Origination Fee, Third-Party Closing Costs, Mortgage Insurance Premium (MIP), Servicing Fee

Origination Fee

An origination fee pays a lender for preparing your paperwork and processing your loan, also known as “originating” a loan. If your home is worth less than $125,000, a lender can charge up to $2,500 for this fee. If it is worth more than $125,000, the fee is limited to 2% of the first $200,000 of your home’s value plus 1% of any amount over $200,000, up to an absolute limit of $6,000. On a $250,000 home, for example, the origination fee limit would be $4,500 (2% x $200,000 = $4,000 plus 1% of $50,000 = $500).

Origination fees vary from one lender to another, so it can pay to shop around. The amount of this fee may also be negotiable with a lender.

Third-Party Closing Costs

A “closing” is a meeting at which legal documents are signed to “close the deal” on setting up a mortgage. The date of closing is the day on which a mortgage begins. Closing a mortgage requires a variety of services by third parties other than the originating lender. These services

include an appraisal, title search and insurance, surveys, inspections, recording fees, mortgage taxes, credit checks, and others.

Third-party closing costs on a HECM loan vary with the value of the home and from one state or area to another. However, all the HECM lenders in a given area are likely to charge about the same closing costs on any specific loan. The total of all these costs generally ranges from about $2,000 to $3,000, although they are substantially higher in some areas.

A lender may require a cash application fee to pay for an appraisal and minimal credit check. Some will refund this fee to you. Others will apply it to your origination fee or third-party closing costs.

Mortgage Insurance Premium (MIP)

HECM insurance is financed by an MIP charged on all HECM loans. The cost, which may be financed with the loan, is charged in two parts:

• 2% of your home’s value (or 2% of HUD’s home value limit, whichever is less) is charged “upfront” at closing; and

• 0.5% is added to the interest rate charged on your rising loan balance.

HECM insurance guarantees that you will receive your promised loan advances, and not have to repay the loan for as long as you live in your home, no matter:

• how long you live there;

• what happens to your home’s value; and

• what happens to the lender from whom you got your loan.

The MIP also guarantees that your total debt can never be greater than the value of your home if it is sold to repay the loan.

It makes it possible for you to keep getting your monthly loan advances or growing credit line as promised even if:

• you live much longer than others your age;

• your home’s value grows very little, not at all, or declines; or

            • your loan balance catches up to and then is limited by the value of your home.

As a government program, HECM insurance does not generate a profit. The premiums paid by all borrowers are used to continue making loan advances to and limit the amount owed by the borrowers who live the longest and whose home values grow the least or decline.

The MIP is a substantial cost. The upfront portion on a $250,000 home, for example, would be $5,000. The cost of the 0.5% added to the interest rate depends on how much money you borrow, when you borrow it, and the interest rate on the loan. For a 75-year-old borrower living in a $250,000 home, who borrows one-half of the maximum loan amount at closing at an expected rate of 7%, the cost during her remaining life expectancy (12 years) would be about $7,900.

Servicing Fee

“Servicing” a loan means everything lenders or their agents do after closing it, including making or changing loan advances at your request, transferring insurance premiums to FHA, sending

account statements, paying property taxes and insurance from the loan at your request, and monitoring your compliance with your obligations under the loan agreement.

FHA limits the servicing fee to $30 per month if the loan has an annually adjustable interest rate, and to $35 if the rate is monthly adjustable (see below). But the amount of this fee can vary from

lender to lender within these limits. So it can pay to shop around. To finance this fee with the loan, a lender is required to “set aside” a prescribed dollar amount* and deduct it from your

available loan funds. But this total amount is not added to your loan balance. Instead, the monthly fee is added to your loan balance each month.

The total amount actually paid in servicing costs depends on the amount of the monthly charge plus how long it is paid. For a 75-year-old borrower who pays $35 per month for her remaining life expectancy (12 years), that cost would be $5,040.

On traditional “forward” mortgages, the cost of servicing is added to the interest rate. So you may not have seen this fee before—but you’ve paid it.

Monthly Advances Only, HECM Repayment ,Debt Limit, HECM Costs

Monthly Advances Only

Table 2 also shows that you get the largest possible monthly advance if you do not take a lump sum or a credit line. But putting all of your loan funds into a monthly advance reduces your financial flexibility, especially if you have little in savings. Remember, monthly advances are

fixed, so their purchasing power decreases with inflation. Adding a growing credit line to a monthly advance not only gives you a hedge against rising prices. It also provides readily available cash for unexpected expenses. So if you are interested in a monthly advance, it’s a good idea to consider adding a credit line as well.

On the other hand, for a $20 fee, you could change your payment plan at any time. For example, you could add a credit line to a monthly advance, although this would reduce the amount of the

monthly advance. You could also convert part or all of a credit line into a monthly advance.

HECM Repayment

As with most reverse mortgages, you must repay a HECM loan in full when the last surviving borrower dies or sells the home. It also may become due and payable if:

• you allow the property to deteriorate, except for reasonable wear and tear, and you fail to correct the problem; or

• all borrowers permanently move to a new principal residence; or

• due to physical or mental illness, the last surviving borrower fails to live in the home for 12 months in a row; or

• you fail to pay property taxes or hazard insurance, or violate any other borrower

obligation.

Debt Limit

If your rising HECM loan balance ever grows to equal the value of your home, then your total debt is limited by the value of your home if the home is sold to repay the loan. But if the home is not sold and the loan is repaid with other funds, then you or your estate would owe the full

loan balance—even if it is greater than your home’s value. Your heirs would not have any personal liability for repaying the loan.

HECM Costs

Almost all the costs of a HECM can be “financed,” that is, they can be paid from the proceeds of the loan. Financing the costs reduces the net loan amount available to you, but it also reduces your cash, out-of-pocket cost. The itemized costs of a HECM loan include an origination

fee, third-party closing costs, a mortgage insurance premium, a servicing fee, and interest.

Creditline Growth, Plus a Monthly Advance,

Creditline Growth

Perhaps the most attractive HECM feature is that its creditline grows larger overtime. This means that the amount of cash available to you increases until you  withdraw all of it.

For example, if the creditline equals $100,000 and you withdraw $20,000, you would have $80,000 left. But if your next withdrawal is one year later, you would then have more than $80,000 left because the $80,000 grows larger by the same total rate being charged on your loan

balance. If that rate were to equal 6% per year, for example, your available creditline one year later would be $84,800 (6% x $80,000 = $4,800).

So a growing HECM creditline can give you a lot more total cash than a creditline that does not grow. The HECM creditline keeps growing larger every month for as long as you have any

credit left; that is, until you withdraw all your remaining cash.* The calculator at

www.aarp.org/revmort (click on “Reverse Mortgage Calculator”) estimates how much cash would remain in a HECM versus a non-growing creditline. HECM creditline growth means you should not even think about taking a large lump sum of cash from a HECM and putting it

into savings or an investment. If you did that, you would be charged interest on the full amount of the HECM lump sum. But if you leave the money in the creditline, not only would you avoid

substantial interest charges. You would also end up with more available cash, as your creditline increases at a greater rate than a savings account or safe investments are likely to increase.

Plus a Monthly Advance

The HECM program lets you combine a lump sum, a creditline, or both with a monthly advance. A monthly loan advance does not increase or decrease in dollar amount over time. So it will buy

less in the future as prices increase with inflation. 

You can choose to have monthly HECM advances paid to you for:

• a specific number of years that you select (a “term” plan); or

• as long as you live in your home (a “tenure” plan).

A term plan gives you larger monthly advances than a tenure plan does. The shorter the term, the greater the advances can be. But the advances only run for a specific period of time. You do not have to repay the loan when the term ends, but you no longer receive monthly advances

past the end of the term you select.

Table 2 shows some of the combinations that could be selected by a 75-year-old female borrower living in a $250,000 home with a loan at 7% expected interest.

For example, if this borrower selects a $25,000 lump sum and a $50,000 creditline, she also could get any one of the following: a monthly advance of $444 for as long as she lives in her home, $557 each month for 15 years, $713 each month for 10 years, or $1,204 monthly for 5

years. Table 2 makes two things clear:

• if you take more money as a lump sum or creditline, the monthly advances are smaller; and

• if you select a shorter term of monthly advances, the amount of each advance is greater.

HECM Benefits, Loan Amounts, Lump Sums & Creditlines

HECM Benefits

The HECM program provides the widest array of cash advance choices. You can take your entire loan as a:

• single lump sum of cash; or

• “creditline” account of a specific dollar amount that you control, that is, you decide when to make a cash withdrawal from this account, and how much cash to withdraw; or as a

• monthly cash advance for a specific period of time, or for as long as you live in your home.

In addition, you can choose any combination of these options, and change your cash advance choices at any future time.

Loan Amounts

The amount of cash you can get depends on your age, current interest rates, and your home’s value. The older you are, the more cash you can get. If there is more than one owner, the age of the youngest is the one that counts. The lower the interest rate, the greater your loan amount will be.

 In general, the greater your home’s appraised value, the more money you can get. However, the value is subject to a limit of $417,000 in November of 2008, and this limit is subject to change every January. If your home is worth more than $417,000, you are still eligible for an HECM loan, but the amount of money you can get is based on $417,000, not on your home’s actual value. For example, if your home is valued at $500,000, then the amount you can borrow is the same as it would be if your home were valued at $417,000. (The $417,000 limit does not apply to parts of Hawaii, which have higher limits. But it does apply to the other 49 states plus the

District of Columbia and Puerto Rico.)

Lump Sums & Creditlines

Table 1 shows how much you could get from a HECM if you take it all as a single lump sum of cash or as a creditline, if: • the value of your home is $150,000, $250,000, or $350,000;

• the expected interest rate on the loan is 6%, 7%, or 8%;

• the age of the youngest borrower at closing is 65, 70, 75, 80, 85, or 90; and

• the servicing fee is $35, closing costs are $2,500, and the origination fee is the maximum allowed by HUD

(see p. 13).

You can divide the amounts in Table 1 between a lump sum and a creditline. For example, a 75-year-old borrower living in a $250,000 home getting a HECM loan at 7% expected interest could select:

• a lump sum or creditline of $135,484; or

• any combination of lump sum and creditline that totals $135,484, for example, a lump sum of $30,000 and acreditline of $105,484.

For an estimate of HECM cash benefits based on your age, home value, and current interest rates, go to the online calculator at www.aarp.org/revmort (click on “Reverse Mortgage Calculator”).

The Home Equity Conversion Mortgage (HECM)

The HECM is the only reverse mortgage insured by the federal government. HECM loans are insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of

Housing and Urban Development (HUD). The FHA tells HECM lenders how much they can lend you, based on your age and home value. The HECM program limits your loan costs, and the FHAguarantees that lenders will meet their obligations.

HECMs Versus Other Reverses

HECM loans generally provide the largest loan advances of any reverse mortgage. HECMs also give you the most choices in how the loan is paid to you, and you can use the money for any purpose. Although they can be costly, HECMs are generally less expensive than privately

insured reverse mortgages. These other reverse mortgages may have smaller fees, but they generally have higher interest rates. On the whole, HECMs are likely to cost less in most cases. A notable exception may be the reverse mortgages now being developed by some credit

unions. The only reverse mortgages that always cost the least are the ones offered by state or local governments. These loans typically must be used for one specific purpose only; for example, to repair your home or to pay your property taxes. They also generally are available only to homeowners with low to moderate incomes. Part 4 of this booklet discusses reverse mortgages other than HECMs.

HECM Eligibility

HECM loans are available in all 50 states, the District of Columbia, and Puerto Rico.

To be eligible for a HECM loan:

• You, and any other owners of your home, must be aged 62 or over, live in your home as a principal residence, and not be delinquent on any federal debt.

• Your home must be a single-family residence in a 1- to 4-unit dwelling, or part of a planned unit development (PUD) or a HUD-approved condominium. Some manufactured

homes are eligible, but most mobile homes are not. Cooperatives are expected to become eligible by the end of 2008.

• Your home must meet HUD’s minimum property standards, but you can use the

HECM to pay for repairs that may be required.

• You must discuss the program with a counselor from a HUD-approved counseling agency; information on HECM counseling appears in Part 5 of this booklet.

Canceling the Deal, Loan Types & Costs, Total Annual Loan Cost

Canceling the Deal

After closing a reverse mortgage, you have three extra days to reconsider your decision. If for any reason you decide you do not want the loan, you can cancel it. But you must do this within three business days after closing. “Business day” includes Saturdays, but not Sundays or legal public holidays.

If you decide to use this “right of rescission,” you must do so in writing, using the form provided by the lender at closing, or by letter, fax, or telegram. It must be hand delivered, mailed, faxed,

or filed with a telegraph company before midnight of the third business day. You cannot rescind orally by telephone or in person. It must be written.

Loan Types & Costs

The most well-known and widely available reverse mortgage is the Home Equity Conversion Mortgage (HECM). This loan is discussed in detail in Part 3. Other types of reverse mortgages and alternatives to these loans are discussed in Part 4. Loan costs can vary by a lot from one

type of reverse mortgage to another. Not all reverse mortgages include the same types of loan costs. As a result, the true, total cost of reverse mortgages can be difficult to understand and compare. That is why federal Truth-in-Lending law requires lenders to disclose a “Total Annual Loan Cost” for these loans.

Total Annual Loan Cost

The Total Annual Loan Cost (TALC) combines all of a reverse mortgage’s costs into a single annual average rate. TALC disclosures can be useful when comparing one type of reverse mortgage to another. But they also show that the true, total cost of an individual reverse mortgage loan can vary by a lot and can end up being much more—or less—expensive than you

might imagine. TALC disclosures reveal that reverse mortgages generally are most costly when

you live in your home only a few years after closing the loan. Short-term TALC rates are very high because the start-up costs are usually a very large part of the total amount that you owe in the early years of the loan.

However, as your loan balance grows larger over time, the start-up costs become a smaller part of your debt. As these costs are spread out over more and more years, the TALC rate declines.

If the loan’s growing balance catches up to the home’s value, your debt is then generally limited by that value. This makes the true cost of the loan decrease at a faster rate. So the longer you live in your home, or the less its value grows, the less expensive your loan is likely to be. Some shortcomings of the TALC disclosure and a more complete way to measure reverse mortgage costs and benefits are discussed in Part 3. 


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Debt Limit, Repayment

Debt Limit

The debt you owe on a reverse mortgage equals all the loan advances you receive (including any used to finance loan costs or to pay off prior debt), plus all the interest that is added to your loan balance.

If that amount is less than your home is worth when you pay back the loan, then you (or your estate) keep whatever amount is left over.

But if your rising loan balance ever grows to equal the value of your home, then your total debt is generally limited by the value of your home. Put another way, you generally cannot owe more than what your home is worth at the time you repay the loan.

This overall cap on your loan balance is called a “non-recourse” limit. It means that the lender, when seeking repayment of your loan, generally does not have legal recourse to anything other than your home’s value and cannot seek repayment from your heirs. (See Part 3 for an exception to this limit on federally insured reverse mortgages.)

Repayment

All reverse mortgages become due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home. (Typically, a “permanent move” means that neither you nor any other co-borrower has lived in your home for one continuous year.)

Reverse mortgage lenders can also require repayment at any time if you fail to:

• pay your property taxes or special assessments;

• maintain and repair your home; or

• keep your home insured.

These are fairly standard “conditions of default” on any mortgage. On a reverse mortgage, however, lenders generally have the option to pay for these expenses by reducing your loan advances, and using the difference to pay these obligations. This is only an option, however, if you have not already used up all of your available loan funds.

Other default conditions could include:

• your declaration of bankruptcy;

• your donation or abandonment of your home;

• your perpetration of fraud or misrepresentation; or

• eminent domain or condemnation proceedings involving your home.

A reverse mortgage may also include “acceleration” clauses that make it due and payable. Generally, these relate to changes that could affect the security of the loan for the lender. For example:

• renting out part or all of your home;

• adding a new owner to your home’s title;

• changing your home’s zoning classification; or

• taking out new debt against your home.

You must read the loan documents carefully to make certain you understand all the conditions that can cause your loan to become due and payable.