue Lake Dr., Ste 325, Birmingham, AL CSA JOURNAL 68 / VOL. 1, 2017 / SOCIETY OF CERTIFIED SENIOR ADVISORS / PAGE 41