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Should my loved ones get a reverse mortgage?

Should my loved ones get a reverse mortgage?

What Every Family Should Know About Reverse Mortgages

The older we get, the more life becomes about having difficult conversations-about health, finances, end-of-life decisions, and the legacy to be left for future generations.

Often, one of these emotional discussions is about the family home. Will mom and dad be able to continue living there? Do they have enough saved for a comfortable, safe and secure retirement? What is the strategy for financing long-term care? Can you afford to help out without impacting your own finances?

Home equity is the largest store of savings for most households entering retirement, yet it’s typically an underutilized retirement asset. So what’s the best

way to leverage home equity to be better financially prepared in retirement?

We created this guide to help families better understand how reverse mortgages work, and the role they can play in smart financial planning strategies for not only older homeowners, but also their adult children. It also addresses common questions and concerns that adult children have as they assist their parents in the decision-making process.

Understanding the Basics

What is a reverse mortgage?

It’s a versatile home equity loan created specifically for older homeowners and homebuyers, allowing them to turn part of the equity they’ve built up in their home into funds they can use as they choose.

A reverse mortgage is a lot like a mortgage you’d get from a bank or credit union. However there are key differences that make reverse mortgages better suited for people who are retired or looking ahead to retirement.

One major advantage is its flexible repayment feature, which allows the borrower to make any size monthly mortgage payment, or even none at all.

Most reverse mortgages are FHA-insured Home Equity Conversion Mortgages (HECMs). The typical reverse mortgage candidate is at least 62 years old, has 50% or greater equity in their home, and wants to:

• Reduce or eliminate monthly mortgage payments*

• Consolidate other debt, such as credit card balances

• Make home improvements

• Establish a line of credit for unplanned expenses

• Creating a line of credit to defer pulling from other investments accounts

With a HECM, the borrower can choose to take their funds as a line of credit, lump sum, monthly advances, or a combination of these.

In addition to HECMs, proprietary reverse mortgages may be available to accommodate a broader array of borrowers with loan amounts up to $4 million. Please reach out to your Mutual of Omaha Mortgage loan specialist for details.

What are the costs involved?

Except for a fee for required reverse mortgage counseling, most of the fees can be financed with the loan, so out-of-pocket costs are minimal. Or, the borrower can choose to pay them out of pocket.

The costs are added to the loan amount (“principal”) and paid aIong with the accrued interest when the loan becomes due. Depending on the loan option chosen, there may be an origination fee, closing costs, a mortgage insurance premium (required for HECM loans) and a monthly servicing fee.

*Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees. If your heirs want to keep the home after your death, they will have to repay either the full loan balance or 95% of the home’s appraised value, whichever is less.

How is a reverse mortgage loan repaid?

It must be repaid when the last surviving borrower sells the home, moves out, or passes away. Typically, the home is sold to repay the loan, and the homeowner or their heirs keep any remaining equity. If the homeowner or family members wish to keep the property, the loan can be repaid using a traditional mortgage or other funds.

If the loan balance exceeds the home’s value when my parents pass am I responsible?

No. Reverse mortgages have a non-recourse feature: Neither the borrower nor their heirs will have to pay more than the loan balance or the appraised value of the home at the time the loan is repaid, whichever is less.

When the last surviving homeowner passes away, the

loan must be repaid. If you are the heir, you can satisfy the debt by either selling the home, or purchasing the property for 95 percent of its appraised value. If the home depreciates in value to the point that the balance owed exceeds the value of the home, you will not be responsible for repaying more than what the home is worth at the time the loan is repaid.

What are the loan obligations?

It is extremely important to Mutual Of Omaha and the entire reverse mortgage industry that borrowers and their families understand their obligations. As with any mortgage, the borrower has certain obligations under the loan:

1. Keep the home in good condition

2. Keep current with property taxes and insurance

3. And with a reverse mortgage, the borrower(s) must live in the home as the primary residence (there is an annual certification)

Failure to meet these loan obligations can lead to the loan becoming due and payable.

The details of the borrower obligations are discussed during an independent counseling session, which is required before your application can be processed. The counselor’s responsibility is to certify that the prospective borrower understands the loan terms and conditions. At the conclusion of a successful session, the counselor will issue a counseling certificate. Without the certificate, the lender cannot move forward with the loan application.

Exploring Your Family’s Options

Are there alternatives to reverse mortgages?

Yes, many families look at refinancing with a traditional mortgage loan or a Home Equity Line of Credit (HELOC). However, for older homeowners, in many

cases a reverse mortgage is a more suitable option. That’s because it’s designed to be sustainable for those on a fixed or reduced income-be it now, or in the future.

Which financing option is right for your family?

What if there’s an existing mortgage on the home, or an outstanding home equity loan?

The homeowner may still be eligible. In fact, many people refinance their existing mortgage(s) with a reverse mortgage in order to substantially reduce their monthly bills. (As with any mortgage, the borrower must continue to keep current with property taxes, insurance and maintenance as part of their loan obligations). Proceeds from the reverse mortgage would first be used to pay off any existing mortgages(s).

Will the bank own the home?

No. This is the #1 misconception. In fact, the borrower holds the title to the home.

As with any mortgage, the borrower must meet their loan obligations, keeping current with property taxes, insurance and maintenance. Just like a traditional mortgage, failure to meet loan obligations could result in property foreclosure. That is why we clearly define the terms and set the borrower’s expectations.

Isn’t a reverse mortgage a loan of last resort?

Recent product advances have made reverse mortgages more attractive, and academic researchers and financial advisors have developed effective strategies for using a reverse mortgage as part of an overall retirement plan. Just as there are loans specifically for students and for first-time homebuyers, a reverse mortgage is another type of “life stage” loan.

Increased longevity and rising healthcare costs have also changed the retirement landscape. The ability to access home equity through a reverse mortgage

Common Family Concerns WILL THE BANK OWN THE HOME?

No. This is the #1 misconception. In fact, the borrower holds the title to the home.

can provide tremendous peace of mind for families who want their older loved ones to live safely and comfortably as long as possible.

What about our inheritance?

Many older homeowners choose to live frugally so that they’re able to leave their house to their children. Meanwhile, adult children may want their parents to live more comfortably and not worry so much about stretching their funds to cover mortgage payments, healthcare costs, or other living expenses. That’s why it’s important to have a candid conversation about finances sooner rather than later.

Also, keep in mind that when the home is sold, once the loan is repaid any remaining equity belongs to the homeowners or their heirs.

What protections are there for borrowers and their families?

Reverse mortgages come with built-in safeguards to help ensure borrowers are making wise choices. These include:

Financial assessment

All reverse mortgage lenders are required to conduct a financial assessment to ensure the borrower has adequate cash flow to pay ongoing costs, such as property taxes and homeowners insurance, over the life of the loan. Borrowers must provide documentation, such as tax returns and bank account statements, for all sources of income.

Mandatory loan counseling by an independent, FHAapproved counselor. As part of the loan process, each potential borrower must meet with an independent, FHA-approved counselor to objectively ensure that they understand the reverse mortgage process, what it entails, the specific program’s details, and the individual terms of their loan.

Non-recourse feature

Borrowers will never owe more than the home is worth when the loan is repaid. No matter how large the loan balance, borrowers (or their heirs) will never have to pay more than the total debt or 95% of the appraised value of the home at the time the loan is repaid, whichever is less; and no assets other than the home must be used to repay the debt.

Borrowing limits

To help their home equity last as long as possible, HECM borrowers are limited in the amount of funds they can access at closing and during the first 12 months of the loan. Proprietary reverse mortgages may be structured differently. Please reach out to your Mutual of Omaha Mortgage loan specialist for details.

For homeowners age 62 and better, a HECM Line of Credit offers greater flexibility and control

For homeowners age 62 and older, an FHA-insured* Home Equity Conversion Mortgage (HECM) Line of Credit offers all the benefits of a traditional Home Equity Line of Credit (HELOC), plus some significant advantages. But unlike a traditional HELOC, with a HECM line of credit:

• There’s a flexible repayment feature: Pay as much or as little as you like each month toward principal and interest. (As with any mortgage, you must meet your loan obligations, keeping current with property related taxes, insurance and maintenance, and any homeowners association fees.)

• The lender cannot reduce or cancel your line of credit, as long as you meet your loan obligations so it’s certain to be there if and when you need it.

• The unused portion of a HECM credit line grows over time1—independent of home value-as the chart to the right shows. So, as you age, you can gain access to more funds.

• If you like, you can choose to convert the remaining line of credit into monthly installments at any time in the future.

• Its non-recourse feature means you can never owe more than the home is worth when it’s time for the balance to be repaid.

1If part of your loan is held in a line of credit upon which you may draw, then the unused portion of the line of credit will grow in size each month, The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan.

*These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency.

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These materials are designed to provide the reader with a general overview and understanding of the topic(s) presented and are not intended as a substitute for consultation with qualified legal counsel regarding the manner in which the laws, regulations, and guidelines covered may apply to a particular fact pattern or business model. No part of this presentation may be reproduced, forwarded, copied, or redistributed in any form or by any means without the prior written consent from the author. This presentation could include technical inaccuracies or typographical errors. Mutual of Omaha Mortgage, Inc., does not guarantee the accuracy of the information provided and disclaims any and all express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. This presentation should not be construed as legal advice or relied on as a sole resource for any part of the Home Equity Conversion Mortgage for Purchase program. Unauthorized reproduction, forwarding, distribution or display of this copyrighted work is subject to criminal and civil penalties under federal law.

Borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.

*The Lifestyle Home Loan is a Home Equity Conversion Mortgage for Purchase. Mutual of Omaha Mortgage, Inc. dba Mutual of Omaha Reverse Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N 1100, San Diego, CA 92108. Alabama Consumer Credit License 22123. Alaska Broker/Lender License AK1025894. Arizona Mortgage Banker License 0926603. Arkansas Combination Mortgage Banker/Broker/Servicer License 109250. Licensed by the Department of Financial Protection & Innovation under the California Residential Mortgage Lending Act, License 4131356. Colorado Mortgage Registration 1025894. Connecticut Mortgage Lender License ML-1025894. Delaware Lender License 028515. District of Columbia Mortgage Dual Authority License MLB1025894. Florida Mortgage Lender Servicer License MLD1827. Georgia Mortgage Lender License/Registration 46648. Hawaii Mortgage Loan Originator Company License HI-1025894. Idaho Mortgage Broker/Lender License MBL-2081025894. Illinois Residential Mortgage Licensee MB.6761115. Indiana-DFI Mortgage Lending License 43321. Iowa Mortgage Banker License 2019-0119. Kansas Mortgage Company License MC.0025612. Kentucky Mortgage Company License MC707287. Louisiana Residential Mortgage Lending License 1025894. Maine Supervised Lender License 1025894. Maryland Mortgage Lender License 21678. Massachusetts Mortgage Broker and Lender License MC1025894. Michigan 1st Mortgage Broker/Lender/Servicer Registrant FR0022702. Minnesota Residential Mortgage Originator Exemption MN-OX-1025894. Mississippi Mortgage Lender 1025894. Missouri Mortgage Company License 21-2472. Montana Mortgage Broker and Lender License 1025894. Nebraska Mortgage Banker License 1025894. Nevada Exempt Company Registration 4830. Licensed by the New Hampshire Banking Department, Mortgage Banker License 19926-MB. Licensed by the New Jersey Banking and Insurance Department. New Jersey Residential Mortgage Lender License 1025894. New Mexico Mortgage Loan Company License 1025894. North Carolina Mortgage Lender License L-186305. North Dakota Money Broker License MB103387. Ohio Residential Mortgage Lending Act Certificate of Registration RM.804535.000. Oklahoma Mortgage Lender License ML012498. Oregon Mortgage Lending License ML- 5208. Pennsylvania Mortgage Lender License 72932. Rhode Island Lender License 20163229LL. Rhode Island Loan Broker License 20163230LB. South Carolina BFI Mortgage Lender/Servicer License MLS-1025894. South Dakota Mortgage Lender License ML.05253. Tennessee Mortgage License 190182. Texas Mortgage Banker Registration 1025894. Utah Mortgage Entity License 8928021. Vermont Lender License 6891. Virginia Mortgage Broker and Lender License, NMLS ID #1025894 (www.nmlsconsumeraccess.org). Washington Consumer Loan Company License CL-1025894. Wisconsin Mortgage Banker License 1025894BA. Wyoming Mortgage Lender/Broker License 3488. (866) 200-3210. Subject to Credit Approval. Rates subject to change without notice.

Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.

These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency. For licensing information, go to: www.nmlsconsumeraccess.org

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