An excellent question from one of our readers...
Dear All Reverse Mortgage,
The financial collapse of 2008 took about 40% of my retirement assets,
and although there has been a nice recovery in 2009 and 2010 I am
modestly in doubt about my remaining liquid assets to outlive me if
both me and my wife live to be 95ish!!
Hence my interest in securing a reverse mortgage more as a form of
later years insurance than as a requirement of current survival. My
wife (68) and I purchased a house in 2007 in Florida where we currently
reside and lead extremely active and healthy lives. We paid $675,000
for this house in 2007 and I roughly assume it is currently worth not
less than $500,000 after the deflation of the past three years. We paid
cash for the property and have no outstanding mortgage balance on it
although we do have a $250,000 never used equity line of credit as a
form of insurance.
Over the next several years I expect to invest roughly $100,000 in
improvements such as bathrooms, kitchen, roof and exterior pool
landscaping. I have the cash to fund all of these improvements and no
need for any form of financing to fund them. However, having said that,
my liquid assets will diminish at a pace greater than "plan" over the
next 5 years or so if I do use cash available. Also, if I use IRA funds
to finance improvements I will have to pay taxes at the marginal rate
of 20-30% on any such distributions. I would rather not take
distributions in excess of the so called IRS "required minimum annual
One alternative I have to finance such improvements would be to draw on
the heretofore unused equity line of credit of $250,000. The rate is
under prime but I'm unclear on the cash flow characteristics of using
that line for financing improvements. The proceeds, of course would be
tax free, and the interest paid would be tax deductible to a principal
limit of about $100,000.
A second alternative would be to take a reverse mortgage for about
$200,000 or higher NOW and let it sit idle for a few years until and if
I decide we should use it. If I did take a reverse mortgage now, I
would pay the fees out of cash and not take an advance on the Reverse
mortgage. The trigger as to whether or not I take this course of action
now or delay it for a few years is the effect of current versus future
interest rates on Reverse Mortgages. So... finally I come to the
If I were to take a Reverse Mortgage:
1. What total closing costs might I expect on a loan in the amount of $200-250K?
2. If I took a loan NOW for, say $200,000 and did not draw on it for,
say, three to five years or longer, would the amount available to be
drawn under the loan increase over those years?
3. Since interest rates are quite low right now and only reasonably
expected to rise over the next few years, would it make sense to take a
loan now in order to achieve the lowest "cap" on a monthly variable
rate in the future if rates rose very substantially? Keep in mind that
I would not expect to draw on the Reverse Mortgage line of credit for a
few years or more and would pay all closing fees out of pocket.
I could postpone the decision until the need arose in a few years, but
at that point the base rate might be higher and the consequent "cap" or
maximum rate would assumedly be higher as well.
4. What are currently available terms on variable rates for Reverse
Mortgages and what are the "cap" or maximum rates based on currently
5. Are you licensed to broker or bank an HECM in Florida?
Well, thanks for bearing with me on this explanation and inquiry. I
like your company's marketing approach and look forward to your
These are all
excellent questions and I am afraid to answer them well is going to
take a bit of time and explanation so hang with me on this! Firstly, I
understand your concerns. Your existing Home Equity Line of Credit (HELOC)
is by far the least expensive option for you to keep since you already
have the loan in place and there would be no additional fees to keep it
there. I also understand your concerns with a HELOC as many borrowers
have seen their HELOC's frozen
over the last several years and what they thought they had for
insurance (as you put it) was not available when the time came that
they really needed it.
start with some mechanics. A reverse mortgage does not work like a
forward mortgage in that you don't apply for a loan of $200,000 to
$250,000, you are given an eligibility which is affected by the
property value, the HUD lending limit, borrower's ages and interest
rates. In 2009, HUD limits received a temporary increase which was
extended into 2010 to a maximum lending limit of $625,500 for the Home
Equity Conversion Mortgage (HECM or "Heck-um") reverse mortgage
program. The limit prior to the temporary increase was $417,000.
Since I know your ages are 68, if I just assume that you just turned 68
and are not ready to turn 69 in the next 6 months I can run your
eligibility numbers from that using today's information.
You would have to take an adjustable rate mortgage, the fixed rate HECM
option requires that you take a lump sum of all your available funds up
front. Also, living in Florida, you live in one of the higher states
for other closing costs due to the Intangible Tax and the state taxes
which alone would total about $4,125.00 on this transaction. So to
answer your first question, the total fees would run anywhere from
$20,000 to $22,000 depending on the origination fee.
maximum origination fee that could be charged is $6,000 and the
originator can discount this fee. You can pay these fees up front so
that you are not accruing interest on any balance; however, every
reverse mortgage also has a monthly servicing fee of $25 - $35 (there
may soon be others available) that would be added to the balance
monthly. This amount could also be paid monthly or annually if you did
not want to allow it to accrue for any reason. Reverse mortgages never
have any prepayment penalties so you can prepay any or all of your
mortgage at any time. (You may also reference this complete list of Reverse Mortgage Fees)
The amount of available funds for your reverse mortgage under today's
rates and fees with today's interest rates would be $240,000 or
$262,000 +/- if you paid the fees out of pocket. The unused portions
of the funds do grow as your eligibility grows. In other words, to
answer your question, if you did not use your line of credit for the
first five years, that line would grow to somewhere between $330,000
and $350,000. When you apply, we or any other originator can give you
a graph indicating the growth of the credit line if left unused.
Your third question is an excellent one and one which actually has
several ramifications which no one can tell you for sure which way you
should go. I can only tell you what can happen and let you make an
informed decision. There is a 10% rate cap on the adjustable rate.
Another thing to consider is the current margin. Margins have been
reasonably stable in recent months but over the past year or two have
been rising steadily. The margin is added to the index (mostly the 1
month LIBOR) to determine the rate at which you will accrue interest on
your loan. If the margin rises from its current level of 2.25% - 3.0%
to a higher level in the future, this will affect the interest you
accrue and will negatively affect the amount for which you will qualify
under the program.
interest rate increases would mean that if you chose to obtain your
reverse mortgage at that time you will have a higher cap (meaning if
the rates continue to rise, you could have an even higher rate, but
that would take a really high increase) and you would be eligible for
less money under the program. All HECM's have the same 10% lifetime cap
but margins do vary between originators so you should definitely watch
to make sure you don't pay above 2.5% on your margin. Some lenders are
charging 3% or more and I would not advise anyone to take a margin that
high at this time. All Reverse Mortgage is a licensed broker in Florida and we do offer the 2.5% margin.
are a couple of things you did not ask but I feel as though I should
add them at this time. Please remember that this is not intended to
try to "scare you" into applying for a reverse mortgage and it is not
my intent to try to hurry you into anything you might not otherwise do,
but I feel as though I should tell you everything we currently know. In
October of 2009, HUD lowered the eligibility
for HECM borrowers by about 10%. Meaning, prior to the decrease, you
would have received roughly another $26,000 in eligibility. There is
talk that the program may receive another cut in October of 2010.
There has also been some discussion that HUD may raise the mortgage insurance premiums
this October. Of the $20,000 - $22,000 in fees I said your HECM would
cost you today, $10,000 alone is the up-front mortgage insurance
premium. There is also a premium of .50% on the unpaid principal added
to the balance monthly that is due to HUD on every HECM loan.
figure may be going up the future as well. Finally, unless the
temporary increase is again extended, the eligible Principal Limit will
decrease to $417,000 on October 1, 2010 and your eligibility will be
based on $417,000 - not the value of $500,000. Therefore, if you do
choose to wait and if the principal limits come back down, you would be
eligible for less money. If the limits come back down and HUD drops
the eligibility as is currently being discussed, you would lose even
more in eligibility. If rates and or margins go up, limits come down
and HUD drops the eligibility, well, you understand where I'm going
Please let me stress again that we do not know for
sure that the HUD fees will increase nor do we know if Congress will
again extend the temporary limit increase, but I would be remiss if I
did not let you know that these things are currently being discussed.
If the $625,500 limits are extended, HUD does not further decrease
Principal Limits Factors or even goes back to former Limit Factors
prior to their decrease in October of 2009 and rates or margins go
down, you could actually be eligible for more funds under the program.
It all depends on what you think will happen in the
future and where you think rates will go. Your basic premise was that
you felt rates were probably going to rise in the future and
unfortunately, I tend to agree. If we are correct and if all the
recent changes to the HECM program continue on their current course,
then there will never be a better opportunity than now for a reverse
mortgage from the standpoint of lowest rates and greatest eligibility.
But as I stated when I first started, no one can
predict the future and all I can do is give you the information we have
and let you make an informed decision. A HECM is an expensive loan and
only you can decide if the costs are worth it to put the loan in place
at this time knowing the line can never be frozen and will grow over time.