What are reverse mortgages?

Older individuals who own their homes often find themselves "house rich and cash poor." Developed to address
this dilemma, a reverse mortgage provides funds--all at once or over time--to an older homeowner by drawing
against the equity built up in the residence. Unlike "forward" mortgages, reverse mortgages are not repaid on a
monthly basis. The total loan (including the accumulated interest) is repaid when the last surviving borrower sells
the home, permanently vacates the property, or dies.

In most cases, the funds the homeowner receives may be used for any purpose: to supplement a fixed income, to
pay for at-home medical care, or to see the world. For an individual facing a retirement income shortage or an
increased dependency on medical care, reducing home equity with a reverse mortgage may be preferable to
selling the home to raise much-needed cash.

A reverse mortgage can have drawbacks, however. The closing costs normally exceed those for a conventional
mortgage, which can make the loan expensive if the homeowner remains in the home for only a few years.
Additionally, under certain circumstances, the proceeds from a reverse mortgage could affect the homeowner's
eligibility for some public-assistance programs such as Supplemental Security Income (SSI) or Medicaid. The
reduction in home equity could also reduce the homeowner's estate.

There are three basic types of reverse mortgages: single-purpose, federally insured, and proprietary reverse
mortgages.

Single-purpose reverse mortgages

As the name suggests, a single-purpose reverse mortgage is designed to provide funds for a specific use. Such
uses may include:
• Repairing the home
• Making home modifications that are necessary to accommodate a disability
• Paying property taxes or special assessments

In most cases, these loans are offered through state or local government agencies and/or nonprofit organizations.
They are often earmarked for low- or moderate-income homeowners and/or for residences of limited value. Many
do not charge any fees or mortgage insurance premiums, and the closing costs (if any) are usually minimal. If the
mortgage charges interest (some don't), it's often at a low, fixed rate calculated on a simple, not compound,
basis. In some cases, the loans need not be repaid at all if the homeowner remains in the residence beyond a
specified term.

Caution: Single-purpose reverse mortgages aren't available in all states, or in all areas within a
state. For information about what's available, contact the local agency on aging, community
development agency, or housing department.

Federally insured reverse mortgages

Available since 1989, the oldest and most popular reverse mortgage is the Home Equity Conversion Mortgage
(HECM) which is offered through banks, mortgage companies, and other financial institutions. The federal
government insures HECMs through the Federal Housing Administration (FHA), a division of the U.S.
Department of Housing and Urban Development (HUD). The HECM program guarantees that, as long as they
remain in their homes, homeowners will receive the loan advances initially promised them, even if their homes
decline in value or the financial institutions that make the loans go out of business.

Eligibility requirements

To be eligible for a HECM, all parties to the property's deed must be age 62 or older, and at least one
homeowner must use the property as a principal residence. The homeowners must receive reverse mortgage
counseling from an agency that is approved by HUD. This counseling is designed to make sure that the
borrowers have explored their housing options and understand the details and ramifications of the HECM
program.

It's possible for a homeowner who has little or no income and a blemished credit report to qualify for a HECM.
Because they are not repaid in the same way as other loans, homeowners are not required to have income to
qualify for a HECM. Moreover, credit report reviews are limited to making sure that the borrower has not
defaulted on any other debt owed to the federal government.

The property itself must also be a qualified property. It must:
• Be a single-family residence, part of a 2- to 4-unit dwelling, part of a condominium or planned unit
development approved by HUD, or a manufactured home (not a mobile home) built after June 1976
• Meet minimum property maintenance standards established by HUD (proceeds from the HECM may
be used to make any required repairs)
• Be free of other liens (proceeds from the reverse mortgage may be used to repay them), unless the
holders of those liens are willing to subordinate the debts they represent to the HECM

Principal limits

The principal limit is the maximum amount a homeowner may receive from a loan made under the HECM
program. This limit is affected by four factors:
1. Age--While all borrowers must be age 62 or over, the amount a homeowner may receive is
determined in part by the age of the youngest borrower. Older borrowers will receive higher principal
limits.
2. Home value--The greater the value of the home, the greater the maximum principal limit, subject to
the other determining factors.
3. FHA loan limits--Set annually by the FHA, these limits reflect the average home value for residential
properties in a particular county, and vary by geographic area. These loan limits provide a "ceiling" on
property valuation for HECMs in that county. Higher ceilings will allow higher principal limits.
4. HECM interest rates--The principal limit is affected by an amount estimated to be sufficient to cover
the anticipated accumulating unpaid interest. Higher rates will mean lower principal limits.

Expenses

Although obtaining a HECM does not require much money up front from the homeowner, these reverse
mortgages can be expensive.

An application fee covers an appraisal of the residence and the minimal credit check mentioned above. This is
often the only expense the homeowner must pay in cash. The remaining HECM fees are usually financed as part
of the loan.

An origination fee covers the lender's expense to prepare and process the HECM. The insurance that guarantees
HECM loan disbursements is financed by a premium charged to all HECM borrowers. Other closing costs may
vary by state or area, and by the value of the property. These fees are most often financed, adding to
the original outstanding mortgage balance (and reducing the principal amount that remains available to the
homeowner).

The lender may also charge a monthly service fee. If this fee is financed as part of the loan, the lender initially
reduces the principal limit available to the homeowner by a predetermined amount. As the fee is earned, the
monthly amount is added to the homeowner's outstanding loan balance.
                                                                        
And of course there's the interest. Lenders are required to offer an interest rate that's adjusted annually. This rate
can't increase more than 2 percentage points a year or more than 5 percentage points over the life of the loan.
Lenders may also offer a (generally lower) monthly adjustable rate. This monthly rate is only limited over the
loan's duration by a cap of 10 percentage points above the original rate.

Payment options

A HECM offers a variety of payment options. The borrower may elect any one option, or a combination of them.
These options include:
• A lump sum payment
• A growing line of credit that may be drawn on at the borrower's discretion
• Monthly cash advances for a predetermined number of years (the term option)
• Monthly cash advances for as long as the homeowner occupies the residence (the tenure option)

Caution: A HECM may be structured as a reverse annuity mortgage, where an initial lump-sum
payment is used to purchase an annuity that will provide a monthly income for the remainder of the
homeowner's life even if he or she no longer lives in the property. In addition to being a relatively
expensive choice, however, the income provided by a reverse annuity mortgage option might
jeopardize a borrower's eligibility for Supplemental Security Income and/or Medicaid.

The HECM regulations allow a borrower to switch options at any time, providing the outstanding mortgage
balance is less than the original principal limit. Homeowners considering a reverse mortgage may wish to explore
their payment options before making a choice by using the loan calculator located at the AARP web site
http://www.aarp.org

Repayment

A reverse mortgage usually becomes due when the last surviving borrower either vacates the property for 12
consecutive months (as might be the case if the borrower enters a nursing home) or dies. At such a time, the
borrower (or the borrower's estate) can repay the reverse mortgage with funds from another source in order to
keep the property. If this isn't done, the lender will require the sale of the property to secure repayment.
When a HECM is repaid, the lender receives the total amount of principal advanced to the borrowers, including
any financed expenses or payments made on the borrowers' behalf, as well as the accumulated interest. If the
proceeds from the sale of the property are greater than what's needed to repay the HECM, the remaining funds
are remitted to the borrower or the borrower's estate. However, the repayment obligation is limited by the
property's value; if the sale of the property doesn't bring in enough to repay the HECM in full, the borrower (or the
borrower's estate) is not responsible for the difference.

Any reverse mortgage may become due and payable on demand if the borrower, either by action or inaction,
undermines the value of the property that secures the loan. Some conditions of acceleration and/or default
include:
• Not maintaining and/or repairing the home
• Failing to pay property taxes
• Failing to insure the property
• Adding a new owner to the property's title
• Incurring new debt that uses the home as collateral for the loan

Proprietary reverse mortgages

Proprietary reverse mortgages are private mortgage instruments offered (and owned) by the financial institutions
that develop them. Generally speaking, the eligibility requirements, payment options, and repayment obligations
for proprietary reverse mortgages are similar to those for HECMs. Because they are not subject to the same
regulations, proprietary reverse mortgages can often provide higher principal limits than those possible under the
HECM program. However, proprietary mortgages are not federally insured, and they often are more costly to
obtain and service than HECMs.

The Home Keeper program, available in every state, is a proprietary reverse mortgage developed by the Federal
National Mortgage Association (Fannie Mae), a private, shareholder-owned company. For 2008, Fannie Mae's
mortgage limit is $417,000 ($729,750 in expensive parts of the country; this figure is permanently set at $625,500
beginning January 1, 2009). As a result, a Home Keeper loan may offer the ownerof an expensive home a higher
principal limit than the homeowner could obtain with a HECM. The homeowner maytake the loan proceeds in a
lump-sum cash advance. Other payment options include a tenure monthly payment plan (fixed monthly payments
for as long as a borrower remains in the home), a fixed line of credit (unlike the HECM option, the unused portion
of a Home Keeper's line of credit does not grow), or a combination of all three.

The fees associated with a Home Keeper reverse mortgage can be substantial. Home Keeper mortgage
guidelines allow an origination fee of either $2,000 or 2 percent of the value of the home, whichever is greater
(2 percent on the first $200,000 borrowed and 1 percent on the balance thereafter with a cap of $6,000 beginning
January 1, 2009). In addition, as part of the mortgage closing costs, Fannie Mae collects a fee equal to 1 percent
of the property's value. Both fees may be financed by adding them to the homeowner's loan balance.

The interest rate adjusts monthly. The only limit on the interest rate is a lifetime cap of 12 percentage points over
the original rate. Monthly servicing fees can also be added to the outstanding loan balance.

Caution: Proprietary reverse mortgages may only be suitable for homeowners whose homes are
valued substantially higher than their county's average home value, and who are willing to pay
higher fees to obtain the greater benefits that may come with higher principal limits.

Make careful comparisons before you decide

Comparing reverse mortgage products can be complicated. Lenders who offer HECM and/or Home Keeper loans
can analyze the projected costs of these loans. Both loan programs require reverse mortgage counseling through
HUD-approved agencies; the mortgage counselors at these agencies can also help homeowners decide which
type of reverse mortgage is best for their circumstances

Note: Securities offered through Commonwealth Financial Network, Member FINRA/SIPC. Investment advisory services may
 be offered through Commonwealth Financial Network, a registered investment adviser, and/or Poulin Investment & Advisory
Services, a Maine-licensed investment adviser.

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