Use Of A Reverse Mortgage To Pay For Home Care Service

By John Krajsa
AFC Reverse Mortgage

A fairly common use of reverse mortgages is to provide the funds for in home care. Although the money from a reverse mortgage cannot pay for these services indefinitely, reverse mortgage funds when combined with other assets can extend the period of time that such services are available.

In a typical situation the homeowners working with family members get to the point that family and friends can no longer provide the necessary services and an evaluation is made of the available assets. When staying in the home as long as possible is the goal, sale of the home to raise funds is not an option, and consideration is given to borrowing against the home. Conventional financing is usually ruled out since the homeowners are likely not employed, may be the object of the care being obtained, and in any event, cannot qualify for conventional financing. Enter the reverse mortgage, specifically the FHA insured Home Equity Conversion Mortgage (HECM). Since no monthly mortgage payments are required, there is no income test for a reverse mortgage, and, yes, even the homeowner who is the object of the care and may be unemployed and unemployable can qualify for a reverse mortgage. So through a reverse mortgage the home can serve as an additional pot of cash along with other resources to help pay for in home care.

Some of the factors to be considered in choosing a home care service were recently addressed in an article from the National Care Planning Council. More on that next week.

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Reverse Mortgage Example

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage must always be in first position and sometimes it is not possible to do a reverse mortgage if the amount currently owed in existing mortgage debt exceeds the amount of money available from the reverse mortgage. However, where there is a first and second mortgage or home equity loan, it is possible to pay off only the first mortgage and to subordinate the second mortgage, that is, place the second mortgage behind the reverse mortgage. In a recent example the same bank held both a first and a second mortgage totaling about $240,000 but the homeowner qualified to borrow only $220,000 in a reverse mortgage. It appeared the reverse mortgage would not be possible. However, the bank agreed to accept the $220,000 and subordinate the remaining $20,000. From the bank’s perspective, they got most of their money without having to go through the expense of foreclosure. From the borrower’s perspective, they were able to stay in their home and dramatically reduce their monthly mortgage payment from over $2000 per month. It is likely that in 3 or 4 years the remaining balance will be paid off and the homeowner’s monthly mortgage payments will be completely eliminated.

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Initial Results From The NRMLA/NCOA Pilot Program

By John Krajsa
AFC Reverse Mortgage

A report at a recent National Reverse Mortgage Lenders Association (NRML) meeting in Newport Beach, CA indicated promising results from a pilot program designed to assist reverse mortgage borrowers achieve a “soft landing” should they at some point no longer be able to stay in their home even with the additional cash provided by their reverse mortgage. The idea is for reverse mortgage servicers and community agencies to work together to assist homeowners. Case managers are assigned to meet with the homeowners to see if it is possible to develop an action plan to stay in their home, and if that is not possible, to work with community agencies to help them transition out of their home. The pilot program has been continued through May and hopefully will be adopted nationally in the near future.

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NRMLA/NCOA Pilot Program

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage has been described as an “extra pot of cash” that can improve cash flow by eliminating monthly mortgage payments and/or by simply providing additional cash. The improved cash flow from a reverse mortgage can greatly increase the amount of time homeowners can afford to stay in their home. However, if at some point the homeowners can no longer pay their household expenses such as real estate taxes, homeowners’ insurance and utilities it may be necessary to sell the home. None of us, after all, know if we will be able to stay in our homes indefinitely. The National Reverse Mortgage Lenders Association (NRMLA) and the National Council on Aging (NCOA) have initiated a pilot program to assist homeowners achieve a “soft landing” when they can no longer afford to stay in their home. We’ll have more on the pilot pgrogram next time.

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HECM Saver Example

By John Krajsa
AFC Reverse Mortgage

A retired homeowner had enough income and savings for her foreseeable needs but wanted to borrow money to buy a car. Since in a HECM there are no income requirements and no mortgage payments to make, she thought a HECM might be the way to borrow the money. However, she soon learned that the financed closing costs on a traditional HECM on her $200,000 home would exceed $10,000. That amount could be justified for someone borrowing a large amount over time, but not for someone whose only use for the HECM would be to purchase a car. Enter the HECM Saver with no up front FHA insurance premium. The financed closing costs for the HECM Saver on the same house were about $6000, or forty percent less than for the traditional HECM. The lower closing costs coupled with a reasonable interest rate made the HECM saver a viable alternative and enabled her to purchase her car with a loan that requires no monthly mortgage payments.

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Reverse Mortgage Closing Costs Explained

By: John Krajsa
AFC Reverse Mortgage

If Truth in Lending Act (TILA) TALC disclosures estimate the true cost of a HECM to be reasonable as in our example last week, shouldn’t it be game, set and match to TILA, and end of discussion?  We think so.  After all, it takes only one example to disprove a generalization, and one reasonably priced HECM means they cannot possibly all be expensive.  However, we thought it might be helpful to address some HECM dollar cost issues.

Here is our example from last week, which included abbreviated TALC rate estimates as of June 17, 2010, for a Home Equity Conversion Mortgage (HECM) with youngest borrower age 76 and a home appraised at $250,000.

Available Fixed Rate Loan Amount                  $160,000
(Fixed Interest Rate 5.49%)

Available Adjustable Rate Loan Amount       $152,522
(Initial Interest Rate 2.10%*)

 

 

High Closing Costs

This week we will address the issue of high closing costs. HECM closing costs are higher than for other loans, mostly because of the FHA insurance premium.  Some state that HECM closing costs can be as much as 5% of home value – but – can we tell by looking at closing costs alone if a loan is expensive?

HECM closing costs are that portion of total cost that is front loaded, that is, accrued at the beginning of the loan. If the total cost of a loan (as determined by TILA cost estimates that include the closing costs) is reasonable, how could the timing of some of these costs make a loan expensive? In fact, front loaded costs cannot make a reasonably priced loan expensive any more than a large down payment (a front loaded cost) can make a reasonably priced car expensive.

A lower rate loan with high closing costs but low-interest charges can ultimately be far less expensive than one with no closing costs and a higher rate because low-interest charges can offset closing costs. That is why we have TILA cost estimates, so that we have a standard of cost estimation by which we can compare the cost of differently structured loans, and not make the mistake of assuming that high closing costs means expensive or that no closing costs means inexpensive.

We should note that TALC rates are higher for shorter term loans and are most reasonable when a HECM is used for its intended purpose, as a long-term solution. We should also note that, unlike a down payment for a car, HECM closing costs are accrued and are not required to be paid up front.

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Cost of a Reverse Mortgage – TILA vs. APR

By: John Krajsa
AFC Reverse Mortgage

The last few weeks we have pointed out that periodic cost, not dollar cost, is the appropriate measure of the cost of a loan and that it is impossible to evaluate loan cost looking at dollar cost alone. Truth in Lending Act (TILA) loan cost estimates such as the Annual Percentage Rate (APR) are not perfect, but since 1968 have been the starting point for and by many are considered the gold standard in loan cost analysis. TILA disclosures use periodic cost in that they estimate the true cost of a loan expressed as an annual rate. For reverse mortgages the primary TILA disclosure is the Total Annual Loan Cost or “TALC” disclosure. Unlike the APR, which estimates the cost at one point in time, TALC disclosures estimate the cost of a reverse mortgage at various points in time.

Here are abbreviated TALC rate estimates as of June 17, 2010, for a Home Equity Conversion Mortgage (HECM) with youngest borrower age 76 and a home appraised at $250,000.

Available Fixed Rate Loan Amount                       $160,000
(Fixed Interest Rate 5.49%)                           

Available Adjustable Rate Loan Amount            $152,522
(Initial Interest Rate 2.10%*)             

 

The above numbers tell us that the estimated annual cost of the fixed rate HECM would be 8.88% after two years, but would drop to 6.52% after 15 years. The estimated annual cost of the adjustable rate HECM would be 7.75% after two years, but would drop to 3.45% after 15 years, based on current rates.

The fixed rate TALC numbers are actual, since the full amount is borrowed at closing and the rate is fixed. The adjustable rate TALC numbers are based on the current rate of 2.1%, and the actual long-term adjustable rate cost may be higher or lower than estimated due to rate adjustments and additional amounts borrowed.

The above TALC rates include ALL costs, such as financed closing costs (about $12,000 for the adjustable and about $8,000 for the fixed), FHA insurance premiums and monthly service fees, and of course, interest.

We should also note that the 5.49% fixed rate is not a 15 year or 30 year rate; it is a lifetime rate. The Annual Percentage Rate (APR) for the fixed rate version of the above loan is 6.47%.

The above TILA cost estimates, in our view, do not support the view that all HECM loans are expensive, but rather estimate the true cost of the above HECM to be very reasonable and to be lowest when used for its intended purpose, as a long-term solution.

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Cost of a Reverse Mortgage – Part III

By: John Krajsa
AFC Reverse Mortgage

Last week in “Cost of a Reverse Mortgage – Part II” we attempted to demonstrate how dollar cost, standing alone, can be misleading in evaluating the cost of a loan, since a loan is really a rental transaction. You don’t buy money; you pay a fee to use it for a period of time and then return it, and the appropriate measure of the cost of a rental transaction is the periodic charge, which in a loan is the annual rate.

The Federal government in the Truth in Lending Act, passed in 1968, originally provided us with the Annual Percentage Rate (APR), and more recently has provided us with the Total Annual Loan Cost rate disclosure (TALC) for reverse mortgages. These Federal cost estimates, found in Section 226 of Regulation Z promulgated by the Federal Reserve, estimate the true cost of a loan with cost expressed as an annual rate. Unlike the APR, the TALC disclosure for reverse mortgages always includes all costs (closing costs, FHA insurance premiums, monthly service fees and, of course, interest). Also, unlike the APR disclosure which only estimates the cost of a loan at one point in time, TALC rate disclosures estimate the total annual cost of a reverse mortgage at various points in time.

Consumer advocates have praised the TALC as “. . . more complete than the Annual Percentage Rate (APR) disclosure required for other loans.” TALC disclosures generally estimate the total annual cost of a reverse mortgage to be higher in the early years and lower as time goes on, and to be lowest when the loan is used for its intended purpose, as a long-term solution. We’ll talk more about TALC rates next week.

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Cost of a Reverse Mortgage

By: John Krajsa
AFC Reverse Mortgage

There is popular analysis of FHA “Home Equity Conversion Mortgage “ (HECM) loans out there that attempts to evaluate the cost of a HECM primarily through subjective judgements about dollar cost (“high” closing costs; dollar amount of FHA insurance premiums; ‘high” ratio of closing costs to home value). This analysis tends to be dismissive of Federal cost estimates (Annual Percentage Rate and Total Annual Loan Cost rates) found in disclosures promulgated under the “Truth in Lending Act” (TILA) and Federal Reserve Regulation Z. 

The subjective analysis is dismissive of Federal cost estimates in that it concludes that all HECM loans are expensive, while not addressing the fact that Federal disclosures tend to estimate the true cost of many HECM loans to be quite reasonable, even low. It is a mystery to us how an analysis that on its face is inconsistent with and does not distinguish its conclusions from Federal cost estimates has gained credence. 

In contrast, a HUD official defended the HECM program last summer at the National Reverse Mortgage Lenders Association public policy conference in Washington by saying that these loans are not expensive loans, they are transparent loans.

In future weeks we will discuss the cost of reverse mortgages, addressing some of the issues raised by the subjective analysis while providing examples of Federal TILA cost estimates for HECM loans.

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