Reverse Mortgage Insider Has Some Advice for Senior Citizens on Using These Loans

July 31, 2009 - I was contacted recently by a freelance writer who wanted to get some dirt on reverse mortgages. He said he could find people all over the place who could sing the praises of the reverse mortgage, but he wanted to find someone who could give him the pitfalls and things to watch out for. This got me thinking…there are a number of times I do not recommend the usage of a reverse mortgage and there are several things to watch for, but I would not necessarily call them “pitfalls.”

A reverse mortgage is a complex financial transaction and it is not an inexpensive loan, but when used correctly and under the right circumstances, it can greatly enhance the lives of the senior borrowers who obtain one.

So my advice to senior borrowers revolves around education and not the ominous “beware” tone that it appeared this writer was prepared to take.

Choose Option to Meet Need

First, I say to borrowers, "Choose the correct option to meet your needs."

Borrowers can choose a fixed rate or an adjustable rate and fixed rates sound great, but they are what is called a “closed end instrument” and require the borrower to take the entire loan at the very beginning of the transaction.

For borrowers who are paying off an existing mortgage and need all their funds to pay off the current loan, this is no problem. For a borrower who has no current lien on their property or a very small one, this would mean that they would be forced to take the entire eligible mortgage amount on the day the loan funds.

This might give a borrower $200,000, $300,000 or more in cash from the very first day that they do not need at the time and on which they are accruing interest. This can also have an adverse affect on some seniors with needs-based programs.

Seniors on Medicaid and some other needs-based programs would impact their eligibility by having the sudden addition of the liquid assets and the senior would wind up funding their own Medicaid with the equity in their home.

For these seniors, a careful consultation with family members and a financial counselor is advised to be certain that they chose an option such as the line of credit where funds can be made available to them during times of need, but they never have excess funds sitting in accounts to affect their eligibility.

A borrower who is planning on using only a portion of their funds monthly need not pay interest on the entire amount from the very start, eroding the equity unnecessarily fast. An adjustable rate will accrue interest at a much lower rate at today’s rates, but has a 10% cap and can go much higher if rates rise in the future. However, the adjust rate program allows for more options for borrowers to receive their money.

They can choose a lump sum; a line of credit against which they can draw at any time and which cannot be frozen like many of the bank Home Equity Lines of Credit (HELOC’s) are going through now and which grows on the unused portion annually; a monthly payment for a set term or for life; or a combination of all of the options. The adjustable rates are currently much more flexible to meet borrowers’ needs.

One of the things that can determine the amount for which borrowers will ultimately qualify is the rate at which the loan accrues interest. When the margins on the adjustable rates were lower and the fixed rate was higher, the adjustable rates gave borrowers more money in their pockets in the form of eligibility.

Now, most borrowers we run through the reverse mortgage calculator receive more money on the fixed rate program. This is extremely important to know if you are trying to get as much as possible to pay off an existing lien. It also means that the higher the margin, the less money the borrower will receive and the faster interest on the loan will accrue.

So the thing to look for in a reverse mortgage here is definitely the rate on a fixed rate or the margin on an adjustable rate that is being quoted.

Watch for Fees Being Charged

Another thing seniors need to look out for in their reverse mortgages is the fees being charged. The fees are highly regulated by HUD and therefore, the lenders cannot charge fees like processing fees, administration fees and things like that, but there are some things borrowers can watch to help themselves!

First is the servicing fee. The amount of the servicing fee will determine the servicing set aside, which ultimately determines how much money goes to the borrower.

The servicing fee set aside is not a fee at the time you close your loan, it is money that is not made available to you and is left in the equity of your property that is meant to go toward the payment of the monthly servicing fee.

On a regular or forward mortgage, you don’t see this fee, you simply pay anywhere from .25% to .50% higher rate which goes to the servicing company and is built into the rate you pay.

Reverse mortgages use a flat dollar amount instead, and the set-aside is determined up-front due to the fact that the balance of the loan is increasing, not being paid down by the borrower.

The maximum origination fee is set by HUD, but they do not require every lender to charge only the maximum! Check around and see if you might be able to get a better origination fee.

Watch for Long-Term Annuity Pitches

Finally, one of the biggest things for seniors to watch out for with their reverse mortgage has nothing to do with the actual mortgage at all…it’s becoming aware that there are those who are going to try to get you to part with your money!

Do not consider investment strategies which include long term annuities which will not allow you access to your funds for long periods of time without penalty.

Be wary of reverse mortgage originators who seem overly-anxious to help you invest your loan proceeds. Always remember that this is your home equity and with some careful stewardship, it should take care of you but if not guarded, can be taken away, leaving you with a loan on your home and nothing to show for it.

It seems most of the time I see a “reverse mortgage horror story” it is usually due to what happened to the money and not the reverse mortgage itself. With some careful planning by the senior borrowers, getting the family and/or a trusted financial advisor involved and knowing what to watch for, a reverse mortgage can be a viable retirement tool for many borrowers.

It’s just a matter of making sure you put the seniors’ best interest first and knowing what to look out for when doing reverse mortgages for senior homeowners that keep those horror stories from happening in the first place.

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Home Equity Loans vs. Reverse Mortgages

Are you 62 years or older and looking to tap into the equity in your home but are unsure if a reverse mortgage or a home equity loan is the way to go? There are big differences between a reverse mortgage and a home equity loan.

Home equity loans or a home equity line of credit are considered a second mortgage on your home. To qualify for a home equity loan or line of credit, you have to have enough income to pay back the loan on your mortgaged home.

In addition, there are debt to income ratios that banks consider when giving you a home equity loan or home equity line of credit (HELOC). Not to mention, a HELOC is a variable rate line of credit, meaning the interest rate you pay isn’t a set rate and can go up. Home equity loan rates are also a lot higher than mortgage rates these days so you will be paying more interest than with a traditional mortgage.

A reverse mortgage is different from a loan or line of credit. The difference is that a reverse mortgage pays you, the mortgagee. The amount of money you can borrow depends on the equity in your home, your age, the prevailing interest rate, and the appraised value of your home or Federal Housing Administration’s mortgage limits for your area, whichever is less.

You can use a reverse mortgage calculator to see how much you qualify for but the general rule of thumb is the more valuable your home is, the older you are, the lower the interest rate, the more you can borrow.

Reverse mortgages may be a great way to tap into the equity in your home. As long as the home is your principal residence, you don’t have to make payments on the money you receive with a reverse mortgage. Keep in mind that as with a regular mortgage, the loan becomes due in full when you move or sell the house.

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Loan Growth Augmenting Core Business at MetLife

Most financial services companies wouldn't consider themselves "lucky" to have bought two mortgage providers last year amid a wicked housing slump. Then again, maybe they didn't have MetLife Inc.'s ulterior motives.

"Our timing really couldn't have been any better," said Donnalee A. DeMaio, the president of MetLife Bank and a member of its board of directors. "Our mortgage business has really taken off," particularly refinancings, she said.

Along with its mortgage business has come the opportunities for MetLife to cross-sell its insurance products and services.

MetLife Bank opened more than 200 mortgage offices nationally in the past year, reporting $41.1 million in first-quarter net income while originating about $1.5 billion in monthly loans.

MetLife Bank made two acquisitions last year to establish its lending business. In May 2008 it bought EverBank Reverse Mortgage LLC and a month later bought First Horizon Home Loans, a Dallas mortgage originator, from First Tennessee Bank. That acquisition made MetLife the 15th-largest mortgage originator nationally.

DeMaio said in an interview last week that MetLife Bank had the advantage of learning from the mistakes of competitors left saddled with bad loans after buying lending businesses.

In the First Horizon deal, MetLife bought the company's origination and servicing capabilities but did not buy any existing loans. With Everbank, DeMaio said MetLife bought a reverse mortgages business "in its infancy" that did not have a large book of business.

"We were able to buy all of the capabilities that we needed in order to grow," she said. "Now our plan is to grow organically."

DeMaio, who spent 18 years at PricewaterhouseCoopers before joining MetLife Bank in 2002, described MetLife Bank's cross-selling strategy: "There is a natural opportunity when someone is getting a mortgage for us to offer them homeowner's insurance. We are looking for ways to seamlessly make referrals from one line of business to another. When someone is buying a home, it is a natural opportunity to discuss homeowner's and life insurance. Ultimately, our objective is to create a customer for life."

DeMaio said MetLife Bank also wants to gather deposits. "We want customers to know we are not just a mortgage company, we are a bank. By offering mortgages, it just gives us another avenue to look at our customers' entire financial picture."

Analysts say MetLife may have a blueprint for how an insurer can thrive as a bank holding company. "MetLife clearly has a strategy where it wants to use its banking and mortgage services as a way to offer cradle-to-grave services to its customers," said Carmen Effron, an analyst with C.F. Effron Co. LLC in Weston, Conn. "It can get in the door with lending and deposit services, and then work on how to invest and what insurance products to use later."

Burton Greenwald of BJ Greenwald Associates in Philadelphia said MetLife — which got a banking charter in 2001, but kept its banking unit below 100 employees until the deal with First Tennessee — has distanced itself from insurers that became banking holding companies for federal aid.

"MetLife didn't become a bank holding company to get … [Troubled Asset Relief Program] money," Effron said. "It didn't race in and start lending. MetLife started a bank and waited six or seven years, and it knew it was better off buying a shell and building a business on its own."

DeMaio said MetLife isn't looking to create a banking model that works for anyone but MetLife. "There certainly are other banks owned by insurers, and they each have their own missions, some of which are probably like MetLife Bank's, and some of which may be different," she said. "But you'd really have to talk to them to get their strategy. An insurer-owned bank certainly could pursue a share-of-wallet strategy as much as a brand-promise strategy, but each organization will have to do what is most in line with its goals."

Analysts said MetLife Bank's first-quarter results are a bit misleading. They said it generated healthy profits in the quarter because of a "boom in refinancing," as one analyst put it, but they said it could be difficult to maintain such strong results.

DeMaio said she expects lending conditions to "remain volatile," but she thinks MetLife has the pieces in place to build and maintain a strong mortgage business. She said mortgage origination is expected to remain solid as long as rates remain low. "We know that refis will slow down," she said. "When you really look at it, the government is involved in the economy, and that has kept the rates low. But we have seen strong growth and we are excited."

MetLife Bank does not need more lending deals, she said, but it will be opportunistic. She said the company has MetLife Home Loan offices in 95% of markets where it wanted offices.

In the next five to 10 years, she said she thinks MetLife Bank will be able to contribute 10% of MetLife Inc.'s profits annually. When the mortgage market "normalizes, it will be more of a challenge to keep volumes up," she said, but she remains confident in its strategy. "We are going to emerge from, whatever you want to call this economic environment, a different type of financial services industry," she said. "Lending is going to go back to basics. People are going to need down payments and a good loan-to-value. We are going to go back to lending like it was meant to be, and strong companies will survive. Without the baggage of bad loans, we can look forward."

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Mortgage- Free Helpful Guideline About Mortgage Loans

If you are looking for information about a mortgage, you will find the below related article very helpful. It provides a refreshing perspective that is much related to mortgage and in some manner related to discount a mortgage, interest only mortgage rates, mortgage rates land or 40 year mortgage calculator. It isn’t the same old kind of information that you will find elsewhere on the Internet relating to mortgage.

Mortgage Life Insurance: Mortgage life insurance is a mortgage insurance that can protect you instead of your lender. This type of insurance covers the amount of your mortgage if you should die, obtain a disability, or acquire a debilitating illness.

The capped mortgage is basically an adjustable rate mortgage in which the maximum interest rate is set. Any spike of interest rate over the maximum interest rate will not affect the mortgage repayment. The borrower knows the maximum mortgage payment.

The borrower usually purchases home through mortgage. It takes a huge amount income to pay off the mortgage. In case of critical illness, debilitating an accident, or depressing death of the borrower, the family needs to replace the loss of income to pay off the mortgage. With mortgage life insurance, the family does not need to worry about repaying the mortgage.

Don’t forget that if this article hasn’t provided you with exact mortgage information, you can use any of the main search engines on the Internet, like Ask Dot Com, to find the exact mortgage information you need.

Mortgage interest rates lift or dive at any given time. To fully see the advantage and disadvantage of switch, the borrowers must take annual percentage rate, mortgage insurance, and mortgage closing costs into consideration. Like any mortgage, Re mortgage comes with a price such as penalty, discount points, application fee, title search fee, and appraisal fee.

So long as senior citizens retire in the lovely state of Florida, Florida mortgage leads will continue to increase. It’s the perfect storm for an ageing population with increasing living costs. As a mortgage broker or lender, Florida mortgage leads will only swell, powered by reverse mortgages that are as juicy as an orange, the State’s second biggest industry.

It is the opposite of Single Purpose Reverse Mortgage in which the reverse mortgage loan can be used in any purpose. And, the mortgage is widely available anywhere. There are also no income or medical requirements.

We discovered that many people who were also searching for information related to mortgage also searched online for related information such as mortgage rate, mortgage interest rates, and even investment mortgages.

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FHA mortgages may be more costly compared to other loans

The importance of FHA in the home mortgage market has changed markedly over the years. This has been due less to changes in the FHA itself than to changes in the broader market in which it operates.

In the early 1990s, FHA had about 15 percent of the home-purchase market. In subsequent years through 2006, FHA lost business to the growing subprime market, which took many borrowers who could have gone FHA. In addition, FHA lost business to the prime conventional market, which developed and aggressively merchandised option adjustable-rate mortgages (ARMs) and interest-only products, as well as reduced documentation underwriting, none of which FHA offered. In 2006, FHA's share of the purchase market had fallen to less than 4 percent.

Then came the financial crisis.

With home prices declining and defaults rising, the subprime market largely disappeared; option ARMs declined to a trickle; and documentation requirements on prime conventional loans were substantially tightened. In addition, FHA loan limits were raised materially in 2008, and again in 2009. In early 2009, FHA's market share of new purchases was back to about 15 percent, and its share of refinances was substantially higher.

The FHA market niche: An FHA borrower in early 2009 1) doesn't need a loan larger than the FHA maximum in the borrower's county; 2) can't put more than 3.5 percent down, which is the FHA requirement; 3) is not eligible for a VA loan, which allows zero down; and 4) can't be approved for a conventional loan but can be approved under FHA's more liberal underwriting rules.

A borrower who can put 10 percent down on a loan smaller than the FHA maximum, and who can be approved for a conventional loan, will usually do better with a conventional loan, but there can be exceptions - see below.

FHA loan limits: The loan limits on FHAs effective until year-end 2009, established on a county basis, were the same as those applicable to Freddie Mac and Fannie Mae. On a single-family house, they ranged from $271,050 to $729,750 in 76 higher-price counties. Loan limits on two- to four-family houses are higher. On HECMs (reverse mortgages), the maximum was raised to $625,500 for the balance of 2009. You can find the limit applicable to any particular county at www.hud.gov.

Down-payment requirements: In 2009, FHA's 3.5 percent down payment compared with 5 percent to 10 percent on most conventional loan programs. Zero-down loans, which were widely available in the conventional sector during the go-go years of 2000-2006, have largely disappeared. The only generally available zero-down loans are VAs and USDA loans in rural counties.

FHA borrowers in some cities, counties or states have access to special programs that eliminate the need for a down payment by offering second mortgages at favorable terms. Usually, no payments are required on the second until the house is sold. The public agencies offering these programs have their own eligibility rules that are independent of FHA.

Underwriting requirements: FHA will accept lower credit scores than are acceptable on prime conventional loans, and are more forgiving of past mistakes. FHA will forgive a bankruptcy after only two years, and a foreclosure after three years.

Mortgage insurance: FHA borrowers pay a monthly mortgage insurance premium of 0.5 percent per year (0.55 percent on loans with less than 5 percent down), and an upfront premium of 1.75 percent, which is almost always included in the loan amount. In contrast, most conventional loans have only a monthly premium, which is higher than the FHA monthly premium but disappears at 20 percent down. Because of the higher mortgage insurance premiums, an FHA will be more costly to a borrower when the rate and points are the same.

Differences in rate and points between FHAs and conventionals: In shopping lenders who offer both FHA and conventional loans, I have found that in many cases the rate and points quoted on FHAs are higher. Lenders often charge larger markups on FHAs, partly because they are more costly to originate, and also because "they can." There isn't as much competition for FHAs because a large proportion of brokers and smaller lenders don't offer them.

On the other hand, I found that some lenders quote the same or even lower rates and points on FHAs. This kind of market fragmentation, which surprised me, appears to be a consequence of the financial crisis. It places an added burden on borrowers shopping for the best deal, as if that wasn't already difficult enough.

Comparing prices: Borrowers should be able to compare the all-in costs of an FHA and a conventional by comparing their APRs. The APR takes account of the rate, points, other lender fees and all mortgage insurance premiums. Unfortunately, the APR assumes that all loans run to term, which makes it deceptive for any borrower who expects to have the loan less than 10 years.

Furthermore, most of the lenders I checked are not calculating the APR on FHAs correctly. The most common mistake is ignoring the upfront mortgage insurance premium, which their software was never programmed to accommodate. If you want to make an all-in price comparison over the period you expect to have the loan, use my calculator 9c online at mtgprofessor.com/mpcalculators/FRMvsFRM Calculator/FRMvFRM.asp.

• Jack Guttentag's column appears Sundays in Homes Plus. Contact him via his Web site at mtgprofessor.com.

Inman News Service

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