Video of Dr. Pfau and Jamie talking about reverse mortgages
Academic retirement research with practical application presented by Wade Pfau, Ph.D., CFA & the Retirement and Financial Planning teams at McLean Asset Management.
Net Available Line of Credit or Tenure Payment for a Variable Rate Loan.
Market research that provides thought leadership, analysis and guidance about technologies and services that enable boomers and seniors to remain longer in their home of choice.
The Social Security Administration now has a calculator that lets you estimate your retirement benefit by accessing your actual earnings record through a secure interface.
The National Association of Area Agencies on Aging’s primary mission is to build the capacity of our members so they can help older adults and people with disabilities live with dignity and choices in their homes and communities for as long as possible.
This handbook provides updated instructions to approved mortgagees and to HUD Field Office personnel regarding the processing and servicing of a Home Equity Conversion Mortgage (HECM).
The 3in4 Need More campaign a national awareness campaign to educate Americans about the need to form a long term care plan and which products, services and options could be part of that plan. The key message is “Health Insurance Isn’t Enough; 3in4 Need More.” And who better to raise this awareness and communicate this message than agents, financial advisors, insurance carriers and planners?
Adjustable Rate HECM
An option selected by a homeowner. The index rate can change either monthly or annually. HECM adjustable-rate loans can be indexed to either the Treasury (CMT) rate or the London Interbank Offered Rate (LIBOR). A given loan must use either Treasury or LIBOR for both the Initial and the Expected Rates. Some lenders offer a monthly adjusting HECM with a 5% lifetime cap increase. The annually adjusting HECM uses the one-year LIBOR rate as its index. It generally has a 2% cap on annual changes and a 5% lifetime cap.
The process of paying off debt with payments allotted to carrying costs (interest) and principal.
A right to receive periodic payments, usually fixed in size, for life or a term of years that is created by a contract or other legal document. The HECM Tenure Payment Option “annuitizes” a portion of the house.
The lender shall have no obligation to make further loan advances on or following the date that a petition for bankruptcy of the borrower is filed. At application, Chapter 7 or Chapter 11 Bankruptcies must be discharged or dismissed. If the credit report says that the bankruptcy was dismissed or discharged over a year ago, no additional documents are required. If it was dismissed or discharged less than a year ago or if the credit report does not show a dismissal, a court order signed by the judge or a credit supplement evidencing the discharge/dismissal may be submitted as proof of the discharge or dismissal. Chapter 13 may pay the bankruptcy off at the closing or continue with the bankruptcy and the reverse mortgage. The borrower still has to pay off any liens against the property and any federal debt. The borrower will need permission from the court to do so.
An upper limit on the interest rate that applies to a loan, e.g. an adjustable rate mortgage.
Combination Payment Option
Selecting one or more payment options to be used simultaneously.
Cooperatives were authorized by Congress in 2008, but the implementing regulations have not been issued. Therefore, a HECM cannot be placed on a cooperative property at present.
The day when access to remaining line of credit is allowed.
Delinquent Federal Debt
Outstanding Federal debt is acceptable if the borrower has a payment agreement and is making payments as agreed.
The interest assessed on HECM loan balance that includes Mortgage Insurance Premium.
Eligible Non-Borrowing Spouse
A spouse, declared at closing, who will be eligible for a deferral period should the borrower leave the home permanently. Refer to most recent Mortgagee Letters for NBS treatment for loans originated before August 4, 2014.
Expected Average Rate
HECM Credit Determinant Rate. The Expected Rate is fixed for the life of the loan and is used for any future payment plan change calculations. Currently the Expected Rate is the 10-year LIBOR swap rate. It is never used to calculate accrued interest once the loan has closed. Rather, this rate is meant to be a predictor of the rates that could be charged over the life of the loan. The higher the Expected Rate, the less money is available at closing. For the purposes of calculating the Principal Limit, the Principal Limit Factor for all HECMs has a floor of 3.0%, regardless of whether the loan has a fixed or adjustable rate. The HECM has a 120-day rate lock feature such that the swap rate used is the better of the one at application or at closing. The initial credit capacity is much more sensitive to changes in Expected Average Rate than increasing age. For those 90 and above, the same PLF factors are used. http://www.federalreserve.gov/releases/h15/update/
In the event of lender default, the loan will be assigned to HUD, which will continue to make payments to the borrower based on the original terms of the loan. A HECM is a “non-recourse” loan, which means that a borrower can never owe more than the value of the property at the time the loan is repaid.
FHA Lending Limit
In HECM lending, it is $679,650. Any value in excess is not considered in Principal Limit calculations.
Fixed Rate HECM
An option selected by homeowner. The note rate will not change during the loan life but the client will not have access to further credit beyond sum drawn at closing. The Expected Rate and Note Rate are identical in fixed rate loans.
Home Equity Conversion Mortgage: FHA-insured reverse mortgage with an open-ended term.
HECM for Purchase
An option for purchasing a new principal residence using reverse mortgage financing for a portion of the purchase price.
HECM Line of Credit
A revolving line of credit that grows in borrowing power as a dependent variable of the Ongoing Principal Limit.
Home Equity Line of Credit. This loan requires monthly payments on the interest, or interest and principal, and has a closed term.
An index that is based off the interest rate of a financial instrument or basket of financial instruments. An interest rate index serves as a benchmark used to calculate the interest rate charged on financial products, such as mortgages.
Ineligible Non-Borrowing Spouse
At application, the mortgagee (lender) must identify any current Non-Borrowing Spouse and must determine if the Non-Borrowing Spouse is currently eligible or ineligible for a Deferral Period. This determination is a factual determination and cannot be changed or waived by any election. A Non-Borrowing Spouse that meets the FHA qualifying attributes requirements at application for a Deferral Period is an Eligible Non-Borrowing Spouse and may not elect to be ineligible. Similarly, a Non-Borrowing Spouse that is ineligible at application because he or she does not satisfy the requirements for a Deferral Period may not elect to be eligible.
Initial Disbursement Level
If a homeowner requires more than 60% Year 1, upfront MIP is 2.0% of Maximum Claim Amount. If less than 60% Year 1, upfront MIP is 2.0% of Maximum Claim Amount.
Initial Net Principal Limit
Remainder of available credit once set asides (if any) and financed closing costs are deducted from Original Principal Limit.
Initial Principal Limit
Funds available at closing based on Age, Expected Rate, and Maximum Claim Amount.
The beginning index + margin at loan’s inception. Also known as the Note Rate.
Interest Rate Caps
For HECM Annually Adjusting, it is 5%. For HECM Monthly Adjusting, it is 10%.
Jumbo Reverse Mortgage
A proprietary reverse mortgage, not FHA insured, that may be used when FHA guidelines are not suitable, or in which a client’s property vastly exceeds the FHA lending limit. These loans usually have higher interest rates, lower loan to value ratios, and restrictions requiring full draws, no line of credit growth, and no revolving access to line of credit once paid down.
Life Expectancy Set Asides, either in full or in part, for future tax and insurance payments if client is deemed by underwriter to be deficient in either willingness or capacity to meet homeowner obligations.
The London Interbank Offered Rate is the average interest rate estimated by leading banks in London that the average leading bank would be charged if borrowing from other banks. The 1-month Libor commonly is used as an index for the monthly Adjustable Rate HECM.
Libor 10-Year Swap Rate
Currently used to calculate “Expected Average Rate” in HECM loans.
The right to live in the home, while one or more others own the right to sell the property and to take full possession when the life-estate holder dies or leaves (the “remainder interest”). A HECM can be done on a property where the borrower has only a life estate interest, as long as the owners of the remainder interest agree.
A living trust is a legal entity created during a person’s lifetime, to hold the ownership of money and real property, often for estate planning purposes. Property held in a living trust may be eligible if the beneficiaries are eligible HECM borrowers.
Ratio of loan amount to home value.
The lender’s margin is controlled by the lenders and their investors and may vary from lender to lender and from week to week until loan closing. However, once it is set for a particular loan, it never changes throughout the life of the loan. The margin is constant throughout the life of the mortgage, while the index value is variable, if a HECM adjustable loan is chosen. For example, the index might be the 1-month Libor, which varies according to market conditions, and the margin might be 2.25%. If that Libor rate were 1% and the margin 2.25%, the interest rate would be 3.25%.
Maximum Claim Amount
Appraised value of home, or FHA lending limit, whichever is less.
Maximum Fully Indexed Rate
For the Adjustable HECM, the Index + Margin + Maximum Periodic Adjustments. The rates will vary throughout the life of the loan but will never exceed the Maximum.
Modified Tenure Payment
Borrower may combine a line of credit with monthly payments for as long as one borrower remains in the home (tenure option).
Modified Term Payment
Borrower may combine a line of credit with monthly payments for fixed number of months (term option).
A loan with a growing loan balance. Carrying costs are added to loan balance when no payments are made in any given month. In a HECM, this would be draws, interest, monthly MIP, and any fees set aside for servicing or other purposes.
No deficiency judgment may be taken against the borrower or his estate should the loan balance exceed the market value of the property.
Index + Margin in Adjustable HECM loans in any given month.
Ongoing Mortgage Insurance Premium (MIP)
Calculated on the current loan balance and added on to the loan balance every month. It is typically an advance from the borrower’s available funds. This fee, along with the Upfront Mortgage Insurance Premium, provides insurance through FHA to protect both the borrower and lender should the loan balance exceed the home value. Today the rate is 0.5%. The money becomes part of FHA’s mortgage insurance fund. This fund is used to pay claims to lenders if the borrower’s loan balance exceeds their home value at the time the loan is paid off. When the loan balance reaches 98% of the Maximum Claim Amount, the lender may assign the loan to HUD and be paid the full loan balance from the mortgage insurance fund. This protection makes the HECM possible for lenders, who now have minimal risk of loss, regardless of what happens to the borrower’s home value.
Ongoing Principal Limit
Growing credit capacity during HECM loan life tied to EFFECTIVE RATE.
The origination fee compensates the lender for the activities involved in setting up the loan. Although origination fees in the forward mortgage world are typically 1% or less, the origination fee for HECMs is permitted by FHA to be as much as 2% of the first 200,000 of Maximum Claim Amount plus 1% of additional home value BUT not more than $6,000 total. Lenders may always charge at least $2,500 on lower value homes and lenders may offer to waive or reduce origination fees. This fee can be negotiated.
Principal Limit Factor
Table of values used by FHA to determine how much the Initial Principal Limit will be based on Age and Expected Rate. Applied to Maximum Claim Amount.
If property does not meet Minimum Property Standards, the borrower must complete required repairs. If the cost of the repairs is less than 15% of the Maximum Claim Amount, the borrower may complete the work after closing. In these cases, the lender attaches a “repair rider” to the Loan Agreement, certifying that the work will be completed as required. A repair set-aside of 150% of the estimated cost of the repairs is established, and this credit is not available for any other purpose until the repairs are complete and approved. Once repairs have been inspected, and contractors paid, any remaining amount will convert to available credit.
Service Fee Set-Aside (SFSA)
If a servicing fee is charged, the lender sets aside from the borrower’s principal limit the present value of the total monthly servicing fees from closing until the borrower would reach age 100, taking into account the growth of the principal limit. This reduces the funds available to the borrower at closing, typically by $4,000–$6,000. This amount is not debt, so it is NOT added to the loan balance at closing. Instead, it is set aside or held in reserve so that it cannot be spent in other ways. The loan servicer deducts its monthly fee from this credit amount and adds it to the loan balance each month during the life of the loan. Since few borrowers live to age 100, the total amount set aside by the HECM program typically inflates the actual total amount likely to be charged on most HECMs during the life of the loan. If the loan is paid off early, the remaining amount in the SFSA is like the line of credit; it reverts to equity. In other words, the set-aside is money that has not been borrowed. There is no refund of the SFSA because it was never charged to the borrower in the first place. Most new HECM loans do not require a service fee set-aside.
The entity that administers the loan after closing, maintaining records and issuing statements.
Set-asides are not costs, because they do not immediately become part of the loan balance. Instead, they represent money reserved for a future purpose. The amounts will be added to the loan balance only when the funds are drawn.
Total Annual Loan Cost. The TALC rate is an annual percentage cost of a reverse mortgage. Different than (APR), which takes into account only the finance charges in a credit transaction, the TALC rate considers all costs. In projecting the total cost of credit, TALC rates are based on different loan periods such as two years, a period equal to the youngest consumer’s life expectancy, and a period equal to 1.4 times the youngest consumer’s life expectancy. TALC rates are based on assumed annual house appreciation rates of 0%, 4%, and 8%. The projected total cost of credit must reflect all costs and charges to the consumer, including the costs of any annuity that the consumer purchases as part of the reverse mortgage transaction. In general, the longer the borrower remains in the house, the lower the total annual loan cost will be.
Borrower receives monthly payments from the lender for as long as the home is occupied as the principal residence. Although the loan balance is scheduled to equal the principal limit when the youngest borrower reaches age 100, payments continue for as long as the borrower lives in the home as a principal residence, no matter how long that is. In effect, the homeowner has used his home, rather than his cash, to create an annuity, but an annuity that is not portable to a new residence. If the lender is late sending the payment, the borrower is owed a late fee.
Borrower receives monthly payments from the lender for a period of months selected by the borrower. If the lender is late making the payment, the borrower is owed a late fee.
Time Value of Money
The concept that the value of a dollar to be received in future is less than the value of a dollar on hand today. One reason is that money received today can be invested thus generating more money.
Upfront Mortgage Insurance Premium (MIP) Calculated on Maximum Claim Amount and added to loan balance, unless paid outside of closing. The UFMIP is 2%. This fee, along with the Ongoing Mortgage Insurance Premium, provides insurance through FHA to protect both the borrower and lender should the loan balance exceed the home value.