Our Reverse Mortgage Products

Generation Mortgage currently has one reverse mortgage option available to you.

HECM

The Home Equity Conversion Mortgage (HECM) is the oldest and most common reverse mortgage and is insured by the federal government through the Federal Housing Administration (FHA). Recent legislation increased the maximum loan limit to $417,000. A unique feature of the HECM loan is the Mortgage Insurance Premium (MIP). This is required by and paid to HUD to insure the mortgagee against losses. HUD also guarantees the borrower their funds will be available if the lender or servicer is not able to make payments.

FHA PROGRAM PROVIDES HUGE BENEFITS FOR HOMEOWNERS AGED 62 AND OLDER

The Federal Housing Administration (FHA), an agency of the United States government, runs a program to provide Seniors who are 62 years old or older money to use however they want? You didn't know that? If you didn't, you aren't alone. But hundreds of thousands of seniors have already collected and the numbers are growing at over 10,000 seniors per month.

What is the program? It's the Reverse Mortgage program run by FHA, which is part of the Department of Housing and Urban Development (HUD). If you've heard of Reverse Mortgages, you may have read that contrary to providing huge benefits, they are expensive, have high fees, and, according to some financial journalists, are to be avoided. Well, you've been had! In fact, many CPAs and attorneys, once they find out how Reverse Mortgages work, recommend these to their clients. Unfortunately, Reverse Mortgages are confusing but when people find out how they really work they end up getting one - more than 10,000 seniors per month. We are going to show you how an FHA Reverse Mortgage literally provides you more money than you should be getting, up to $250,000 or more depending upon your age, the value of your home and where you live.

This article is a bit complicated with respect to the math involved, so if you find it confusing, we invite you to share it with your family members or financial advisors.

But before we get to the numbers, we're sure you are wondering what the catch is. Why is the U.S. government providing this money to people with no income qualifications and no credit qualifications? Furthermore, if we convince you Uncle Sam really is doing this, why haven't you heard about it?

The first answer is easy. Your Federal Government has decided to subsidize seniors. Why? Everyone knows it is very difficult to live on Social Security these days so the Federal Government had two choices. First, they could increase Social Security benefits but the program is already under financial pressure so that won't work. Secondly, neither political party wants the bad press when seniors begin to lose their homes due to the rising cost of basic living expenses. So the Federal Government has set up a program to help senior homeowners. Even if you still have a mortgage you may be able to take advantage of the FHA Reverse Mortgage program. And you or your heirs always maintain ownership of your home. Even after you pass away your heirs maintain control of your home.

If you don't have any debt on your home, you can pocket a lot of money. If you do have some debt, you can pay off your debt with the FHA Reverse Mortgage money and either pocket the rest of the cash, or leave it available to you on your line of credit. And remember, you make zero payments on an FHA Reverse Mortgage for as long as you or your spouse remains in your home. As for why you haven't heard about this...well, we think it goes back to bad advice or misunderstanding by so called experts, or, most likely, both.

Let's get to the numbers. We are going to make some assumptions about you. First, we are going to assume you are 70 years old. It doesn't matter if you are male or female. We are going to assume you are married to a 70 year old spouse. Under the FHA Reverse Mortgage program, the last surviving spouse has a right to stay living in your home no matter what happens to your home value, interest rates, or your mortgage balance. Finally, we are going to assume you live in a home worth $417,000 and that you own it free and clear.¹

Ok, so where's this Federally Insured money we are talking about? Please don't go away. We need to do a little bit of arithmetic to show you where it is. But it's there.

Well, first you have to go get the money from a Reverse Mortgage lender. The Government does not give this money directly to seniors. Instead, they use Reverse Mortgage lenders to provide it for them. Given what we've assumed about you, your Reverse Mortgage lender puts the information into an FHA approved calculator. All lenders will generate the same following information. For comparison purposes, we also show you what a private lender will give you - and only Reverse Mortgages are guaranteed/insured by the FHA. The below information was generated on September 16, 2008:

Ok, the FHA loan gives you $262,896 (with rounding) compared to $120,724 for the private loan-a difference of $142,172. We are going to show you that this difference-over 34% of the value of your house, is more money than you should qualify for, courtesy of the FHA.

(¹We won't bother you with all the good news, but FHA just raised their limits to cover homes worth $417,000, so while not yet implemented, we are going to use those higher limits for this example).

WHAT ARE THE FEES?

You may have seen newspaper articles citing the fees are upwards of 8%. This simply is not true. Let's look at the above example. The lender gets a fee of $6,000 for providing the loan. Then there's a like amount that goes to the FHA for Federally Insuring your loan. They are insuring two things. First of all they are insuring that you get to live in your home with no payments for as long as you or your spouse lives in the home - again, no monthly payments whatsoever. Secondly, they are insuring that this is a non-recourse loan which means, in the event you live to be 100 years old and the value of your home drops and you end up owing more money than your house is worth, the FHA takes the loss. Let me say that again, if you owe more than your house is worth FHA takes the loss. Neither you nor your heirs will owe more than the sale price of your home. (There is some potential tax liability associated with forgiveness of debt if your home doesn't cover your loan balance. Consult your advisors on this point.) Then another 1% goes to pay document preparation, title insurance, appraisals, etc., i.e., the usual stuff you need when you get a mortgage.

All together it amounts to at most 5% of the money you get. More on this below. In addition, about $5,000 is set-aside to pay for the servicing of your mortgage but this is not a fee or a cost per se since you get back any unused portion (you are charged $30 dollars a month for servicing). Every loan in America has a monthly service fee. You may not have seen it broken down in other mortgages you had but it is in there. Servicing is in the monthly payment on your mortgage. So there are $19,340 in "fees" and for that you get $262,896 to use any way you want. The Federal Government does not view this as taxable income. It does not affect your standard Social Security or Medicare Payments. Note that the private, non-FHA loan only has $5,732 in "fees." Isn't that loan cheaper? The answer is: DEFINITELY NOT. Why? Because any good financial planner will tell you what matters most to you is the amount of dollars you can get from a program or loan - minus all the costs. FHA provides you with more than twice the dollars a private lender would. And the FHA loan provides a lower interest rate as well.

ISN'T AN FHA REVERSE MORTGAGE EXPENSIVE?

No. Here is why. The cost of a reverse mortgage should be measured by looking at the total of (1) the initial costs; (2) the FHA insurance premium; and (3) and the loan interest rate over the life of the loan. In fact, if FHA wasn't insuring the Reverse Mortgage the interest rate on this program would be higher.

Fortunately, there is a number which takes all of these components into account called the Internal Rate of Return or IRR-which is similar to an APR on consumer loans. The IRR calculation is simple: The starting loan balance is the dollars that are available to you at the beginning of the loan plus the origination fee and FHA insurance premium. The ending loan balance is the starting loan balance plus interest, compounded monthly, on the starting balance. If you divide the ending loan balance by the starting loan balance and then normalize (banking term) this amount for a single year, that is the IRR for the loan. The higher the IRR is, the more expensive the loan. The lower the IRR is, the better the loan is. In fact, your IRR and loan rate are identical if a loan has no upfront costs or fees associated with it.

Ok, so let's calculate some example IRR's for you and your spouse over the next 15 years (this may seem like a long time, but odds favor one of you still surviving another 20 years or more). What are your borrowing costs-measured as your loan IRR--assuming your house remains unchanged in value, and goes up at 1, 2, and 3 percent a year respectively. The key here is that you are only responsible for the debt balance or what your house is worth, whichever is smaller. In other words, neither you nor your heirs will owe more than the sale price of your home - that is what FHA is insuring and that is really what makes this Reverse Mortgage program work.

Right now, the federal government borrows money for 30 years at 4.01%. So these effective borrowing costs are very low as measured by the IRR of your loan. So whenever you hear Suze Orman or some other financial "expert" tell you an FHA Reverse Mortgage is "expensive" you should realize they haven't looked at the total picture. They are simply looking at the cost compared to a regular loan and not taking into account the unique benefits of FHA Reverse Mortgages. To be able to get equity out of your home with no income qualifications and no credit qualifications and make zero payments for as long as you live in the home and never worry about losing your home, all for a low interest rate that is insured by FHA - there is nothing else like this anywhere! The reality is that the true total cost of a Reverse Mortgage makes it one of the best-if not the best-deals around!

OK, BUT SHOW ME HOW THE FEDERAL GOVERNMENT IS PROVIDING ME TOO MUCH MONEY!

This is a good question. An FHA Reverse Mortgage provides you money-a lot of it and on cheap terms-and the right to live in your house forever. So if you want to get a lot of money today and a place to live forever, how else can you do it? A Reverse Mortgage is the only way to explicitly accomplish this. You could borrow money from your kids until you give them the house, but that places a large burden on your children. You could do something similar, but not as attractive, and do the following: (1) Sell your house and (2) Find other housing to rent for the rest of your life. Let's compare an FHA Reverse Mortgage to that option, again using the above example numbers for you and your spouse.

According to Fortune Magazine (November 7, 2007), the 15 year average ratio of Home Prices to Comparable Rents is 16.9. What they mean is that for every $100,000 of home value you would like to rent, you would need to pay $5,917 per year. So a $417,000 house would cost $24,674 to rent. You might pay a little more to rent in some places and a little less in others. This analysis assumes you pay the average.

Now, let's assume something about your rent bill which isn't likely to be true-which is that it stays the same for the next 15 years, i.e., there is no inflation in your rent. We are also going to make another unrealistic assumption which favors renting. We are going to assume you can put money aside right now which grows tax free and risk free at 5% for 15 years so that this money can be withdrawn each month for rent payments. To cover this rent for 15 years on these terms, you need to put aside approximately $245,000. So let's look at a table so we can compare the option of selling and renting versus the Reverse Mortgage:

As we can see, the sale proceeds from your house have to be used to pay for a new place to live. This eats up pretty much all the gains from sale, as it should since you have sold your shelter only to go out and get new shelter. The only gains from this transaction come from the relative cheapness of renting versus owning. But an FHA Reverse Mortgage is the ultimate equalizer in the real estate business: it provides you a home to live in with no monthly payments for as long as you or your spouse lives in the home. And it gives you, if you are 70, over 60% of your home's value right now! The difference between what the FHA Reverse Mortgage gives you compared to the selling/renting option or jumbo Reverse Mortgage is extra money! Nothing you can do gives you as much money as an FHA Reverse Mortgage! And if you sell your home and rent you might run out of money and end up with no place to live. The amounts provided by FHA Reverse Mortgages are gigantic! But if you want to know exactly how much money you can get under the Reverse Mortgage program today - call us at 800-662-1962.

We bet you haven't seen or heard about this simply because the people talking to you have not done this analysis. And the benefits of a Reverse Mortgage-only become larger when the weak housing market is taken into account since you might not even be able to sell your house at all in the time frame needed at even a 20% discount to appraised value. Note also that the private market loan or bank line of credit, does not give any where near as much money as you deserve. Only the FHA Reverse Mortgage does that.

OK, YOU'VE CONVINCED ME, BUT WHAT IF I WANT OUT?

Unlike variable annuities or long term certificates of deposit or lines of credit which have high charges if you want out of your transaction sooner than originally contemplated, a Reverse Mortgage can be reversed very easily. And there are no pre-payment penalties with a Reverse Mortgage. You just pay the borrowed money back, either with the loan proceeds you still have or by selling your house and moving. Now, if you are planning on moving in the next 3 years this might not be for you. Why? Because you can not amortize the origination fee and FHA insurance over longer periods so your loan IRR will be higher than had you stayed in your home longer. Consider the IRR on your loan if you only stay 5 years. Your loan IRR is still only 8.0% which is a very reasonable all-in borrowing cost by historical standards in the mortgage market.

CONCLUSION

Because Reverse Mortgages are relatively complex compared to traditional mortgages and because financial journalists and commentators are generally busy covering so many other stories that they cannot be experts on any single topic such as Reverse Mortgages. They have provided you an immense disservice by not telling you that the FHA is literally giving too much money to homeowners like yourself who are 62 years of age or older. If you have further questions you should consult your Reverse Mortgage loan officer who specializes only in Reverse Mortgages. Call us at 1-800-662-1962. We will tell you exactly how much you can get with a Reverse Mortgage and we will be happy to answer any questions. Call us today!