fha

The Differences Between a HECM and a HELOC

I previously discussed in earlier posts some of the details and considerations when a senior might be thinking of borrowing equity from their home and they have four options.

  • Refinance their home using a traditional mortgage – There will be a monthly payment
  • Do a Home Equity Line of Credit/HELOC – % only for five years then become fully amortized for remaining 10 years.   There will be a jump in the monthly payment.   “Payment shock”
  • Get a Fixed rate 2nd. Deed of Trust – Fully amortized monthly payment for 15 years.
  • Use a HECM/Home Equity Conversion Mortgage; a “reverse” mortgage.   No payments or loan term.  It is in effect as long as the borrower continues to occupy the home and/or they”pass” away.

Let’s examine the options a little bit closer.  The first three choices all require the borrower to qualify using their income and credit, plus they will have monthly mortgage payments.

Initially, the first 3 options are less expensive in closing costs, but there are risks associated with obligating oneself for a mortgage payment in the later years of their life.

If the borrower is currently employed and plans on working for many more years, then maybe the first 3 choices are ideal.  But what if you want to retire?  The mortgage payments won’t go “away”, the borrower will have to continue to make them each month.

Doing a traditional “cash-out” refinance is certainly an option to consider especially if the existing mortgage is at a high interest rate or it’s an Adjustable Rate Mortgage  ( who knows what will happen with interest rates in the future?  They will probably increase).  And of course, there is a monthly mortgage payment to be made.

Is this a particularly good option for a senior to continue to maintain an ongoing mortgage for many more years?

I will discuss the other three mortgages in my next post and each of them can be appealing depending on the borrower’s circumstances and what they are attempting to accomplish.

 

Continue Reading

What is MIP and PMI?

In my previous post I described what IMIP is in regards to Reverse mortgages and that it is one of the fees listed as a Closing Cost for all borrowers.

Let’s pick up where I left off in the earlier post.

The other benefit to paying this insurance premium, is that in the event and if for any reason the Lender who is servicing the borrower’s Line of Credit should cease to exist and or are unable to provide funds to the borrower from their Line-of-Credit, the borrower is protected, because their loan and funds in the LOC are insured by FHA.

Any money left in the borrowers account will continue to be available to them regardless of whether or not the company servicing their loan continues to exist.

The IMIP protects the borrower, their funds in the Line-of-Credit and the heirs to the estate and that’s very reassuring and beneficial to everyone who has a reverse loan and to their family.

Sometimes the consumer is confused about what MIP and PMI are and there is a difference between them.   PMI is used in conventional mortgage financing whenever a borrower will have less than 80% in equity.

This is typically seen when someone is buying a home and coming in with a small down payment.   PMI protects the Lender in the event the borrower ceases to make mortgage payments on their loan and there is a foreclosure.   PMI gives the Lender some protection by having the loan insured against this possibility.

PMI is for traditional financing and IMIP is for FHA government insured loans.

And there you have it.

Continue Reading

Reverse Loan Fees

Fees or “costs” for a reverse mortgage are identical to what the fees are for traditional real estate loans, with a couple of exceptions and I’m going to discuss one of those exceptions in this post.

I discussed this topic previously, but I thought that I would go into more detail about the IMIP that is always charged on FHA loans and just what it is, because it is the most expensive but important fee that is charged on all reverse mortgages.

Reverse loans never have a required mortgage payment and there is no loan term to be concerned about, but the interest that is owed each month on it will compound over the life of the loan and one of the important purposes of the Initial Mortgage Insurance Premium / IMIP is to guarantee that no matter how much is owed when the loan becomes due  ( the death of the last borrower and or the estate selling the home), they can never owe more than the present value of the property.

In other words, if the loan is larger than what the property is worth, the IMIP will pay the difference, not the borrower or their heirs.   They are completely protected and not liable for the repayment of any funds that exceed the current value of the property.

This is referred to as a “Non-Recourse” mortgage.

 

 

Continue Reading

Reverse Loans for Million Dollar Properties

There are actually two totally different reverse mortgages that are available for seniors to use when they are considering using a Reverse Mortgage to pay off an existing mortgage or simply want additional funds.

Not too many consumers know about the optional “Jumbo” reverse loan that will enable them to receive more of their equity than they would if they used the FHA HECM program, plus it’s less expensive as well.

The FHA Home Equity Conversion Mortgage has a ceiling on the appraised value of a property and it is referred to as the HUD Lending Limit.   Originally this Limit was calculated on a national basis per county, so it varied in the amount of allowable appraised value of a property, county by county with the west coast having the highest limits.

Several years ago HUD eliminated these unfair limits and issued one single amount for the entire country which at this time is $636,150 but I can recall when it was only $362,790 and lower.

It’s considerably higher now, but keep in mind that the actual amount of the reverse loan will use a smaller percentage of the appraised value of the property or the HUD Lending Limit,  ( Whichever is less) than a Conventional loan would use and most often ( Depending upon the age of the borrower) they might receive between 40-70% of the appraised value/Hud Lending Limit.

But if their property is worth 1.1 MM plus, the value will be capped at the HUD Lending Limit and they will not have any of the remaining equity in their property accessible for their use.

This is where the Jumbo Reverse Loan becomes another option, unlocking the rest of the equity in the property to the borrower and enabling them to draw out more money from their home then they could receive under the HECM FHA loan.

I will give the details about this loan in my next post.

Continue Reading

Reverse Loans and Call Centers

This next section of my article cautions the prospective borrower on how to locate information about Reverse loans and what to avoid.

Part V

The best option is to not “shop” around on the Internet or call any of those “800” phone numbers, but to meet in person an experienced and qualified Reverse Loan Consultant who will prepare a personalized proposal and assist you by providing various options to achieve a satisfactory solution for you.

If they are unwilling to meet with you personally, avoid them and do not provide any personal information, setting yourself up for relentless, endless and annoying sales calls.

It is very typical for companies to employ sales people who are not licensed or experienced in the mortgage industry to answer incoming calls from ads in a Call Center.

They will never personally meet with the potential borrower and will mail a loan application package to them without previously providing a proposal or explaining how the loan works and expect them to sign it correctly and return all the necessary documentation that is needed to process the loan.

This is unprofessional and lazy.

And HUD and FHA require a potential borrower to complete telephone counseling with a HUD certified counseling agency before they can apply for the mortgage.

And it is very, very confusing and overwhelming for the individual that was only seeking information about Reverse loans and is now bombarded with phone calls from sales people.

Be smart and ask your Bank, CPA, Realtor or Estate Planning attorney if they can refer you to a licensed and professional loan consultant.

And consider taking advantage of telephone counseling with a HUD approved agency who will help you to understand the loan without and potential for personal gain or commitment to apply for it.

 

Continue Reading